Interest rates have been trending down since the early 1980s:
|Graph #1: Collected Interest Rates|
Click for FRED source page
We need a concept that accounts for why interest rates trend up for long periods and then down for long periods. But anyway, this is the FedFunds rate since the '50s:
|Graph #2: The Policy Rate|
The long trend is up, to the Volcker Peak (1981) and down thereafter. The rate went above 19% in January and again in June of '81. Since then it has fallen to nothing. And what has this done for economic performance?
If a fall of interest rates is good for economic growth, then rates falling to zero must be very good for growth, right? You would think.
Graph #3 shows the percent change ("change from year ago") of nominal GDP with the percent change ("change from year ago") of the FedFunds rate subtracted out of it. What it shows is this: For the sake of boosting economic growth, interest rates have been allowed to fall for 30 years. Growth withered all the while.
This does not mean interest rates should be pushed up. What it means is that, whatever we had before that gave us growth, well, Volcker broke it.
|Graph #3: The Urge to Grow|
Before Volcker, the economy wanted to grow.
After Volcker, not so much.
Next: What's in Bernanke's bag?