Low interest rates are harmful.

Bernanke and colleagues emphasize that low interest rates help the economy. How? By making loans available at lower rates. That supposedly encourages private investors and business to borrow. So, how come that a short term interest rate of between 0.0 to 0.25% is producing an anemic economy and high unemployment? Could it be that low interest rates have harmful effects as well? It could, say several investment gurus:

http://www.bloomberg.com/news/2012-10-30/who-loses-when-fed-keeps-interest-rates-low-.html

What are the interacting factors?

1. How low interest rates are produced. The FED reduced the discount rate at which banks can borrow. Banks are then encouraged to invest in Treasuries which yield very little. The FED digitizes the money for the banks, which then sit there earning very little. The FED also buys Treasuries and pays the low rate to the Treasury which goes into  the bottomless pit of the government deficit.

2. Low interest rates produce low savings rates. These depress bond returns as well. Since, people can not earn enough from savings deposits, they must work longer and reduce job opportunities for the young.

3. Low interest rates reduce investment opportunities for pension funds and businesses must contribute more. This reduces the availability of cash for expansion, research.

The overall effect? Reduced movement of money (M2), as the new money digitized by the FED sits there doing very little positive. Stagnation. When inflation goes up, stagflation results. As long as the deficit remains high, the printing must continue. Higher taxes would reduce economic activity even further. So, why do such economists as Krugman advocate higher taxes and higher govt spending? Because they are Socialists and want to grow the government. OK, so why did Krugman turn down an appointment to Treasury? Because as it is common with academics, they do not want to be responsible for the effects of their opinions in action. Krugman knows that Socialism has a poor record. By being out of govt, he can blame the failure on the people in charge or on them not doing enough.