Interest rates are a very important aspect of money because interest rates represent a price. And like all prices, they are determined by supply and demand. The supply is all the savings, the demand is all the people that want to borrow money, wether its businesses, wether its college students, someone who wants to buy a car, the government... Everyone borrowing money is competing for this store of savings. Because for every dollar borrowed, someone had to save that dollar, someone had to not consume and put that dollar into savings so that someone else could spend it or invest it.
If you have a lot of savings then you are going to have low interest rates because the supply is going to be greater. And what does that mean? What economic signals is that sending to the market? What that says is that people prefer future consumption to current consumption. Because after all when you are saving money, you are just deferring consumption. Every dollar you save is going to be spent eventually, except you are not going to spend it today, you want to spend it tomorrow. And hopefully you will spend the dollar tomorrow plus all the interest that you earned over time.
Peter Schiff is an American businessman, investment broker and financial commentator. Schiff is the CEO and chief global strategist of Euro Pacific Capital Inc.
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