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$2 of debt for every $1 invested
Low rates
Prolonged periods of low or near 0% interest rates pushed households toward equities to outpace inflation on low savings yields, and cheap borrowing let them take on massive mortgages to outbid competitors in tight housing markets. Those low rates started in 2001, the same year net worth and GDP began to diverge, and the timing is probably no coincidence.
Chasing price gains
Gains on non-productive assets above inflation have been on par with, and at times beyond, the operating returns of productive assets. That gives investors a reason to chase price appreciation in equities and real estate over real economic investment.
Debt crowds out investment
Debt competes for the same dollars. For every extra dollar that goes into paying down debt, there is one less available for productive investment. More money is going to paying debt or chasing asset appreciation, and GDP struggles to keep up when productive investment is not the priority.
How do low interest rates push up house prices?
A mortgage payment depends on both the size of the loan and the interest rate, so a lower rate lets a buyer borrow more for the same monthly payment. When many buyers can borrow more, they bid prices up against each other, especially where new supply is limited. The Federal Reserve cut its policy rate to 1.75 percent by the end of 2001 and to 1 percent by mid-2003. The Case-Shiller national home price index peaked in 2006 and then fell for about six years.
Where did near-zero interest rates begin?
Japan was the first major economy to settle into them. The Bank of Japan cut its policy rate to effectively zero in February 1999, after an asset price crash and years of weak growth. In March 2001 it also launched the first large quantitative easing program, buying government bonds to expand bank reserves. Other central banks adopted similar tools after the 2008 financial crisis.
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