The writer is co-founder and co-chair of Oaktree Capital Management and author of ‘Mastering the Market Cycle: Getting the Odds on Your Side’Most people want to see low interest rates. But low rates alter investor behaviour, distorting it in ways that can have serious consequences. As the excellent book The Price of Time: The Real Story of Interest by the financial historian Edward Chancellor makes clear, there are many negative aspects of so-called “easy money”.
Easy money keeps the economy aloft, at least temporarily. But low interest rates can make the economy grow too fast, bringing on higher inflation and increasing the probability that rates will have to be raised to fight it, discouraging further economic activity. This oscillation of interest rates can cause an economy to see-saw between inflation and recession. No one should want this.
Further, low rates reduce the prospective returns on safe investments to levels considered unpalatable, encouraging investors to accept increased risk in pursuit of greater return. Consequently, in low-return times, investments are made that shouldn’t be made; buildings are built that shouldn’t be built; and risks are borne that shouldn’t be borne. Capital moves out of low-return, safe assets and into riskier opportunities, resulting in strong demand for the latter and rising asset prices. This encourages further risk taking and speculation.