An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

Do Low Interest Rates Ensure High Asset Prices?

Mortgages are available at outrageously high interest rates.

In this case, the price of loanable funds is the real interest rate. An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

Sterilized foreign exchange intervention keeps domestic interest rates high and feeds the inflows.

Corroborating statistical evidence shows that high deficits and debt increase long run interest rates.

The answer lies in their view of the root cause of continued high unemployment excessively high real interest rates.

Such circumstances include, first, a high debt GDP ratio, with rising interest rates impeding growth.

Similarly, a potential downside to quantitative easing is that low interest rates send capital to higher growth, high interest rate countries.

Faced with high inflation, Thatcher backed a monetarist approach that supported high interest rates and succeeded in sharply reducing inflation.

Interest Rates

The sixteenth century Habsburgs borrowed at very high interest rates from Florentine, Genovese, and Augsburg merchants.

But, even after disinflation in the mid 1980 s, long term interest rates remained relatively high.

But if nominal interest rates stay positive, while inflation is negative, then real interest rates may become too high for an economy in recession, causing recession to become more severe and prolonged.

But if market nervousness persists and interest rates remain high relative to rates for secure German debt, the debt burden will rapidly become unsustainable.

This enabled US banks to profit by offering low rates of return to foreign lenders while forcing foreign borrowers to accept high interest rates.

So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.

Senegalese Prime Minister Abdoul Mbaye has cited high interest rates as a major impediment to GDP growth.

Those high interest rates strangle businesses and households, causing further economic collapse and making debt ever more unsustainable.

World monetary conditions seem to point to a protracted period of high liquidity and low international interest rates.

When Interest Rates Rise

But real interest rates did not fall enough, because nominal interest rates cannot go below zero.

For decades, developing countries dreamed of a nirvana of sky high commodity prices and rock bottom international interest rates.

Other contributory factors were high domestic liquidity and low, albeit gently rising, interest rates, which enhanced domestic demand expansion.

With European interest rates up 200 basis points since late 2005 and the euro near a record high, Sarkozy wants the ECB to stop raising rates now.

The Trouble With Interest Rates

Interest rates are already low.

One oft heard justification for high asset prices is that real (inflation adjusted) long term interest rates are very low.

The combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment, and slow growth.

Ordinarily, rapid global growth translates into high long term interest rates that is, unless, deep down, people have become nervous.

Because the downturn was not caused by high interest rates, lowering them could not lift the economy out of recession.

To respond to inflation by increasing interest rates would simply compound the difficulties of high prices with high unemployment and an even less competitive exchange rate.

And, with slow growth, subdued inflation, near zero short term interest rates, and more QE, longer term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high).

Central banks respond to lowered demand by reducing interest rates and to higher expected inflation by raising interest rates.

This means that real interest rates interest rates measured in terms of goods and services have stayed the same.

Or, if these deficits are monetized, high inflation may force up long term interest rates and again choke off economic recovery.

To combat the effect of high oil prices, consuming countries adopt expansionary economic policies, lowering interest rates and increasing government spending.

Slow Growth for US Interest Rates

Bondholders gain when interest rates fall.

Moreover, because profits are high in Europe, likely future increases in real interest rates needed to ensure price stability easily can be financed out of profits without economic disruption. The truth of the matter is that interest rates both nominal and real are too low in Europe, not too high.

High vacancy rates

First, high household debt means that if interest rates rise, as they do in a normal recovery, households will find themselves strapped.

If interest rates on US Treasury securities were high and rising rapidly as the debt grew, I would agree with this argument.

The second oil shock and high international interest rates, coupled with a lack of foreign investment, led to significant internal and external imbalances and high levels of foreign debt.

US Interest Rates Will Continue to Rise