In response to the financial crisis in 2008, reserve banks in the developed world reduced their interest rates to the lowest levels on record. In fact, some of the interest rates have gone into negative territory. Slashing the interest rates is a classical response to weakening economies, and there are a few justifiable reasons for it. One of the reasons is to reduce the interest payments on borrowings, thereby giving consumers who have debt such as mortgages, more cash in their pockets to spend or to pay off their mortgage. It would also be cheaper for companies to take on more debt, and invest the proceeds. The third effect is that governments would issue bonds at much lower rates, allowing them to borrow more to invest in infrastructure spending. The combined effect would boost the growth rate of the economy again.

We have had 8 years of record low interest rates, and there is some sort of fragile economic recovery through-out the US, Europe and Asia. But the main beneficiaries have been investors who invested in the stock markets in 2009. As it is obvious by the mood in the political landscape, the broad population has not necessary benefited the same as those investors. They still feel poor, and are fed up with 8 years of austerity imposed by their governments. Instead of taking advantage of the record low rates, governments have not taken on more debt and haven’t spent it on building better infrastructure, new schools and hospitals. They have done their best to cut down on spending. They have not bought back their “expensive debt” (bonds at a higher yield), issued years ago when the interest rates were much higher and replaced it with debt at current levels, something any property company would have done. The investors have benefited so much, not because the companies are selling more than they have ever before, but mainly because debt is so cheap that it makes business sense to buy back their own shares and thereby increasing their earnings per share. They have also taken this time to rationalize as much as possible, which is a good thing because it makes them leaner in the next up-cycle. But 8 years down the line, any reasonable manger has used the opportunity to move things around to be as competitive as possible. Lowering interest rates even further or even starting such ridiculous plans as “helicopter money” won’t make the companies more competitive.

Private individuals with mortgages have also have had enough time to refinance their loans at more favorable rates. The property markets have recovered and over indebted investors must have had enough opportunities to off-load some of their assets at reasonable prices.

The reaction of governments around the world (particularly Europe and USA) to the financial crisis has been to implement stringent austerity plans instead of pushing through more infrastructure spending, the benefits of which can often only be seen years down the line. Now we see the adverse effect of a narrow recovery (ie the broad dissatisfaction), for example with the vote to leave the European Union by Britain and the nomination of Trump as presidential nominee (which would be comical if it wouldn’t be so sad). You would have been described as a lunatic a few years ago, if you would have predicted this, but there is probably more to come. As I said in a previous article, we will remember this time as a time when central bankers did too much and politicians too little.

So trying to reduce the effective interest rate even further will have almost no positive effect. Most of the benefits are in the system already, and I think that the benefits of increasing interest now to reasonable levels would be far greater than any reduction in lending rate. For a start, pensioners can finally look forward to more reasonable pensions. As most of their money is invested in “safe” assets that provide a steady stream of income, such as bonds, they would benefit from higher rates (especially the ones about to retire). Savers in general would get a higher reward for doing so. Also, low interest rates makes the whole business of banking very tricky, because the margins are so thin that it becomes almost impossible to attract much money to lend out. Insurance companies would also have less hassle to provide enough liquidity for payouts, while generating returns on the investments. And finally, the hurdle rate for a good investment is so low at the moment (all you need is a single digit return to make it worthwhile) that the decisions are not going through enough scrutiny and thus a lot of capital might be invested in projects that under real circumstances would never be able to survive.

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