The disaster of negative rates

The disaster of negative rates, by Alan Kohler. Why are central banks increasingly imposing negative interest rates?

Never mind that low prices are largely the result of supply gluts somewhere else — of steel in China and oil in the US and Middle East — central banks are attempting to clear these gluts by increasing demand because it’s all they can do.

They are doing it by driving banks away from their doors: “if you deposit money with us,” they are saying, “we’ll charge you. Go lend it to someone.”

And never mind that subdued demand is largely due to excess debt -central banks want to increase it with yet more debt.

The damage done to savers is immense. For retirees and others living off savings, the low interest rates since the GFC have been crippling — and it’s getting worse.

But most importantly the impact this is having on savers is devastating. In his annual letter to shareholders over the weekend, BlackRock chief executive Larry Fink said not enough attention is being paid to the toll that low and negative interest rates are taking on investors’ ability to save for the future.

“This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.”

They also push up insurance rates, because insurers cannot make as much from your premium money:

“If low or negative rates persist, they could undermine the viability of life insurers, pensions, and savings vehicles. Low rates make it difficult for insurers to meet guaranteed returns, and with substantial duration mismatches, this will eventually force losses on life insurance policyholders.”