The crippling cost of zero interest rates

They used to say there are but three ways to ruin the class of petit-bourgeois savers who form the backbone of all successful democracies: a banking collapse (as in the 1929 crash); hyperinflation (as in banana republics); or straightforward state expropriation (as in oppressive taxation). Now we’ve invented a fourth. The introduction of zero to negative interest rates is “destroying” the economics of wealth creation. It has nullified the magic of compound interest, thus making it impossible for a generation of savers to amass a decent amount of money for their retirement. A decade ago, you had to put aside £761,000 to enjoy a £35,000 annuity in retirement. Today you’d need to save £1.4m. That’s not all. Low interest rates have created “a massive black hole” at the heart of company pension schemes; so rather than spend on factories and machines, businesses are having to plug the gap. And since banks can’t profit from super-low interest rates, the supply of loans also starts to dry up. In their obsession to push down the cost of borrowing, Government and central banks have forgotten that “free credit comes at a crippling, hidden cost”. (Allister Heath, The Daily Telegraph, UK).

There is also another phenomenon. You can put money into any number of financial funds, but the return is risible. This is a disaster for the elderly, many of whom have to scrape through on Social Security (thank heaven for it, but it’s rather hard to live on it and actually do anything). This means that the elderly cannot spend. (By the way, all this escapes the attention of people who complain about how pampered elderly people are). I you do have funds invested you tend to ignore them, because it costs more than it’s worth to move them. There is no incentive to even bother. At the moment the stock market is doing well, but for how long? Many fear (or expect?) another disaster, this time caused by car financing or some other financial services idiocy from banks whose greed blinds them to history. What is going up now could disappear next week.   I remember when interest rates were 18% at one point.  That was a disaster, but almost- zero interest rates are as bad in different ways. Cue for mention of Epicurean moderation.

  • Owen Bell

    Long-term low interest rates are a result of the developed world’s addiction to debt- a problem caused by politicians on all sides of the political spectrum. For conservatives and liberal internationalists, debt is worth incurring to fight wars and promote economic development abroad. For socialists, debt is worth incurring to fund infrastructure upgrades and expand the social security system. Because interests rates are generally lower than the rate of inflation, the government is incentivised to borrow. But there’s no such thing as a free lunch. Someone must lose out. And in this case, it is savers. With our ageing population, sub-replacement birth rates and worsening dependency ratio, a low savings rate will cost us all very dearly.

    Having said that, the likes of Allister Heath are not really serious about reducing the debt. For a start, Heath is an ardent supporter of Brexit, which will almost certainly increase the debt because of long-term worse growth due to new barriers to trade being implemented. Heath is also one of these neoliberal Brexiteers who wants to cut taxes dramatically after Brexit in order to make us tax competitive. Now it’s true that outside the Single Market, we will need to do more to attract foreign investment, and perhaps lower taxes would help. But there’s no way lower taxes will lead to higher revenue; countries will lower taxes collect less revenue as a proportion of GDP, and don’t necessarily have higher growth rates. Heath correctly identifies a problem, but his solutions will only make things worse.

  • Carmen

    “Cue for mention of Epicurean moderation.” Yes, moderation from those groups who control credit and investment. Most public accountability when they become criminally immoderate. Rational Interest rates, effective public oversight, transparency–all these aspects rely on actual accountability which hasn’t happened even regarding the 2008 crisis.