Why record low interest rates are a cause for alarm, not celebration

Telegraph (UK) ^ | 11 June 201 | Jeremy Warner

[Lorianne]

UK rates may be at an all time low, but they are even lower elsewhere, particularly on the Continent, where the European Central Bank has been so busy buying up government debt that in Germany and Holland the stock of available bonds has been almost completely exhausted. There is virtually no yield left at all on 10 year German bunds, against which their UK equivalent look positively bountiful.

So utterly desperate has this hunger for yield become that there are now an astonishing $10 trillion of government bonds worldwide trading on a negative interest rate. Some corporate borrowers too have recently entered the sub-zero club.

Bill Gross, founder of Pimco and self-proclaimed king of the bond markets, calls this phenomenon “a supernova that will explode one day”. I’d be inclined to agree with him, but for the fact that some years ago he said that UK gilts were "sitting on a bed of nitroglycerine". Since then, the yield has halved, and then halved again. This has been an implosion rather than an explosion, more black hole than supernova.

Of all the explanations posited for declining global interest rates, the most plausible is that of the “savings glut”. Worldwide, companies and households are saving as never before. But they are not investing, as would normally happen when surplus earnings are being generated, so they chase “risk free” government bonds instead, hard-wiring subdued demand into the global economy. Bond yields won’t rise markedly until investors rediscover their appetite for risk and growth.

Nowhere is this more apparent than in the Eurozone, where the European Central Bank, with a negative official policy rate and a huge ongoing bond purchasing programme, is struggling to keep up with the decline in market rates.

... snip

[Gen.Blather]

Low interest rates encourage governments to deficit spend. But when interest rates reach a paltry 4% most countries will be spending their entire income to meet interest payments. This is insane. Governments will collapse or simply print money as in the Weimar Republic.

[Buckeye McFrog]

Which is precisely WHY they won’t be going up. Everyone on the planet has too much skin in the game, and the stakes of losing are unthinkable.

Hence the game of Three Card Monte goes on indefinitely.

[Boogieman]

“Hence the game of Three Card Monte goes on indefinitely.”

Seems more like Monopoly, since the banks keep printing play money...

[Adolf_Josef_Maobama]

Interest rates need to be gradually raised to the point where retirees can live off the interest of their savings like they used to be able to. I’ve read that the short-term rate should be allowed to float like the long-term rates rather than being arbitrarily decided by an unelected cabal of ten people.