Low Interest Rates For The Young!

Moneybox
A blog about business and economics.
July 9 2013 2:38 PM

You're Never Too Young To Be Excited About Low Interest Rates!

Jessica Misener at BuzzFeed offers "30 Signs You're Almost 30" and I think it's pretty spot-on except for No. 26 "You get excited about lame stuff, like low interest rates."

You are never too young to be excited about low interest rates!

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In fact, low interest rates should be especially exciting to young people. That's because of a little thing called "consumption smoothing." The idea of consumption smoothing is you don't make much money when you're young, but your earnings rise as you gain experience and seniority. Then eventually your earnings fall again and you retire. But rather than having your level of consumption take that same up-and-down swing, it makes sense to "smooth" the path of your lifecycle consumption. In other words, you go into debt when you're young (consume more than you earn) and then pay down the debts and build up savings (earn more than you consume) during prime age and then spend down your savings (consume more than you earn again) while in retirement. It's popular in certain strands of economic modeling to actually act as if people universally engage in perfect lifetime consumption smoothing.

But even though that's an absurd simplication, the underlying idea of consumption smoothing isn't absurd. The case for going into debt is stronger when you're younger, and the younger you are the stronger it is. And low interest rates are exciting because the make it cheaper to go into debt. So it's young people who should be especially excited about them.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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