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In May of 2012 Chris Ferreira wrote:  

In May of 2012 Chris Ferreira wrote:  

{{cquote|What are the effects of low interest rates when they are artificially suppressed?

{{cquote|If, however, central banks intervene in the market to suppress interest rates to pump an artificial stimulus into the markets, this provides the illusion to entrepreneurs that there is real excess savings in banks that would supposedly account for a longer term vision and increase of demand for capital goods.

 

If, however, central banks intervene in the market to suppress interest rates to pump an artificial stimulus into the markets, this provides the illusion to entrepreneurs that there is real excess savings in banks that would supposedly account for a longer term vision and increase of demand for capital goods.

This is a fallacy. Entrepreneurs in this scenario are lead into making malinvestments, for when the suppressed interest rates are allowed to increase to their normal levels, the malinvestments fail. The longer the suppression of interest rates, the more malinvestments are created and the more systemic damage it will create in any given economy when interest rates return to normal (and corrections are inevitable).

This is a fallacy. Entrepreneurs in this scenario are lead into making malinvestments, for when the suppressed interest rates are allowed to increase to their normal levels, the malinvestments fail. The longer the suppression of interest rates, the more malinvestments are created and the more systemic damage it will create in any given economy when interest rates return to normal (and corrections are inevitable).

Construction and real estate are two of the main beneficiaries of capital good investments when interest rates are low. The inverse applies for high interest rates, as more capital is spent on a shorter-term vision on consumer goods and away from capital goods.<ref>[http://www.economicreason.com/canadahousingbubble/effects-of-low-interest-rates-part-2/ Effects of low interest rates]</ref>}}

Construction and real estate are two of the main beneficiaries of capital good investments when interest rates are low. The inverse applies for high interest rates, as more capital is spent on a shorter-term vision on consumer goods and away from capital goods.<ref>[http://www.economicreason.com/canadahousingbubble/effects-of-low-interest-rates-part-2/ Effects of low interest rates]</ref>}}

==See also==

==See also==