We are back to bizarrely low long-term interest rates, and that says something is very rum in the world economy. You now pay money to lend to the German government, for you get a negative interest rate for short-term debt and only 0.36 per cent to lend for 10 years. The yield on UK 10-year gilts was down to 1.33 per cent, its lowest since the Bank of England was founded to raise money for the Government in 1694. Even US rates are at historic lows at 1.66 per cent for 10-year money, a full percentage point below the level of a year ago.
There is a superficial parallel with Japan, whose rate is even lower at 0.27 per cent. But this is seen as a function of frantic saving by Japan’s ageing population, a lack of profitable investment opportunities there, and very slow growth over the past 20 years. We have lots of problems in Britain but an excess of personal saving is not one. We, and the US, also have a fast-growing economy, something that has eluded Japan and may now elude much of continental Europe.
But Europe does share one aspect of the Japanese condition, and that is falling consumer prices. Eurozone prices are down 0.6 per cent year-on-year, and it looks as though Britain may dip into a period of falling prices this year. But that is largely the result of the one-off plunge in the oil price. Factor that out and prices would be rising, even in Europe, by a bit below 1 per cent a year. Meanwhile, here in Britain and in the US this underlying inflation is somewhere around 1.5 per cent. (US headline inflation is 0.8 per cent.) Once the impact of this fall in the oil price moves through the economic system, which will take about a year, inflation will start to climb again.
Unlike Japan, Britain and the US have rising populations. Property prices have recovered, arguably a bit too much here. US shares are at record levels, while UK ones have experienced nothing like the collapse that took place in Japan. True, there are closer parallels in parts of Europe, but not even Greece has public debt of more than double GDP.
If we’re not all becoming like Japan, what other explanations could there be? Financial repression is one. This ugly expression means governments nudging, forcing or bullying people to lend them money at artificially low rates because they have borrowed too much and need to cut their financing costs. A typical way of doing so is to require banks, pension funds and other financial institutions to hold government debt for “prudential” reasons. Forcing pensioners to buy annuities (which are invested in government stock) is a classic ruse.
Quantitative easing is an element of this. By flooding money into the system, interest rates are reduced. Borrowers benefit, or at least they should do if they can borrow at these low rates, and savers suffer. The excuse, a perfectly reasonable one, is that the greater good which QE brings to the economy as a whole, in the form of higher asset prices and greater growth, more than offsets the disadvantages it brings to savers and the increase in inequality which it creates from, for example, higher house prices.
There is a further and more nebulous explanation: fear. These ultra- easy monetary policies have managed to create some growth in the US, and more recently here in Britain. The European Central Bank is beginning its own programme and we will see how that works, or doesn’t, later this year. Japan began its QE last year but it is too early to judge its impact.
But investors are frightened of these policies. They know they have to come to an end. They know that eventually interest rates have to rise. They are aware that Mark Carney, among others, has voiced concern that as things get back to some sort of normal, this will put pressure on some financial institutions, some companies, and indeed some people.
So what do you do in this world of uncertainty? You do at least know that you won’t lose too much money. The German government will pay you back, and if other, weaker eurozone governments can’t, the European Central Bank will probably stump up somehow – well, maybe not for Greece. The British and US governments will certainly pay, because they control their own currencies and have compliant central banks.
I find this fear both troubling and unreasonable. Troubling, because it shows a lack of trust and a dearth of hope. But also unreasonable, because the world economy is growing, and that growth is gradually improving living standards in most of the developed world. Savings should go into real investment projects that better the human condition, not just be shovelled into government debt. So let’s hope the markets are wrong, and that this plunge in long-term bond yields is an aberration, soon to be reversed.Reuse content