What’s the Difference Between Naturally and Artificially Low Interest Rates?

We know that the Federal Reserve pushes interest rates artificially low by manipulating the federal funds rate (the target interest rate that commercial banks borrow and lend their excess reserves to each other) and using monetary policy maneuvers such as quantitative easing. But could we have low interest rates without Fed intervention? In this clip, Peter Schiff explains the difference between artificially and naturally low interest rates and how the Fed messes up the economy with its intervention.

If the Fed wasn’t involved in interest rates at all and manipulating the market, under what circumstances would rates be low?

Simply put, supply and demand would determine rates.

Interest rates are the price of borrowing money. So, what is the supply of loanable funds? That’s the savings. That’s the money that we don’t spend, that we save. That’s the money that is available to be loaned out. That’s the supply curve for the interest rate.”

And what about the demand?

That’s simply determined by all of the people who want to borrow money. This pool of people includes private individuals who want to take out a mortgage, or an auto loan, or a student loan; businesses that want to borrow for capital investments or other needs; governments borrowing for infrastructure or military expenditures; and other institutions.

So, you have all these people borrowing. You have other people saving. And then there’re going to be the curves – the demand curve, the supply curve. They’re going to intersect somewhere and you’re going to get an interest rate.”

So, how do you get naturally low interest rates?

You have an environment where a lot of people are saving and not many people are borrowing.

But of course, that doesn’t describe America at all.

We’re the opposite of that. We hardly have any savings. Nobody’s saving. And everybody is borrowing. So, we have massive demand to borrow and not a lot of savings to lend. So, we should have very high interest rates, if we had a free market.”

Enter the government and the Federal Reserve. They step in and artificially manipulate interest rates. If the government and its central bank didn’t step in, people would stop borrowing because it would be too expensive. And more people would save because there would be a good interest rate return on their savings. That would bring the interest rate down naturally. But instead, we have artificial manipulation.

And the result is a disaster. It always is. Whenever the government interferes in the free market to fix prices, it creates problems — shortages, surpluses. It’s always a mistake. And this is an even bigger mistake because money is a very important price. It’s one half of every transaction. And we’ve gotten it wrong thanks to the Fed.”