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The true cost of low interest rates

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The true cost of low interest rates.

Larry Williams:
Global insurance firm Swiss Re has just put out a report about "Financial Repression". What do they mean by this term?

Frank Jasper:
It's a horrible phrase but "financial repression" refers to the process by which governments look to boost their coffers and reduce debt. Now unfortunately as is always the case, we are the ones who can suffer from that process. Tool number one in the financial repression tool kit is keeping interest rates artificially low. Doing this represents an effective tax on savers who get a lower return than they should do with this wealth transferred to borrowers. In a World where over $5 trillion of government bonds are trading at a negative yield financial repression is rife.

Larry Williams:
Swiss Re's report put some numbers on how much this is costing savers?

Frank Jasper:
Yes, the Swiss Re report estimates that since the financial crisis of 2008, US savers have forgone about $470 billion in interest that they would have received in a more normal environment. That is a massive loss to the savers of the United States. The same theme is also playing out across Europe and some parts of Asia.

Larry Williams:
Some commentators argue that savers have benefited from financial repression due to higher asset prices. What do you think?

Frank Jasper:
There is some merit in this argument for a small group of people. Low interest rates, as we are seeing in New Zealand right now, tend to push up property and share prices. So for those who people who own sizable share portfolios or property the last few years have been very profitable. Unfortunately for most of us it tends to be the "already" wealthy who have benefited from this. Financial repression has had this other unexpected consequence; it has really deepened economic inequality.

Larry Williams:
For people saving for retirement, that all sounds pretty bleak...

Frank Jasper:
It is a challenging environment for savers. Low interest rates give you fewer choices. There are only two options. First save more. This is definitely happening. Savings rates have increased since the financial crisis and this can be clearly be seen in the official data. The other choice savers have is to take more investment risk to boost returns. Again, there is no doubt that this is happening. The flood of new companies floating on the share market points to the fact that investors have plenty of capital there if companies need to raise it.

Larry Williams:
Infrastructure might be an interesting avenue for investment?

Frank Jasper:
I certainly agree with that and this sentiment is also echoed by Swiss Re in its report. They are really saying there needs to be more options for investors who are looking for those higher returns, and major infrastructure projects, like new roads and bridges, are a great way for people to save for their retirement. Swiss Re's advice to governments is to make it easier for all of us to access this type of investment. I am sure anyone stuck in traffic right now pondering their retirement would probably agree.

 

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