Money for Nothing Forever?

Why are interest rates so low?

Source: Morguefile

It’s easy to see our ultra-low interest rates and blame the Fed. After all, they set short-term rates; they’re the ones managing the money supply; they’re the ones that oversee the banking system. But interest rates are low everywhere—not just in the US. And real interest rates—the difference between interest rates and inflation—have been falling for decades. Well before the financial crisis, long-term bond yields around the world began falling from 4% above inflation to roughly equal to inflation.

Source: Bank Underground

The low rates we see today would have been unimaginable a generation ago. I remember a friend in the early ‘80s who was thrilled to get a mortgage for only 8%: “We’ll never see that rate again,” her banker told her. Now, however, governments, corporations, and consumers around the world can get money for almost nothing. On the flip side, though, savers get almost nothing for their money. What’s causing this?

There are lots of possible culprits: technology, productivity, slower global growth. But the explanation that makes the most sense to me is one suggested by Ben Bernanke a decade ago: there’s a global savings glut: more people are setting more money aside and there aren’t enough productive ways to put that money to work.

What’s causing this? I see three major issues. First, demographics: people live longer but don’t necessarily work longer. Our life expectancy has risen, but our retirement age hasn’t gone up as much. That means more has to be set aside to pay for a longer retirement period. Second, global wealth: the rising middle class in emerging economies is generating significant amounts of new wealth. Rich and middle-class people save more than poor people. Finally, technology: the infrastructure of economic growth has changed. New industries don’t need as much capital as older industries. It takes more investment to produce concrete and steel than software and fiber optics. Also, code doesn’t pollute the environment—and doesn’t need to be cleaned up.

These are global, long-term trends. They aren’t likely to turn around any time soon—you can’t put the demographic, financial, and technological toothpaste back in the tube. Ultra-low real rates are going to be with us for a long, long time.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:26+00:00 September 23rd, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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