An Interesting Debate on Interest Rates

An Interesting Debate on Interest Rates, by Vern Gowdie. Our very own RBA Governor Glenn Stevens warned that low rates are hurting retirees (ABC News, 20 April 2016):

Mr Stevens said record low interest rates are “a big problem” for savers and that many stand to be “disappointed” about the direction of their retirement nest eggs.

Mr Stevens warned that, in a world of sluggish growth, “implicit promises” about retirement incomes were in danger of not being fulfilled.’

Token nod to the plight of retirees, but interest rates will remain firmly accommodative because, in our economic growth model, debt trumps savings.

Second, Nobel Prize winning economist Joseph Stiglitz released an article entitled ‘What’s Wrong With Negative Rates?’ on 13 April 2016:

There are three further problems. First, low interest rates encourage firms to invest in more capital-intensive technologies, resulting in demand for labor falling in the longer term, even as unemployment declines in the short term.

Second, older people who depend on interest income, hurt further, cut their consumption more deeply than those who benefit – rich owners of equity – increase theirs, undermining aggregate demand today. Third, the perhaps irrational but widely documented search for yield implies that many investors will shift their portfolios toward riskier assets, exposing the economy to greater financial instability.

Third, Spiegel Online ran a story on 8 April entitled: ‘Germany takes aim at the European Central Bank:

A few weeks ago, Finance Minister Wolfgang Schäuble warned the ECB head that his ultra-loose monetary policies could “ultimately end in disaster.”

‘“It jeopardizes the trust of all those who work hard to establish a small degree of prosperity or a nest-egg for retirement,” says one [German Economics] ministry official. “Plus, the cheap money hasn’t helped get the economy back on track.”

‘There is hardly any other issue that enrages Germans at town meetings and political party conventions as much as the disappearance of their savings due to the “unconventional measures” adopted by the ECB in Frankfurt.’

Gowdie concludes:

Cheap money is hurting both banks and retirement companies. Cheap money will end in disaster. Cheap money has screwed savers. Cheap money has not revived the economy. Cheap money is causing social unrest.

So who is cheap money benefitting? It keeps the debt machine in motion for now. However, when all these dire warnings on the damage cheap money is unleashing morph into reality, that global debt machine will come to a grinding halt…it’ll make 2008–09 look like a hiccup.

Huge swathes of capital will be destroyed. Confidence in the system lost. Social unrest will escalate. … There’s very little doubt that helicopter money is coming.