EDITOR'S LETTERMerryn Somerset Webb
Super-low interest rates: good for nothing
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.
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, 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 (see page 12) 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 the magazine this week, 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 still online if you haven’t seen it yet). Also, we 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.