<p>There is a demand for debt and a supply of debt. The demand for debt is determined by the extent of profitable investment opportunities that are around. The supply of debt is essentially people's saving multiplied by a factor depending on how much risk financial institutions are willing to carry.</p>

<p>Suppose we live in a world where there are no clearly profitable investment opportunities, but many projects which return the same money you put in on average. So nobody would take on debt at positive interest rates. However, even a a zero interest rate, people would still want to save money, for example to insure against bad times, or for retirement. So there's an equilibrium in which the interest rate is zero, but people still borrow and lend.</p>

<p>Another possibility is that people just expect deflation, so a zero nominal interest rate still goes along with positive real returns on your investment.</p>

<p>It is not clear to me what you mean by sustainable, but clearly such situations can arise, albeit rarely. Japan has nominal rates close to zero for a long time now.</p>

CC BY-SA 3.0
2017-01-07T16:35:31.893Z
2017-01-07T17:10:32.170Z
2017-01-07T17:10:32.170Z
Tobias
<p>Assuming you already know that bank loans create money and bank loan repayments of principal destroy money (if not, look up fractional reserve banking)...</p>

<p>In the housing bubble leading up to the 2007/8 crash, biblical amounts of money was being borrowed to purchase houses. When the bubble burst the demand for new loans (mortgages) suddenly fell so the rate of money creation fell. But the rate of money destruction remained high because all the mortgage repayment schedules remain in place. If the government did nothing then there would have been a massive fall in the money supply - just like in the great depression. The whole point of the near zero interest policy is a desperate attempt to encourage borrowing (money creation) to compensate for the still very high rate of money destruction. Its all going on for a long time because mortgage repayments go on for a long time.</p>

CC BY-SA 3.0
2017-01-07T16:38:45.330Z
The question is how can equilibrium interest rates be so low. This post does not attempt to answer this question.
Tobias
CC BY-SA 3.0
2017-01-07T18:44:05.160Z
IMHO my post does explain why rates are so low. They are low to prevent a collapse in the money supply.
Mick
CC BY-SA 3.0
2017-01-07T20:16:35.603Z
There is a supply and demand part to the answer. "They are low because we need them to be low" is not an answer imho. You have to explain why people are willing to save at this interest rate and why investment doesn't go through the roof.
Tobias
CC BY-SA 3.0
2017-01-07T20:21:31.233Z
" You have to explain why people are willing to save at this interest rate".. many are not - that's the whole point, the low interest are set deliberately to discourage saving and encourage borrowing.
Mick
CC BY-SA 3.0
2017-01-07T20:24:07.370Z
Saving and borrowing are an accounting identity, i.e. they are always equal (leaving out international capital flows).
Tobias
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2017-01-07T20:49:14.800Z
Agreed, sorry I should have just said the interest rate is to encourage borrowing - which automatically produces savings.
Mick
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2017-04-02T08:49:53.150Z
On "biblical amounts of money": They had trillions of dollars in the Bible? I thought the amounts of currency back then were relatively small, like 10 talents and such.
Giskard
CC BY-SA 3.0
2017-04-02T17:29:07.397Z
Most bank lending is for the purposes of purchasing houses. It follows that most of our money supply has been created for the purposes of purchasing houses. I think that "most of our money supply" qualifies as a biblical quantity! :-)
Mick
CC BY-SA 3.0
2016-11-08T11:51:08.743Z
2017-01-07T20:32:36.147Z
2017-01-07T20:32:36.147Z
Mick
<p>Over and over again reputable economists and pundits like Alan Greenspan tell us that the 0% interest rates are "unsustainable", yet they are sustained.</p>

<p>How can interest rates be so low? Throughout all of history I could only find interest rates down to 3%, never lower, yet now we have 0% or even negative interest rates. How is this possible?</p>

CC BY-SA 3.0
2016-11-07T19:05:55.000Z
At some level, interest rates are very low because that's where the supply curve for government debt intersects with the demand curve for government debt. It is exactly as pedestrian and exotic as that. FYI, there are other historical episodes of zero and even negative interest rates. I assume you want to know why it happens to intersect at such a low rate when it normally does not but I'm not sure anyone knows for sure why that is.
BKay
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2016-11-07T19:45:10.990Z
@BKay What historic precedents are you referring to?
Lassie Fair
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2016-11-07T20:02:20.033Z
@LassieFair In the last 11 months about half of the ca. [20 questions](http://economics.stackexchange.com/users/1448/lassie-fair?tab=questions&sort=newest) you posted have been answered. You have accepted zero answers. In fact the last time you have accepted an answer was over a year ago.
Giskard
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2016-11-11T08:28:42.683Z
@Lassie are you talking about real or nominal interest rates?
ahorn
CC BY-SA 3.0
2017-02-07T08:52:09.347Z
@BKay if I recall correctly, Portugal had negative interest rates when it left from the IMF surveillance.
Commissar Vasili Karlovic
<interest-rate>
How can interest rates be so low?
Lassie Fair
# How can interest rates be so low?

(Asked by: username_0 on 2016-11-07)

Over and over again reputable economists and pundits like Alan Greenspan tell us that the 0% interest rates are "unsustainable", yet they are sustained.

How can interest rates be so low? Throughout all of history I could only find interest rates down to 3%, never lower, yet now we have 0% or even negative interest rates. How is this possible?

**Tags:** interest-rate
> **Comments:**
> **username_1**: At some level, interest rates are very low because that's where the supply curve for government debt intersects with the demand curve for government debt. It is exactly as pedestrian and exotic as that. FYI, there are other historical episodes of zero and even negative interest rates. I assume you want to know why it happens to intersect at such a low rate when it normally does not but I'm not sure anyone knows for sure why that is.  
> **username_0**: @BKay What historic precedents are you referring to?  
> **username_2**: @LassieFair In the last 11 months about half of the ca. [20 questions](http://economics.stackexchange.com/users/1448/lassie-fair?tab=questions&sort=newest) you posted have been answered. You have accepted zero answers. In fact the last time you have accepted an answer was over a year ago.  
> **username_3**: @Lassie are you talking about real or nominal interest rates?  
> **username_4**: @BKay if I recall correctly, Portugal had negative interest rates when it left from the IMF surveillance.  

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## 2 answers

### Answer by username_5 on 2017-01-07. Score: 1

There is a demand for debt and a supply of debt. The demand for debt is determined by the extent of profitable investment opportunities that are around. The supply of debt is essentially people's saving multiplied by a factor depending on how much risk financial institutions are willing to carry.

Suppose we live in a world where there are no clearly profitable investment opportunities, but many projects which return the same money you put in on average. So nobody would take on debt at positive interest rates. However, even a a zero interest rate, people would still want to save money, for example to insure against bad times, or for retirement. So there's an equilibrium in which the interest rate is zero, but people still borrow and lend.

Another possibility is that people just expect deflation, so a zero nominal interest rate still goes along with positive real returns on your investment.

It is not clear to me what you mean by sustainable, but clearly such situations can arise, albeit rarely. Japan has nominal rates close to zero for a long time now.


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### Answer by username_6 on 2016-11-08. Score: 0

Assuming you already know that bank loans create money and bank loan repayments of principal destroy money (if not, look up fractional reserve banking)...

In the housing bubble leading up to the 2007/8 crash, biblical amounts of money was being borrowed to purchase houses. When the bubble burst the demand for new loans (mortgages) suddenly fell so the rate of money creation fell. But the rate of money destruction remained high because all the mortgage repayment schedules remain in place. If the government did nothing then there would have been a massive fall in the money supply - just like in the great depression. The whole point of the near zero interest policy is a desperate attempt to encourage borrowing (money creation) to compensate for the still very high rate of money destruction. Its all going on for a long time because mortgage repayments go on for a long time.

> **Comments:**
> **username_5**: The question is how can equilibrium interest rates be so low. This post does not attempt to answer this question.  
> **username_6**: IMHO my post does explain why rates are so low. They are low to prevent a collapse in the money supply.  
> **username_5**: There is a supply and demand part to the answer. "They are low because we need them to be low" is not an answer imho. You have to explain why people are willing to save at this interest rate and why investment doesn't go through the roof.  
> **username_6**: " You have to explain why people are willing to save at this interest rate".. many are not - that's the whole point, the low interest are set deliberately to discourage saving and encourage borrowing.  
> **username_5**: Saving and borrowing are an accounting identity, i.e. they are always equal (leaving out international capital flows).  
> **username_6**: Agreed, sorry I should have just said the interest rate is to encourage borrowing - which automatically produces savings.  
> **username_2**: On "biblical amounts of money": They had trillions of dollars in the Bible? I thought the amounts of currency back then were relatively small, like 10 talents and such.  
> **username_6**: Most bank lending is for the purposes of purchasing houses. It follows that most of our money supply has been created for the purposes of purchasing houses. I think that "most of our money supply" qualifies as a biblical quantity! :-)  

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