Constantly falling interest rates are destructive. Those businesses that borrowed at the earlier rate are at a disadvantage to those businesses that borrowed later at a lower rate.
As each new business is encouraged into existence by the incentive of lower interest loans, so the viability of the previous businesses is lessened. They cannot compete against a new business with lower costs. Every business collapse is destruction of capital.
So why are interest rates falling? Interest rates are falling because of the need to service national debt. The principal is beyond repayment, (even were that possible in the peculiar fiat system that we labour under, which it is not. A debt cannot be extinguished with a debt note). The debts are so gargantuan that the difficulty is in even servicing the debt – in paying the interest. If interest rates drop, then it is easier for governments to service the debt so that they can keep borrowing and promising more. Thus, central banks are pressured to drop rates.
However, while the collapse of the debt is mathematically inevitable, that does not necessarily mean that it is imminent. Something has happened recently though that indicates that it is now imminent.
In some parts of the world, interest rates have been artificially pushed so low that they have gone negative; Japan, Switzerland and Germany are major examples.
This is unprecedented. At no time in the history of the world have interest rates been negative. Apart from plain old common sense, there is another reason that mitigates against lending capital for a negative return – getting back less than you lent.
If a business is losing 2%, then it is best to wind up the business and to redeploy the recoverable capital and expertise elsewhere. But if money can be borrowed at negative 3% or more, then the business is suddenly profitable. Negative interest rates means that companies can destroy capital – profitably! It is the ultimate in nutty incentives.
Sometimes a situation is best taken to extremes to appreciate its merit, or lack thereof. What if money were lent at interest rates of negative 100%? For the answer to that, think Weimar Republic. Money so freely available, literally, would be perceived as worthless. Wheelbarrows would be in use well before rates reached negative 100%. We are heading toward the ultimate in capital destruction.
Currently, capital is flowing out of Europe and into the US. Why would you invest in negative yielding bonds in a falling currency when you can buy positive rate bonds in the strongest currency in the world?
Europe is in its death throes. It has destroyed its culture and now it is destroying its currency and its economy.