Unintended Consequences
I recently sent this excerpt, from a research note I had read, to the team. It is worth sharing with you too as it’s very concerning for Australians given declining inflation and interest rates are also evident here…
“In another example of unintended consequences [of near zero interest rate policies], Denmark’s private sector is saving more now with negative rates than when rates were above zero, ostensibly due to what BlackRock’s CEO, Larry Fink recently pointed out, namely individuals have to defer spending today in order to set aside more cash flow for use during retirement. Kasper Ullegaard, who oversees $15 billion of fixed income investments at Denmark’s government pension manager, Sampension, recently made the following observation to Bloomberg in an article dated May 2, 2016, and entitled “World’s Longest Negative Rate Experiment Shows Perversions Ahead”: “Negative rates are counter-productive [because the policy] makes people save more to protect future purchasing power and even opt for less risky assets because there’s so little transparency on future returns and risks.”
The Bloomberg story went on: “The macro data bear out the theory. The Danish government estimates that investment in the private sector will be equivalent to 16.1 percent of gross domestic product this year, compared with 18.1 percent between 1990 and 2012. Meanwhile, the savings rate in the private sector will reach 26 percent of GDP this year, versus 21.3 percent in the roughly two decades until Danish rates went negative, Finance Ministry estimates show.” Making matters worse, the government recently cut its GDP growth forecast for this year almost in half, from 1.9% to 1.1%, while March inflation data showed stagnant prices after two years of readings below 1%.”
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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Aaron Somner
:
You really have to ask, when has lowering interest rates ever been inflationary? Never! Every economic decline has seen lower rates, just like every economic boom has seen rising interest rates. What were interest rates doing before the GFC? Rising! Lowering rates below the point where people can save, and earn income for the future, is deflationary. The central banks theory’s are dead wrong. It does not stimulate demand, force the banks to lend or encourage anyone to borrow. It is a completely unprovan theory. In actual fact, the more they try to manipulate society the worse the economy gets.
The only outcome they have achieved is to heard the worlds capital into the bond market creating history’s largest ever bubble. We are now at the point where not even negative interest rates can solve government’s systemic deficits. A rise in interest rates will create a crisis in confidence that they can sustain thier budgets long term. Throw in the forward estimates for the costing of pensions, healthcare and military. Not to mention the cost of the migrant crisis and we have the biggest threat to the worlds economy. A 1931 style soveriegn debt crisis.
Guy Davis
:
Jim Grant called out ZIRP as deflationary years ago. If only they’d considered him to chair The Fed!