As many Americans prepare for retirement, more people are becoming concerned with how negative interest rates will affect their savings.
Effect of low rates
Negative rates may create instability and lead to unexpected financial disruption. Interest rates measure the preference of economic agents for the present rather than the future.
We know the reason behind the current ultra-low rates: extremely accommodative monetary policies worldwide. This quantitative easing creates an artificial imbalance between supply and demand and the equilibrium price is an artificial price.
Former U.S. Secretary of the Treasury Larry Summers proposes a convincing approach, “Secular Stagnation,” wherein the real equilibrium interest rate would be negative; and the accommodating policies of central banks would only adjust the curve of rates to this negative equilibrium rate.
But without massive debt purchases through money creation by central banks, the rates would obviously be higher; and, therefore, the current situation is artificial. The positive impact of this money creation on the economy is yet to be seen. The only clear effect is the creation of financial bubbles within a number of asset classes.
I draw three consequences from this situation:
Result #1: The current state of interest rates is very unstable. Endlessly solving growth and debt problems through money creation is an illusion.
There would need to be cooperative play worldwide to find a solution. This would include structural reforms, as well as the acceptance of lower growth and lower living standards, which means we likely won’t see this resolved for quite some time.
The overcapacity problem generated by a low interest rate environment will need to be adjusted, writes AXA’s François Robinet. (Photo: Thinkstock)