An argument for keeping interest rates low

I blogged recently about Ann Pettifor’s book Just Money which explains what money is and how understanding money and our monetary system can help us build more productive and less environmentally damaging economies. It’s this latter point from Ann’s book that I want to quote now. There is quite a lot of debate about interest rates at the moment. On the one hand, we have those who want rates to stay low to prevent indebted homeowners and businesses from getting into trouble, and on the other, there are those who express concern for savers and want rates to go up. This is generally the argument – between borrowers and savers, but Ann raises another issue that should also be considered:

“But high rates have implications for the ecosystem too. First, ‘easy credit’ leads to an expansion of consumption. Shopping malls become the temples of the High Street. In order to pay for credit-financed consumption, seas have to be fished out; forests have to be stripped; and the ‘productivity’ of the land intensified – at the same exponential rate as interest rates rise. High-yield crops, the use of fertilisers and pesticides; the containing of animals indoors; increases in food production, not just for the world’s growing population, but to make food production more profitable then debt – all this must be done in order to repay debt. The effects are well known: soil degradation, salination of irrigated areas, over-extraction and pollution of groundwater, resistance to pesticides, erosion of biodiversity, etc.

In other words, the earth’s limited resources have to effectively be cannibalised to repay the world’s creditors.”

This is an argument I haven’t really heard before with reference to interest rates, but it seems quite a strong argument for keeping rates low to me, although I suppose it would depend on how strong an impact on the economy the interest rate set by the central bank has.  It seems to me that managing interest rates are quite a blunt tool for controlling economies, and raising them to ‘help savers’, or too try to cool down a boom could have quite serious unforeseen consequences.

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