The interest rate is too damn high!

Posted: February 7, 2012 by alephnaughty in Economics
Tags: ,

Suppose that, in period one, savers want to save just as much money as borrowers want to borrow. In period two, however, savers want to save more, while borrowers want to borrow less, than in period one. What happens?

In order for savers to save more, they must spend less. In order for borrowers to borrow less, they too must spend less. The money they’re no longer spending is being saved by some, but borrowed by none. It isn’t getting spent.

Less spending implies lower sales figures for businesses. Lower sales figures, in turn, make it unnecessary for businesses to employ as many workers as before. As laid off workers continue to actively seek employment, they raise the unemployment rate.

In period three, the central bank lowers the interest rate. Consequently, savers want to save less, while borrowers want to borrow more, compared with period two. What happens?

In order for savers to save less, they must spend more. In order for borrowers to borrow more, they too must spend more. The money they’re now spending is being borrowed by some, but saved by none. It is getting spent.

More spending implies higher sales figures for businesses. Higher sales figures, in turn, make it necessary for businesses to employ more workers than before. As employment-seeking workers start to find work, they lower the unemployment rate.

Lesson: the interest rate is too damn high!

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