Roger's Soapbox

Low Interest Rate Fiasco

By: | October 15, 2016

Roger Crombie is a United Kingdom-based columnist for Risk & Insurance®. He can be reached at [email protected].

For a decade, I have argued that reducing interest rates to near-zero was a Very Bad Idea. Three main reasons presented themselves: What government would have the courage to raise rates ever again? Where can the Fed go from 0.5 percent, if upwards is ruled out? Why fuel the asset price bubbles that will inevitably follow?

Discouraging saving causes suffering to individuals, banks, insurance companies and the broader economy.

Countries across the globe take their cue from the Fed, and sure enough, interest rates around the settled world have fallen to close to zero. Thanks a lump, Mr. Greenspan.

In framing this discussion for all those years, I failed to anticipate just how dangerous things would become, because — who’da thunk it? — I’m not stupid enough. Where interest rates can go from 0.5 percent is, first, to zero, and then to less-than-zero.

An annual rate of minus 0.5 percent, for example, would mean that every $100 you put in the bank would yield only $99.50 at the end of a year, or less if the punishment were compounded more frequently than once a year.

Below-zero interest rates are now levied by central banks in countries that constitute a quarter of the global economy. Britain is on the brink of joining in. Private sector banks in the E.U., Denmark, Switzerland and Japan must pay their central bank to keep their money on reserve. The banks can only pass that loss on to their customers by penalizing them for saving.

Clearly, those who regulate our money have taken leave of whatever sense they may once have possessed, and are driving us all to the Bank of Brinkruptcy.

Investors in government bonds issued by Japan, Germany and Switzerland now pay their government for the privilege of owning the bonds. For insurance companies, many of whom are limited to holding the great majority of their invested funds in fixed income instruments, this begins to approach a catastrophe, for which reinsurance is not available.

The folly that zero interest rates creates is pernicious and far-reaching. Insurance and other companies, lacking a sensible way to hold billions in currency, cannot pull their money out of banks. The rest of us, being mattress owners, can. The withdrawal from banks of most individual savings would only worsen the banks’ situation and increase the costs they must pass on. The sale of home safes in Japan has soared of late. Guess why.

An even crazier idea is gaining hold. Instead of quantitative easing, the latest proposal is called “helicopter money.” The central bank will create money out of thin air and place it directly into customers’ accounts.

Most central banks try to keep inflation under control. They’ve done such a good job of it that deflation is now public enemy No. 1. Clearly, those who regulate our money have taken leave of whatever sense they may once have possessed, and are driving us all to the Bank of Brinkruptcy.

Economies built on sand crumble when the tide comes in. If I’m the only one who can see that the central bankers of the developed world are strutting about naked, we are all in very serious trouble. &

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