Posted by: Dirk | August 9, 2013

German politicians of two main parties agree: low interest rates bad

Peer Steinbrück, candidate of the social democrat party, gave an interview to Reuters recently. The German weekly Die Zeit reports:

SPD-Kanzlerkandidat Peer Steinbrück hat die anhaltende Niedrigzinspolitik der Europäischen Zentralbank (EZB) kritisiert. Er könne die Unzufriedenheit der Sparer verstehen, die kaum noch Zinsen bekämen, sagte Steinbrück der Nachrichtenagentur Reuters. “Sie kriegen sehr wenig Geld für ihre Anlagen, haben eine höhere Inflationsrate und deshalb werden sie schleichend eigentlich enteignet.” Die Kaufkraft nehme ab.

So, he complains that savers get very little interest while the inflation rate is higher which means that they are expropriated silently. Purchasing power would go down. Now maybe, this is just politics and you have to attract those old people who don’t understand anything about economics. Still, this is very dangerous. If politicians keep on lying to the public – and not saying the truth for me is the same as lying – the public will be completely fooled and unable to vote for good policies. After all, both major parties now say the same thing: low interest rates bad.

It is easy to explain to old people that higher interest rates would leave them with more money if they are net savers, but the interest rate is also a major economic policy instrument – fiscal policy is the other, but European politicians have successfully discredited it. If the story continues, monetary policy will be discredited as well and we have an economic management which is completely ignorant about economics. Any macroeconomics text-book would tell you that if unemployment is high – and 12% in the euro zone is high – than both fiscal and monetary policy should be used. If we are in the liquidity trap or investment trap, fiscal policy will be the only thing that works, which doesn’t mean that contractionary monetary policy does not harm.

In other interviews, Mr Steinbrück has hinted support for a Marshall plan B. It seems that his comments on interest rates might be political. Nevertheless, it is a risky strategy to agree to completely wrong conjectures to appeal to voters. This definitely has long run costs as the perceived consensus will be hard to break up.

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