Zero Interest Rates

Not one politician understands what destruction the zero interest rate policy is doing to the economy.  All they see is that people, businesses and governments can borrow cheaply.  Not one sees the opposite effect; low interest rates discourage savings.  Savings is the foundation of the economy.  Without it banks would not lend to consumers to buy houses and businesses to build plants.  An economy that lacks savings eventually creates poverty.

Low interest rates act like a tax increase on savers and pensioners by reducing their income. Today’s monetary policy has transferred income from older savers, to younger borrowers and banks.  For example, since 2008, borrowers with a $100,000 mortgage are over $2,400 better off every year. However, savers with $100,000 in cash or fixed-rate bonds are over $2,750 a year worse off.   How can our politicians expect these people to rush out and buy new homes and cars?  The reality is, savers cannot afford to spend without depleting their savings.

Many corporations and governments have taken advantage of the low rates to borrow and stick the cash ‘in the bank’, whereas the consumer has chosen to borrow more to spend.  As a result, the average Canadian consumer debt is at historical highs which will be a threat to the economic recovery when interest rates do rise.

Corporations are sitting on trillions of cash doing nothing.  If these businesses did see savers spending their money they would be building new plants, expanding markets and hiring skilled people.  Instead, they are hoarding cash for future opportunities rather than investing it today. 

The longer interest rates stay at zero the longer the economy will stay flat.  Even if interest rates were to rise next month it will not help much because too much of the saver's cash is tied up in 1 to 5 year GICs.  If rates do start to increase it will benefit savers in no less than a years’ time.

Today, corporate profits are healthy.  However, a year from now profits will be in a slow decline due to savers being squeezed by low investment returns.  This will be compounded by the over-leveraged consumer.  Stock markets, over the long term, follow the direction of corporate profits.  As a result, a year from now they will begin a slow decline as long as interest rates stay where they are.  The current interest rate policy, which is well into its 6^th year, has proven to offer zero benefit to the economy.  As long as our politicians continue to protect the borrower rather than the saver our economy will go nowhere.

Remain on the sidelines until the CEO’s of the world stop building cash reserves to historic highs and put their money to work.