FINANCIAL REPRESSION - XX
The Unseen Consequences of
Zero Interest Rate Policy
Incrementum's Ronald-Peter Stöferle explains how central banks with a zero interest rate policy (ZIRP) in place are creating unintenddd consequences & associated adverse risks to investors & retirees .. it's financial repression .. "With artificial stimulus like ZIRP, we only end up with a situation in which governments, financial institutions, entrepreneurs, and consumers who should actually be declared insolvent all remain on artificial life support." .. with the unintended consequences being:
1. Conservative investors by nature come under increasing pressure with respect to their investments & take on excessive risks in light of the prospect that interest rates will remain low in the long term. This leads to capital misallocation & the emergence of bubbles.
2. The sweet poison of low interest rates leads to massive asset price inflation (stocks, bonds, works of art, real estate).
3. Structurally too low interest rates in industrialized nations due to carry trades lead to the emergence of asset price bubbles & contagion effects in emerging markets.
4. Changes in human behavior patterns occur, due to continually declining purchasing power.
5. As a result of the structurally too low level of interest rates, a 'culture of instant gratification' is created, which is among other things characterized by the fact that consumption is financed with credit instead of savings.
6. The medium of exchange and unit of account function of money increases in importance, while its role as a store of value declines.
7. Incentives for fiscal discipline decline.
8. Zombie banks are created: Low interest rates prevent the healthy process of creative destruction. 9. Banks are enabled to roll over potentially non-performing loans practically indefinitely & can thus lower their write-off requirements.
9. Newly created money is neither uniformly nor simultaneously distributed amongst the population
LINK HERE to the Article
The Unintended Consequences of
"The Impossibility of
Meeting Return Targets"
Greenwich Associates conducted a study on German institutions .. some quotes from the study:
“The low interest rate environment makes it impossible to meet return targets. We have not yet found a solution.” — German Public Pension Fund.
“Low interest rates are a problem. As a reaction, we have globalized our investments and invested in higher risk asset classes.” — German Foundation
“Primary challenge is the low interest rates. The only chance to avoid this is to do things you didn’t do before.” — German Insurer.
For many institutions in Germany, “doing things they didn’t do before” means investing significant amounts of assets in something other than domestic & government bonds.
LINK HERE to the Article