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Daily Telegraph - Maybe We Should Stop Worrying And Learn To Love Zero Interest Rates

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Interesting piece. I agree that IRs are not going up any time soon.

Scrap any thoughts about September. It now looks as if it will not be until the New Year at the earliest that the Federal Reserve will raise interest rates for the first time in more than nine years. Or perhaps it may come in March? In this country, Mark Carney has warned us repeatedly to expect a rate rise, and yet it never seems to happen.

As for the ECB, it seems highly unlikely that Mario Draghi will be tightening monetary policy any time soon. Waiting for Godot would seem like a relatively brief exercise compared with waiting for any major central bank to raise interest rates.

Increasingly, zero rates look like there are here to stay. They have been at those levels for close on two decades in Japan, and probably will be in the UK, Europe and the US as well. But, in economics, no idea is ever completely bad. While zero rates might well do a lot of damage, they do have some upsides.

Such as? They are encouraging individuals and companies to become more innovative with their money, they are kick-staring great new markets in financial technology, and they are accelerating the decline of what were always fairly rubbish products.

To paraphrase Dr Strangelove on nuclear weapons, perhaps we should just stop worrying and learn to love them.

The markets were keyed up for a rate hike from the Fed last week, the first since way back in 2006. True, it was never a done deal, but there had been lots of hawkish comments from officials through the spring and summer, and with the US expanding at a decent clip, there was a chance it would finally pull the trigger.

In the event, the committee voted against a rate rise by 9-1. It doesnt get much more decisive than that.

Meanwhile, in this county, the Governor of the Bank of England told us to expect a rate rise when unemployment was below 7pc but when it got there, he promptly forgot about it.

Then we were told they would go up when wages were rising but they are now going up by 3pc in real terms, a more than healthy rate, and there is still no sign of a hike. The end of 2015 was apparently a target, but that doesnt look remotely likely now.

Some time soon Mr Carney will be telling us that the rate rise will come when Arsene Wenger splashes out a couple of hundred million for Gareth Bale, or Yvette Cooper cracks a joke that someone actually laughs at both of which we can safely assume will never happen.

As for the Bank of Japan or the ECB, both can be confidently forgotten about. Neither economy is in any shape to push through a rate rise. What was sold back in 2008 and 2009 as an emergency cut to three-century lows, now looks like a permanent move to near-zero rates.

After all, it is now six years, or 72 meetings of the Monetary Policy Committee, since rates were cut to 0.25pc. To find the last rate rise, you have to go all the way back to May 2007, when they went up to what now seems the extraordinary level of 5.5pc.

In reality, we are just following the path already trod by Japan. It slashed its rates to 0.15pc in 1999. With the exception of one minor rise in 2000, which was quickly reversed, they have been there ever since; and what makes us think we in the UK are going to be any different?

There are plenty of good reasons for viewing the continuation of near-zero rates with dismay. It is going to destroy incentives to save, it will distort the capital markets, it will encourage people into risky investments as they chase yield, and, perhaps worst of all, it will keep a lot of zombie companies alive that would be better off in administration just take a look at some of the miserable performers on your local High Street for evidence of that.

But, hey, even if that is true, it does not mean there are not some upsides as well. The simple fact that you cant, on the whole, earn any sort of return on cash you keep in the bank, and may well not do so for the rest of your lifetime, means that everyone has to be more imaginative about how they look after their savings because no one wants to accept zero returns forever.

That has already resulted in a number of positive changes across the economy.

First, we are seeing a big increase in institutional investment in building property to rent. About £2bn a year is now going into the sector, and a similar amount into building new student flats for the booming university population

In the past, only about 1pc of British rental properties were owned by institutions, compared with 13pc in America and 17pc in Germany. The reason is not hard to figure out. Institutional investors cant earn anything on gilts any more, but they can get a decent yield on building rental properties and without much risk, since they can always sell if there are no tenants.

That will create a far more professional private rented industry than one dominated by one-man-band landlords, in just the same way the Premier Inn is a lot more reliable than an amateurish B&B. And it will also help fix our chronic shortage of housing.

Next, we are seeing a huge rise in peer-to-peer lending as investors look for alternatives to deposit accounts. The likes of Zopa and Funding Circle are opening up markets for lending to consumers and small business and providing some real competition for the banks.

If you could get 5pc on a one-year deposit at the local building society, no one would have much interest in experimenting with the new breed of financial technology companies. But zero rates have made it possible for them to flourish. And they are likely to provide a far better flow of finance than traditional lenders, especially to small businesses which the banks always served very badly.

Finally, we are seeing the rapid decline of what were basically rubbish financial products such as annuities. Over the years those have been characterised by high charges and low returns. They were never a great deal for pensioners, but now with rates close to zero they have become untenable.

There may be other upsides as well. As Paul Krugman has pointed out, far from bailing out the banking industry, zero rates are making it very hard for them to make a living there is not much of a margin on nothing. We have seen a big upsurge in start-ups that may be because people have to be more daring with their savings.

True, interest rates at zero for a couple of decades may turn out to be a big mistake. They certainly dont seem to have done a lot for Japan. But that doesnt mean they dont have some benefits and since we look likely to be stuck with them for a lot longer than we originally thought we would be, we might as well make the most of it.

http://www.telegraph.co.uk/finance/comment/matthew-lynn/11880094/Low-interest-rates-are-here-to-stay-and-thats-not-necessarily-a-bad-thing.html

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The article makes one critical assumption: that central banks remain in control. That is a questionable assumption. If sterling falls quickly or if inflation rises quickly then the BOE may well be forced to put up interest rates, whether it wants to or not. If it ignores rises in inflation - as it did in 2011 - or falls in sterling this will simply confirm a complete loss of credibility and make the loss of control even worse.

I don't think interest rates will go up voluntarily; they will be forced up.

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The closest comparison to the present decade is the 1920s in terms of low interest rates and falling prices after a massive bust at the turn of the decade just like the one we have been through. Of course, then, prices really did fall; the RPI tanked from 10.0 to 5.0 on the modern base between 1921 and 1934 (now 258.6).

The roaring 20s were marked by huge gains in wages, the stock market and living standards. This in spite of 40% cumulative deflation from 10.0 to 6.0 by 1929. Of course then we got the bust in 1929.

So low or falling prices are at odds with modern thinking on that occasion.

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Property = imaginative, apparently.

Get debt = savvy saver.

Everyone I know that had/has thousands in credit debts, now have big homes. While I sat there smuggly counting my puny savings thinking i was the smart one by not getting in debt. Sucks!

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Another telegraph columnist recently said the low interest rate mantra was an intellectual error from the Alan Greenspan policy era, and that growth and inflation alone should not predicate interest rates. He said capital misallocation means interest rates need to rise, and it will be cause for celebration for all those abused by the low IR environment.

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There are an awful lot of unjustified assertions there, reads like a list of blind justifications to speculate.

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As killer Bunny and others have said, we have low interest rates BECAUSE we're screwed.

He can't have his cake and eat it. If we really do have long term zirp then we're going Japanese. There isn't a goldilocks option with debt deflation.

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That's p1ss poor writing across the board. Logical inconsistencies, heresay and speculation presented as fact. Yes he's a BTLr. Expect nothing less

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We should stop worrying and learn not to pay for debt or to repay debt.....only spend it......life is short, tomorrow is another indebted day. ;)

It is an option. And, if the interest rate is fixed for the life of the debt, why not.

I prefer to use low interest rates as a way of paying off debt that I acquired when interest rates were higher more quickly.

That the emergency rate has prevailed for so long has enabled me to make more progress on that than I could reasonably have expected.

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Get debt = savvy saver.

Everyone I know that had/has thousands in credit debts, now have big homes. While I sat there smuggly counting my puny savings thinking i was the smart one by not getting in debt. Sucks!

And they have big credit card debts and big mortgages that they have to service in an uncertain economic climate and horizon, whereas you are free. You made your choice (which I just happen to agree with), you can't really expect to have it both ways.

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And they have big credit card debts and big mortgages that they have to service in an uncertain economic climate and horizon, whereas you are free. You made your choice (which I just happen to agree with), you can't really expect to have it both ways.

And those servicing costs have probably more than wipe out any perceived balance sheet gains, which north of Watford are actually non existent anyway since 2007.

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And they have big credit card debts and big mortgages that they have to service in an uncertain economic climate and horizon, whereas you are free. You made your choice (which I just happen to agree with), you can't really expect to have it both ways.

Very true, and thanks for reminding me - the freedom I have is something I take for granted. But it is sometimes hard to remember when visiting friends and family, seeing there large houses and being looked down upon because I rent. I'm basically a nomad in their eyes. Sorry bit dramatic and off topic.

If you ask someone if low interest rates are good or bad, they will probably say good. They wont know why, its because they will have just glanced and seen it on DM, FB or BBC. Same reason they will say negative interest rates are good for us over the next few years before they are introduced.

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It is an option. And, if the interest rate is fixed for the life of the debt, why not.

I prefer to use low interest rates as a way of paying off debt that I acquired when interest rates were higher more quickly.

That the emergency rate has prevailed for so long has enabled me to make more progress on that than I could reasonably have expected.

hate to be a pedant, but you took money from savers to contribute towards the stellar repayment.

People who worked and saved, ended up subsidising , even while they slept,those who borrowed and spent.

We are living in a criminal society in the west

Edited by evetsm

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Very true, and thanks for reminding me - the freedom I have is something I take for granted. But it is sometimes hard to remember when visiting friends and family, seeing there large houses and being looked down upon because I rent. I'm basically a nomad in their eyes. Sorry bit dramatic and off topic.

If you ask someone if low interest rates are good or bad, they will probably say good. They wont know why, its because they will have just glanced and seen it on DM, FB or BBC. Same reason they will say negative interest rates are good for us over the next few years before they are introduced.

Well you certainly aren't alone there - I still regularly get the same feelings. It's hard not to when, on the face of it, someone appears to have a lovely big house, security, freedom to do what they want etc. But that's all illusory - it's not their house until they've paid for it (which for IO borrowers may be never), they are only as secure as their job is, and they gave away the next 25 years of their freedom for the privilege of being able to replace the kitchen every few years.

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Sounds like a classic meedya contra-indicator.

When everyone & his dog is calling zirp/nirp its probably wrong.

Along with Masons "post capitalism" etc etc

The equivalent of selling the bottom/buying the top. The more plausible the arguments/reasoning the more likely the opposite will happen.

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He also says low rates are a disincentive to save but for a lot of people the opposite is true as there is more uncertainty (loss of confidence) around and so they save more.

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As killer Bunny and others have said, we have low interest rates BECAUSE we're screwed.

Yep - ZIRP isn't a feature of a healthy, recovering economy - it's an emergency measure keeping a weak economy just barely functioning (while borrowing a shit-ton of money to keep the economy barely functioning too).

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Ah....the normality of a nice £50,000 mortgage @ 7% costing £3,000 pa......compared with lovely low interest rates we have now.....same house requires a £300,000 mortgage @ 2% costing £6,000 pa.......

Then say low interest rates are good.....not only have to repay the interest for years but also the principal....less is most certainly far more, a disaster. ;)

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He also says low rates are a disincentive to save but for a lot of people the opposite is true as there is more uncertainty (loss of confidence) around and so they save more.

Sure. And her's the proof.

Euro data suggests most citiizens (Germany/France/Spain/Italy) are still saving > 10% of their income , in spite of efforts by TPTB to get them spending.

http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tsdec240&plugin=1

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