What sectors of the economy have been in a slump? Middle and low incomes. Wages have been barely rising. Under-employment is rampant with high levels of part-time workers and long-term unemployment.
How low interest rates are a Futile Attempt to save the Already Marginalized from High Inequality
Labor share has really been dropping since 2003. Inequality is rising. Corporations are making record profits while labor becomes marginalized. What does it mean to be marginalized?
If you go to any Latin American country, you will see large sectors of the populations marginalized. They just do not participate in the economy to any great extent. I have lived in Mexico, Guatemala and Chile and passed through other countries.
Why are large sectors marginalized? ... It is simple, Inequality. Money gets concentrated at the top and flows very slowly among the bottom of society. The rivers are full at the top, but the rivers run dry and slow at the bottom. It is a liquidity thing. It is the reason that Reagan and others were so wrong about "Trickle-down economics". When you create an economy for the top incomes, hoping that it will trickle-down to the rest, you are in the realm of being evil. It is one of the greatest lies.
I never liked Reagan, even before 1980. I was not happy when he became president. I knew things would not turn out well over time. He started the political process to create inequality.
Ok, enough on Reagan... back to low interest rates trying to cover-up the evils of inequality.
When you look at a society, you will see sectors of labor marginalized, cut off from the economy. You may see millions upon millions in the country-side of China, or millions in India. You may see millions becoming marginalized in the United States.
In Chile, the marginalized are called, "Marginados o marginalizados". It is a common term. Marginalized communities are extremely easy to spot and describe. They really have no place or hope to become part of the real economy and improve their condition. If the central bank of Chile wanted to incorporate these Marginados into the real economy, they would have to drop their interest rate down to zero for a long time and push businesses into less profitable ventures that could employ these people.
If you leave the marginalized labor outside the economy, you only have to set interest rates for a smaller tighter economy. Interest rates will go up because there will be less slack capacity of labor and capital. But the moment that you look to the marginalized sectors and say, "We have get them into the economy", then you all of sudden see unused capacity and you start to drop interest rates in order to expand production and drive down unemployment rates.
You may want to bring the marginalized workers in because it is the right thing to do, or because you see large reserves of cheap labor to take advantage of. Either way, you bring down interest rates to motivate business to employ more people who are more likely to be unskilled and unproductive.
But by lowering interest rates, you bring in workers that are not part of the "real" economy which has been downsized from inequality. These extra workers will take more part-time jobs and lower pay. These jobs are less productive. As the marginalized sectors get incorporated, inflation is weakened due to lower pay and overextended business development, which in the long-run can only be profitable if there is a strong consumer base. So eventually inequality has to be reversed.
Context and the Future
Business development has been the fever for a few decades. Large amounts of marginalized labor, land and capital had to be developed. Interest rates have been falling steadily for decades. Business has overextended in China and as we see now in Europe too where banks have growing amounts of non-performing loans. The context of low interest rates started out as a plan to help businesses develop marginalized sectors worldwide. Now low interest rates are trying to salvage the businesses with non-performing loans.
What is the future? There will have to be a general pullback from low interest rates. Keeping the interest rates low will create deeper and deeper levels of non-performing loans that will have to be dealt with in the future.
Realize this... High inequality has already marginalized many workers. These workers are being employed but they have no hope of improving their condition. These employed workers are destined to be what they really are... marginalized.
It is delusional to think that we are helping them with low interest rates. It is like a patient that has no hope of living, and as doctors, we are telling them that they will live a normal life. It is a lie that will create massive bitterness in the future.
The rich feed upon low interest rates and get stronger. Inequality is not reversed with low interest rates.
Inequality created marginalized workers and trying to make up for this fact with low interest rates is futile. As long as we have higher levels of inequality, we will have to accept higher levels of marginalized workers. Interest rates will go lower and lower trying to deny this reality.
But one day, interest rates will have to rise in order to optimize the economy at a smaller level that is functional with high levels of inequality.
We will set interest rates for a socially optimal level of workers that can work for the rich. Interest rates will have to abandon those who are marginalized. Interest rates will have to rise. In that moment, the reality and evil promise of inequality will be manifested. Large sectors of society will become as they were intended under higher levels of inequality... marginalized and infected with humiliation.
The United States and Europe will become as Latin American countries. You will have smaller neighborhoods of very rich. You will have larger neighborhoods of poor marginalized people. There can be no other outcome from high inequality. And low interest rates can try to hide or postpone this fact, but eventually the reality manifests, and most likely the hard way.
The only solution is to significantly raise labor's share of income around the world. Inequality has to come down. The result will be that the rivers of liquidity at the bottom of society will start to flow better. Marginalized workers will stop being exploited and start being a real and viable part of the economy. They will create their own grassroots business development. Inflation will be supported throughout society. There will then be good reasons to raise interest rates to normalized levels, because the marginalized workers are no longer marginalized. A place has been prepared for them at the table.
High inequality creates large sectors of marginalized people. Interest rates come down in an eventually futile attempt to keep them in the economy. But they are already destined to be marginalized. So interest rates go lower and lower to hide this reality.
The best way to return to normal interest rate levels is to reverse inequality.