We are back to bizarrely low long-term interest rates, and that says something is very rum in the world economy. You pay money to lend to the German government, for you get a negative interest rate for short-term debt and only 0.36 percent to lend for 10 years. The yield on UK 10-year gilts was down to 1.33 percent, its lowest since the Bank of England was founded in 1694. Even US rates are at historic lows at 1.66 percent for 10-year money, a full percentage point below the level a year ago.
There is a superficial parallel with Japan, whose rate is even lower at 0.27 percent. But this is seen as a function of frantic saving by Japan’s ageing population, a lack of profitable investment opportunities, and slow growth over the past 20 years. We have lots of problems in Britain, but an excess of personal saving is not one. We, and the US, also have a fast-growing economy, something that has eluded Japan and may now elude much of continental Europe.
But Europe does share one aspect of the Japanese condition, and that is falling consumer prices. Euro zone prices are down 0.6 percent year on year, and it looks as though Britain may dip into a period of falling prices this year. But that is largely the result of the one-off plunge in the oil price. Factor that out and prices would be rising, even in Europe, by a bit below 1 percent a year. Meanwhile, here in Britain and in the US this underlying inflation is somewhere around 1.5 percent. (US headline inflation is 0.8 percent.) Once the impact of this fall in the oil price moves through the economic system, which will take about a year, inflation will start to climb again.
Unlike Japan, Britain and the US have rising populations. Property prices have recovered, arguably a bit too much here. US shares are at record levels, while UK ones have experienced nothing like the collapse that took place in Japan. True, there are closer parallels in parts of Europe, but not even Greece has public debt of more than double gross domestic product.
ARTIFICIALLY LOW RATES
If we’re not all becoming like Japan, what other explanations could there be? Financial repression is one. This ugly expression means governments nudging or forcing people to lend them money at artificially low rates because they have borrowed too much and need to cut their financing costs. A typical way of doing so is to require banks, pension funds and other financial institutions to hold government debt for “prudential” reasons.
Quantitative easing (QE) is an element of this. By flooding money into the system, interest rates are reduced. Borrowers benefit, or at least they should do if they can borrow at these low rates, and savers suffer. The excuse, a perfectly reasonable one, is that the greater good QE brings to the economy, in the form of higher asset prices and greater growth, more than offsets the disadvantages it brings to savers and the increase in inequality which it creates from, for example, higher house prices.
There is a further explanation: fear. The ultra-easy monetary policies have managed to create some growth in the US, and recently here in Britain. The European Central Bank (ECB) is beginning its programme and we will see how that works, or doesn’t, later this year. Japan began its QE last year, but it is too early to judge its impact.
But investors are frightened of these policies. They know they have to come to an end. They know that eventually interest rates have to rise. They are aware that Mark Carney, among others, has voiced concern that as things get back to some sort of normal, this will put pressure on some financial institutions, some companies and indeed some people.
So what do you do in this world of uncertainty? You do at least know that you won’t lose too much money. The German government will pay you back, and if other, weaker euro zone governments can’t, the ECB will probably stump up somehow – well, maybe not for Greece. The British and US governments will certainly pay, because they control their own currencies.
I find this fear troubling and unreasonable. Troubling because it shows a lack of trust and a dearth of hope. But also unreasonable, because the world economy is growing, and that growth is gradually improving living standards in most of the developed world. Savings should go into real investment projects that better the human condition. So let’s hope the markets are wrong, and that this plunge in long-term bond yields is an aberration, soon to be reversed. – The Independent on Sunday