Monday 1 April 2013

Losing Interest In Economics

Very many people have been hit by the effects of low interest on savings.  They are told that this is for the greater good of stimulating weakened economies.  But all that seems stronger is the financial power of the financial institutions that hold the money. 

Currently, interest rates are historically very low and in many cases negative in real terms.  Martin Feldstein of Harvard University in Project Syndicate thinks that this cannot go on much longer and will be soon before the markets or inflation or economic pressures mean that they have to behave normally.

Added to his comments all I would add is that for those governments with major debt and complex commitments arising from quantitative easing any significant, sharp or unexpected rise in rates could pose problems of management and urgency.

He starts, quote:

Long-term interest rates are now unsustainably low, implying bubbles in the prices of bonds and other securities. When interest rates rise, as they surely will, the bubbles will burst, the prices of those securities will fall, and anyone holding them will be hurt.

To the extent that banks and other highly leveraged financial institutions hold them, the bursting bubbles could cause bankruptcies and financial-market breakdown.


And finishes, quote:

The low interest rate on long-term Treasury bonds has also boosted demand for other long-term assets that promise higher yields, including equities, farm land, high-yield corporate bonds, gold, and real estate. When interest rates rise, the prices of those assets will fall as well.

The Fed has pursued its strategy of low long-term interest rates in the hope of stimulating economic activity. At this point, the extent of the stimulus seems very small, and the risk of financial bubbles is increasingly worrying.

The US is not the only country with very low or negative real long-term interest rates. Germany, Britain, and Japan all have similarly low long rates. And, in each of these countries, it is likely that interest rates will rise during the next few years, imposing losses on holders of long-term bonds and potentially impairing the stability of financial institutions.

Even if the major advanced economies’ current monetary strategies do not lead to rising inflation, we may look back on these years as a time when official policy led to individual losses and overall financial instability.


The full article is here:

As it is Easter remember you cannot make an omelette without breaking eggs.

In the cartoon above, based on the Greek legend of Sisyphus, the language is Dutch. 

Those leading our economies often seem to be talking Double Dutch.

1 comment:

  1. "farm land, high-yield corporate bonds, gold, and real estate"

    Too many with money to invest merely want more money. They don't want to produce or create anything new.

    The day of the better mousetrap is long gone.