Super-low interest rates. What are they good for? I think the answer is now clear. Nothing. They are bad for big companies. They encourage them to issue far more debt than they need. That's been nice for them in the short term they can use cheap money to buy back their shares, pushing up share prices and paving the way for executives to get nice bonuses. But it won't be nice in the long run.
As Societe Generale's Andrew Lapthorne notes, big US companies are now horribly "overleveraged". So much so that he reckons it is reasonable to ask: "are central bank policies going to bankrupt corporate America?" Secondly, they push up pension deficits and cripple company cash flows (the lower rates go, the higher deficits go). A nasty pension deficit has been one of the problems dogging Tata Steel's UK operations, and CEOs across the country will tell you that they can't invest in their corporate future because all the cash goes to the pension scheme.
These are only the most obvious results. Low rates are also bad for people. They make us anxious. As BlackRock's Larry Fink noted this week, if you are 35 and interest rates are 2%, you have to save three times as much to get the same retirement income as when rates are at 5%. People see that. So they don't spend more as rates fall (as they are supposed to) they spend less. A policy designed to jump start growth stalls it. Not good.
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Still, bad as all that is, there is something worse about modern monetary policy. It is bad for social cohesion. There has been no rise in income inequality in the UK since the financial crisis. But the way in which low rates have forced up asset prices has meant a whopping rise in wealth inequality (to say nothing of a world of overvalued assets/endless bubbles). That matters. Why? Because added to the inability of the man on the street to get a return on his deposit account, it is the thing behind today's unhealthy anti-wealth agenda: if the 0.1% weren't so obviously doing so well out of the crisis, would anyone care about Dave's dad's offshore company? Or Dave's mum's entirely normal inheritance tax avoidance arrangements?
And if they didn't, might we have a government able to spend less time agonising about their personal tax returns and more time agonising about the state of the nation's finances and an electorate that would support them in doing it?
You'll be wondering what to do while you wait for the people in charge to come to their senses (it could be a while). In this week's issue, Lucy Walker of Sarasin has a few ideas about how to keep your income up she likes the Aurora Investment Trust I wrote about a few weeks ago (my interview with manager Gary Channon is hereif you haven't seen it yet). We also suggest some interesting Asian funds paying reasonable incomes. And in our main feature, Jonathan Compton tells you how to invest in one of the great themes of the century: the changing demographics of the developed world.
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Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
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How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
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Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
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The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
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The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
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Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
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Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
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Why we need to get a grip on our governmentEditor's letter Our government is trying to do too much, enacting policies that are destructive to the private sector. It needs to drop the the feel-good nonsense and create policies that lead to long-term wealth, says Merryn Somerset Webb.
