What are the effects of long term low or negative interest rates to the world economy?
That’s what everyone wants to know. Everyone from the consumer to the policy maker.
The real answer is that we don’t know.
We can’t look back in history and say, “Yup, that’s what happens with negative interest rates… the economy crashes… it happens every time…”
The reason why we can’t look back in history and say that is because it has never happened.
Governments have never issued negative interest rate bonds like they are now. It’s insanity if you think about it. Who, in their right mind, would lend money to a government (or business) that is charging the investor to borrow the money. It’s crazy.
It’s the government’s genius plan to stimulate the economy. If you can’t invest the money… then you have to spend it… which will of course stimulate the economy.
What government economists have failed to realize is that many people save money (especially when it is being printed like crazy with endless rounds of Quantitative Easing).
So… back to the question… what are the long term effects of low/negative interest rates?We are going to see asset prices sky rocket. Real estate, gold, silver, art, collectables and all sorts of ‘one-off’ assets that have true physical value.
We may also see a huge boost in the US economy. Everyone is terrified of the EU, Africa, South America, China, and everywhere else in the world.
The US certainly has it’s problems (massive debt, upside-down retirement system, social unrest, political controversies, etc.), but it’s still the best looking option out there.
You see, people cannot invest in things that will yield them low or negative interest rates… they just won’t do it.
They will flock to ‘safe-haven’ assets. Things that they believe have value.
People will flock to value.
What has value?Anything that is finite. That cannot be augmented, distorted or artificially reproduced.
If we look a little further out, with the expectation that asset prices will rise, we can then assume that asset prices will become frothy. Too valuable.
People will pay ridiculous prices for real estate, like Vancouver or San Francisco, where the Chinese and Silicon Valley have been flocking to, respectively.
They are flocking there for safety and yield. Because the long term effect of low interest rates have driven people to invest in things that they believe will hold and increase in value.
How long will that inflation in price last? …Who knows…
For the short(ish) term, a smart investor could position themselves to ride that wave of price inflation, making sure to exit before the pop.
Another smart thing to do would be to avoid all things that have already become inflated due to low interest rates, like junk bonds.
Junk Bonds… about as healthy as a hot dog.
Investors have been flooding into junk bonds, because they provide a higher yield than a normal bond.
Go ask a 5-year-old what a junk bond is. They’ll probably say something like “It’s junk!”
And… they’d be mostly right. Junk bonds are loans that ‘riskier’ business take from investors. These risky companies are not as solid and established as a normal blue chip company.
In other words, junk bonds can default. They’re junk!
What’s going to happen when all those people searching for yield, in this low interest rate environment, have their junk bond investments fail?
Your guess is as good as mine.
Most would consider that situation a ‘crash’… and I’d have to agree.