Wednesday, July 01, 2015

Stupidly low interest rates

We have ridiculously low interest rates as the catalyst for the financial problems we've been, and still are, living through and all the financial wizards can think of is to lower them even more while the ramifications are ignored.

Just take Australia, which is not untypical of many other countries.

Interest rates are at historic lows, have been for years, and still there's talk of lowering them even more.

At the same time there's hysterical talk about what they say is the biggest challenge of our times - an aging population. We're told the future is dire with fewer and fewer workers paying taxes to keep ever more pensioners. And something has to be done about it, we're told.

But the low interest rates are adding enormously to the problem, making it much worse than it needs to be.

People self-funding their retirement solves the problem.  So that's the objective, to get as many people as possible to fund their own retirement.

But with the interest rates we have, self-funded retirees are only getting two or three percent return on their savings. You need more than two million in the bank to earn enough to live on, and not many have managed that.

Self-funded retirees have done the right thing, saved to fund their retirement only to find that the interest rate setters have killed that possibility off.

So inevitably they're going to have to look at a government funded pension as a top-up - except that our current apology for a government has introduced a means test to try to head that off. "Can't afford it" they say.

Well, if interest rates were at a sensible level, a neutral rate of around six to seven percent, they wouldn't have to go elsewhere for income, their savings would be producing it.

A neutral rate would mean that both borrowers and savers would be fairly treated, with a reasonable amount being payed or earned.

The justification for the low rates is that it will boost the economy because companies will borrow the cheap money, invest it, expand, hire more staff and push the economy along.

Wrong. It simply isn't happening. It doesn't work any more but the rate setters haven't realised it yet.

Getting companies to invest, expand, hire is far more complex than offering them cheap money.

Government policy, confidence, stability, costs of operating are all more important than the cost of money.

It's way past time that interest rates were put back to a neutral level and governments started to do their job properly.


Young Finance Guy said...

I agree 100%! Interest rates are way too low. I have been thinking about this for the last couple years. I get why the government is afraid to mess with the low rates... at least I get the short term hesitation. However, when you actually study the interest rates over the last 40 years or so you find something rather shocking... Interest rates have always been low and they never go anywhere but down... That may sound a bit confusing and conflicting but bare with me.

If it were 1989 a person would look at the 11% interest rate for a fixed rate 30-year mortgage and say "wow rates are low I remember earlier this decade and they were 17-18%"

If it were 1999 a person would look at a 7% mortgage and say "wow rates have gotten low just earlier this decade they were 10% or so"

2009 people see 5% and compare it to a 7-8%

today we do the same....

My point is that rates are thought to go up and down. They do in the short term. But the long-term trend is straight down.

So my question is what do we do now and what happens as a result.

There is a great article on the long term trend of dropping mortgage interest rates that I suggest everyone read to get the facts that no one ever talks about.

Thanks for the post!!

Seabee said...

Since the disaster that was Alan Greenspan - hugely responsible for creating a climate for the GFC to happen - they still haven't realised that low rates simply don't work. But, like Greenspan, no-one knows what else to do.