Extreme rates of interest

Hypothesis
Monitory policy through interest rates is flawed, extreme levels of interest rates are bad, high rates of change of interest rates are bad and there is a healthy range of interest rates.

Very low interest rates (say low risk rate of less than 3%) as experienced shows terrible outcomes: extreme wealth inequality and destruction of the middleclass, asset bubbles, low wages, reduced participation, low innovation, low risk discrimination and poor investment allocation. The result is an economic and social stagnation.

Very high interest rates (say low risk rate of more than 12%) would, in the longer term lead to: stagnant asset prices (low relative to wages), high wages and savings, high participation and high unemployment, low risk tolerance, very low rates of investment and low innovation. The result is economic contraction with an increase in the economic and social power of the middle class however with a large underclass of the unemployed.

Changing rates significantly or quickly shifts the economy, behaviour and social outcomes disruptively as newly favoured structures/activities are unable to setup/ramp-up in time before old ones are reduced. This creates dislocation of people, confusion for decision makers and wasted investments.

Even with slower changes, if they are functions of government control then those control functions are driven by individuals who are somewhat predictable. Consequently, economic participants influencing or predicting Government actions can derive economic benefit from change, rather than delivering value for the economy. Furthermore, as Government action is usually late as they are based on trailing indicators and the effect of interest rates change take a long time to ripple through the economy - the control function is very weak.

The government is best to avoid dictating interest rates and should focus on smoothing/slowing the rates of natural change in the market place and make steps to maintain interest rates within a goldilocks middle ground to avoid extremes.