The deeper reason for low interest rates

This article was published October 23 in German 

A reader pointed to an article by Professor Thomas Straubhaar, the former head of the Hamburg Institute of International Economics (HWWI) (thanks for that!). Straubhaar complains that central banks are making a mistake by keeping the interest rate at zero. According to him, this makes any reasonable steering of the market economy as good as impossible (see here for his article in German). Professor Straubhaar takes aim at last week’s decision of the ECB to consider (and use) unconventional measures in order to tackle the deflationary trend in Europe. To him, this is unnecessary: deflation is not a condition that entrepreneurs take into consideration when they decide to invest or not. This is so, he says, because:

„The zero interest rate world will therefore continue for the time being. The financial markets will lack any direction for the future. If capital can be borrowed for nothing, capitalism loses its anchor. The policy of cheap money, the purchase of foreign currency and long-term liquidity loans from the central banks cancel credit market and credit supply, i.e. the core and essence of capitalism.“

Under the heading „Central banks without orientation“ [...]

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