An Interesting Debate on Interest Rates

The Dow Jones is up nearly 2500 points over the past two months…little wonder it stopped for a quick breath on Thursday.

The US share market recovery has coincided with the weakness in the US dollar. When, not if, the US dollar regains its strength, expect to see a resumption of volatility on Wall Street that will certainly flow over to the All Ords.

While share markets appear to be on steady ground, there seems to be a growing ‘interest’ with interest rates…specifically, the merits of ultra-low rates.

The pick-up in commentary is not from your usual newsletter-type writers banging on about the stupidity of negative rates and the punitive effect this has on the savers of the world — no, it is coming from esteemed insiders.

Our very own RBA Governor Glenn Stevens, from the safety of a conference room in New York, warned that low rates are hurting retirees.

According to ABC News on 20 April 2016:

The Reserve Bank governor Glenn Stevens has warned that today’s world of ultra-low interest rates is putting increasing pressure on returns for superannuation funds.

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.

Thanks for the revelation, mate. Here in the real world we hadn’t noticed.

With this level of insight, you can see why we pay Glenn the big bucks.

What did Glenn propose to fix the problem facing retirees? Increasing the cash rate? Did he recommend abolishing the RBA, letting market forces determine short term rates? Nope.

He offered nothing of substance, other than this observation, before moving on to the champagne and caviar.

Now that Glenn has paid token interest (literally) to the plight of retirees, interest rates will remain firmly accommodative. Why? Because, in our economic growth model, debt trumps savings.

In effect, Glenn tipped his hat in acknowledgement to the woes of Australian savers, giving them the proverbial middle finger.

In addition to crying crocodile tears for Aussie savers, media reports said Stevens dismissed the concept of helicopter money. Did he? Here’s an extract from his speech (emphasis mine):

The main complication is surely that it would be a lot easier to start doing helicopter money than to stop, if history is any guide. Governments have found that a difficult decision to get right. That is, after all, how we got to the point where direct central bank financing of governments is frowned upon, or actually contrary to statute, in so many countries. It would be a very large step to overturn those taboos, which exist for good reason. The governance requirements in doing so would be, if not intractable, at least very complex. Desperate times call for desperate measures, perhaps. Are we that desperate?

Perhaps I am reading too much into the last two sentences — desperate times call for desperate measures. Hmmm.

Even the economic looney running the Bank of Japan, Haruhiko Kuroda, said at the recent IMF (which we might call the ‘Institution of Monetary Foolishness’) meeting in Washington, ‘We have no intention to employ helicopter money, anything like.

Pull the other one Haruhiko-san.

Since 2008 we’ve witnessed growing levels of desperation from central bankers all around the world — QE, negative rates, central banks financing government deficits, governments propping up share markets, central banks’ backdoor financing of banks. We are told these actions have been necessary in the interest (there’s that word again) of maintaining stability.

Our esteemed central bankers should know that stability leads to instability.

Propping up a deeply flawed and heavily indebted economic model is not doing us any long term favours.

Even Nobel Prize winning economist and Professor at Columbia University, Joseph Stiglitz, has joined the chorus questioning the wisdom of low interest rates.

On 13 April, 2016, Stiglitz released an article titled: ‘What’s Wrong With Negative Rates?’

Here’s an extract:

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. 

Investing in technology — robotics and automation — has never been cheaper. Unemployment queues are destined to lengthen…even by official counting. Retirees with less income cut back on their spending — not good for an economic model heavily dependent upon discretionary spending. Lastly, the search for yield has ensured that investors are taking on risk they would not normally have considered. When, not if, that risk is exposed, all hell will break loose on markets as capital flees to safety.

OK, so we’ve heard from the Aussie central bank chief. And from a Nobel-winning economist, too. Now a word from no-nonsense German politicians.

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

The Germans are none-too-pleased with none-too-Super Mario (Draghi). There has been open criticism that his push for negative rates is not in the best interest of Europe’s most powerful nation.

Here’s an extract from the article:

She [Angela Merkel] observed that his forced policy of cheap money is endangering the business model of Germany’s Sparkassen savings banks and retirement insurance companies. He [Mario Draghi] snarled back that the sectors would simply have to adapt, just as the American financial sector has.

Most dangerous for Draghi, however, is the displeasure from the German Finance Ministry. 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.

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.

Does this sound like desperate times?

There’s very little doubt that helicopter money is coming.


Vern Gowdie

Editor, Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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