business stuff, Dylan Gallagher

Do lower interest rates really stimulate anything?

interest rates

DISCLAIMER:  I am not an economist nor to I pretend to be.  What I am is an entrepreneur who has owned and operated a business for more than a decade.  Further, over my career I have been deeply involved in helping people and businesses with mortgages and loans.  In thinking about the statement “lower interest rates are being kept low to stimulate economic activity” I was struck by the thought “do low interest rates do anything for the people I work with each day?”.  If you have followed this blog over the past while you would know that getting money from the banks is tough.  It’s tough to be approved, it’s tough to meet their conditions and it is very tough to get them to fund.

Since the financial crises of 2008-2009 I have witnessed an explosion in the amount of factoring and accounts receivable financing that is available.  Keep in mind that in my opinion is the most basic type of credit that a business needs.  A business collects its money from customers in 30-90 days but has to pay its own bills every 30-45 days.  This creates a gap that has been filled by very expensive money.  The cost of the money can be 1.0% – 4.0% per month.  I don’t see how low interest rates are helping in this situation.  In fact, I would argue that any “economic improvements” are more a result of businesses figuring out how to be profitable in a tough environment and have nothing to do with a lower interest rate monetary policy of the government.  I could give more examples of situations where low interest rates have no impact (i.e. construction loans for small builders are still double digits including fees) and because banks generally don’t make their capital available for a variety of reasons the “low interest rate” environment could be keeping prices high and economic activity depressed as the businesses pass along their higher cost of capital to the market in the form of higher priced products and services.

If interest rates were low and banks were making money available then maybe economic activity would pick-up.  But if the money is free and you can’t get it then it doesn’t really matter does it?

And for everyone who says that low interest rates are helping homeowners – just wait until interest rates do rise and we have a whole new “economic activity” problem on our hands.  Over the past decade homeowners have come to accept and believe that artificially low interest rates are here to stay.  There is a whole generation of homeowners who have maximized their spending capacity on low interest rates.  What happens when interest rates go up?

“The distinction between the past, present and future is only a stubbornly persistent illusion.” – Albert Einstein

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