Low Interest Rates
It’s been a long day…flew out in the morning and back in the evening. I’m tired. (Of course, at least NBC is being forced to show something other than bikini-ball tonight.) Regardless, I wanted to share one interesting article that I read. It’s titled, “How Long for Low Rates?” and was written by Harvard economist, Kenneth Rogoff.
The primary question he asks is how long low interest rates can persist in countries like the U.S., the U.K., Germany and Japan. Many countries are selling bonds that do not appear to even compensate investors for expected inflation.
Rogoff argues that there are three major factors that underlie today’s low yields:
1. The global savings glut – aging populations are saving for retirement in many countries; some governments (e.g., China) are holding large amounts of bonds (as a hedge against a future banking crisis and as a byproduct of efforts to stabilize the exchange rate).
2. Central banks have lowered short-term policy rates to close to zero – and there is no clear exit in sight. Normally, if a government takes rates too low for a long period of time, investors will eventually start to fear inflation and longer-term rates will rise. This hasn’t happened yet.
3. Investors are wary of a global financial meltdown – and are willing to pay for the safest bonds. Investors worry about Europe, the U.S. fiscal cliff, political instability in the Middle East and a possible slowdown in China.
There’s no telling how long this will last, but Rogoff asked how the process could be reversed. Here are some possibilities:
1. The global savings glut could end –as the elderly retire and start reducing their savings.
2. Many central banks will eventually figure out how to generate higher inflation expectations. He posits that central banks will tolerate higher inflation in order to force investors into real assets, accelerate deleveraging and facilitating downward adjustment in real wages and home prices. We may even see the appointment of central bankers who are not known as inflation hawks.
3. Eventually, the multitude of crises will be resolved. Of course, Europe is likely to get worse before it gets better. But, eventually, there will be a resolution.
Professor Rogoff ended by saying that “today’s low interest-rate dynamic is not an entirely stable one. It could unwind remarkably quickly.”
Have a great weekend.
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