A deputy governor of the Bank of England has said that ultra-low interest rates, and by association, quite possibly quantitative easing – QE– are here forever.
Speaking at a Bloomberg conference, Minouche Shafik, deputy governor for markets and banking at the Bank of England spoke words that may assure property owners, the markets but scare the pants off people saving for their pension.
She said: “Something has changed in the last decade with big forces of demography, global savings and investment, and the neutral rate has fallen and is likely to stay low for a very long time.”
And as a result: “Deep structural forces have combined to depress the level of interest rates at which the economy would be in equilibrium, obliging us to rely ever more on monetary policies that were once considered unconventional.”
Of late, a growing chorus of voices have been calling for the end of QE, and for interest rates to rise, the gist of their argument is that the global economy has become addicted to the medicine it was given when it was put on life support in 2008/09.
One quite famous person – a certain Donald Trump had these words of wisdom at the recent TV debate with Hilary Clinton.
He said: “We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that's doing political things. This Janet Yellen of the Fed. The Fed is doing political -- by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves, and goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you're going to see some very bad things happen, because the Fed is not doing their job. The Fed is being more political than Secretary Clinton.”
But for the time being, at least, Ms Shafik is right, The Don is wrong. Critics of QE have a point, but they miss the main point.
QE and ultra-low rates are not the reason why the global economy, and especially the economy in the advanced world, is weak, rates are low and QE exists because the global economy, and especially the economy in the advanced world, is weak.
And Ms Shafik is also right when she says something has changed, and her explanation is spot on.
But she may not necessarily be right in the longer term.
Savings are high across much of the world partly because the most populous generation in history, the baby boomer generation, is approaching retirement. So they are saving more, en masse.
Company profits to GDP have been soaring as the fruits of business have been channelled towards a coterie of mighty companies. Globalisation has led to increased competition in the labour market, forcing down on wages, pushing up on profits. Lower wages have reduced the imperative for companies to invest, so we have had slower growth in productivity, and massive corporate cash piles.
Other factors have been at play, such as the rise of China, with an exceptionally high savings ratio.
But when the baby boomer generation retires, they will draw down on savings, reducing the size of global savings.
Technology may yet reduce the barriers to entry, as we are already seeing in banking. And witness, the surge in the number of start-ups. Established corporate giants are set to face much greater competition, this is why so many of them are funding start-ups, trying to build stakes in future rivals. The sharing economy may redistribute wealth from companies to consumers.
And if China does what it says it wants to do and rebalances away from export and investment-led growth, then things will change again, with its savings falling.
Under these circumstances, the global economy may grow much faster, but interest rates may rise quite sharply.
