Low Long-Term Interest Rates - An alternative View

The fall in risk free interest rates since the 1980s has mostly been described as being induced by factors that push down interest rates from the demand side. This paper contributes to the literature by adding a view of the supply side, namely that interest has to be earned first, before it can be distributed. Consequently, interest can only sustainably be distributed from the added value in a given period. But through higher debt ratios today, a smaller amount of added value can be used to fund interest payments than in the past. In such an environment, average interest rates can only be held stable, if the nominal amount of interest paid is rising, which would then lead to lower income for labour and/or a lower reward for entrepreneurs in the form of corporate profits and dividends. But labour and entrepreneurial income did not fall as much as would be needed to compensate for the much higher amount of interest bearing assets since the 1980s. The only logical consequence then is a fall in average interest rates.