Super-low interests rates aren't good for anyone

The very policy designed to kick start growth in the economy could end up stalling it, says Merryn Somerset Webb.

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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.