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?

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    $\begingroup$ 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. $\endgroup$ – BKay Nov 7 '16 at 19:05
  • $\begingroup$ @BKay What historic precedents are you referring to? $\endgroup$ – Lassie Fair Nov 7 '16 at 19:45
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    $\begingroup$ @LassieFair In the last 11 months about half of the ca. 20 questions 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. $\endgroup$ – Giskard Nov 7 '16 at 20:02
  • $\begingroup$ @Lassie are you talking about real or nominal interest rates? $\endgroup$ – ahorn Nov 11 '16 at 8:28
  • $\begingroup$ @BKay if I recall correctly, Portugal had negative interest rates when it left from the IMF surveillance. $\endgroup$ – Commissar Vasili Karlovic Feb 7 '17 at 8:52

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.


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.

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    $\begingroup$ The question is how can equilibrium interest rates be so low. This post does not attempt to answer this question. $\endgroup$ – Tobias Jan 7 '17 at 16:38
  • $\begingroup$ IMHO my post does explain why rates are so low. They are low to prevent a collapse in the money supply. $\endgroup$ – Mick Jan 7 '17 at 18:44
  • $\begingroup$ 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. $\endgroup$ – Tobias Jan 7 '17 at 20:16
  • $\begingroup$ " 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. $\endgroup$ – Mick Jan 7 '17 at 20:21
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    $\begingroup$ 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. $\endgroup$ – Giskard Apr 2 '17 at 8:49

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