“When I travel around the world, I find hardly anyone supporting the Fed’s policy on interest rates,” said a senior European official, who did not want to be publicly identified criticizing the I.M.F. “The fund has become very short-term-oriented."I hear this a lot. Stimulative monetary policy, in the spirit of the dissolute John Maynard Keynes, is all about living it up in the present and hardly giving a thought to what follows. Remember Niall Ferguson and the “quip” about Keynes not caring about the next generation because he was gay and wouldn’t have any?
The funny thing is that I am just preparing a lecture on natural resource policy where the central variable, of course, is the discount rate. Low rates put more emphasis on the future, high rates on the here and now. And that’s true for all investment, whether in nature, produced capital or human capital. It’s what r is fundamentally about. Low r stimulates economies by encouraging more spending on investment.
People who’ve already amassed a lot of money and want to earn a return on it—creditors—like high interest rates. The rest of us, who either borrow money to invest or depend on a robust economy for jobs and higher wages, see things the other way around. But in the end, a lower r gives more weight to the future. It’s about as basic an economic truth as you’ll ever find.