Low Interest Rates Helping Governments: Report

Keeping interest rates below the inflation rate may be detrimental to those living off their savings, but according to The New York Times, low interest rates are benefiting governments, making it easier for them to refinance their debts and live within their budgets without having to resort to spending cuts or tax hikes. In the four years that the Federal Reserve set its benchmark interest rate at zero, the U.S. government has saved trillions in interest payments. In addition to keeping low interest rates, governments are also using pension funds and banks to buy their debt, which means that consumers, without even knowing it, are subtly subsidizing governments, according to Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard. Reinhart said this is not the first time governments have benefited by depressing interest rates. Following World War II, interest rates in the developed world were on average below zero, which helped Europe, the United States and Japan carve away most of their war debt as their economies grew faster than their debt. If interest rates today were what they were in 2007, the Treasury would be paying about twice as much to service its debt, according to Reinhart.

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