Europe faces a prolonged era of very low or negative real interest rates between 0 and minus 2%. It will last five more years, until 2021, conclude the experts convened by the European Central Bank (ECB) at its annual conference.
So credit users will sing glad tidings; savers, curses; and the whole society will intone lamentations, as low interest rates indicate sluggish growth, in which any surprise multiplies the vulnerability.
Quite a few consumers of long-term credit are in luck. They continue to benefit from the era of low interest rates that has been going on for almost a five-year period.
On the contrary, those who could save and retirees will continue to hurt as they get only symbolic returns on their piggy bank.
Interests bordering on zero, or even negative, is a dangerous symptom of “secular stagnation” which has been taking place in advanced economies. This situation also threatens to stop emerging economies.
Almost all of them are flirting with significant inflation with price deflation and growth rates sometimes as low as 2%, which for some reason are seen as great nowadays.
How long will the real long-term rates last at their current levels -close to zero- on key financial assets, such as the German or Dutch bond?
At least “for a long time, five years, until 2021,” as calculated by the French economists Pierre-Olivier and Hélène Rey Gourinchas in a report commissioned by the European Central Bank for its annual conference in Sintra, Lisbon.
Just three weeks ago the ECB gave birth to their forecasts on short basic types: the three-month Euribor will continue at -0.3%, at least until 2018, one tenth less than the previous estimate. Meanwhile long-term debt would range from 0.9% to 1.4% in 2018. The calculation of real rates are now tightening the nuts in the same direction, and for a longer term.
The Academic basis for the calculations made by Gourinchas and Olivier take root in history, at a leading indicator: the consumption / wealth shrinking to the beat of recessions.
The mechanism works well, detail: the crisis generates deleveraging, “families are reducing their debt, consume less; companies also; States reduce their spending; all dedicated to save what they can; demand for financial assets weakens, and profitability falls ground. ”
This sequence usually sprawls over a decade. It happened between 1929 and 1939. And now the lowest point was 2011, the second phase of the Great Recession. So the collapse of the interest rates will last at least “for the next ten years,” which will hinder the return to prosperity in developed economies.
Other factors besides deleveraging, contribute to this scenario: the slower technological progress, which reduces the marginal productivity of capital; the declining fertility and increasing life expectancy, which leads to aging, expectation that induces greater savings; or the “growing demand for safe assets”, which are considered risk-free, which cuts its price.
Other central bankers and academics took foresight, based on previous work such as Larry Summers’s or Barry Eichengreen’s. Australian David Vines highlighted as another factor “low consumer and investor confidence” and stressed that “consolidation fiscal austerity exacerbates the problem.”
Despite this analysis, financial entities have insisted in imposing austerity of all types especially on debtor nations. Both in Europe and Latin America, the adoption of austerity as a tool to navigate the turbulent waters of economic recession have yielded more poverty and misery, as people lose their jobs, pensions and safety nets.
A snapshot survey of 150 participants initialed its quasi-unanimity confirmed that low rates will last two to five years. That is what 43% of respondents have said. Those who think it is reach five years, add up to 42%.
The question is how to mitigate the negative effects.
In Europe, there is talk about issuing a kind of European bond, as supposed to member-nations issuing their own. Talks are also considering the establishment of mechanisms for the losses to be removed; promote the union of capital markets; and monitor more banks in the core countries of the euro, the disseminators of the Great Recession.
The problem with this plans is that its premises are all wrong. A move to issue European bonds will make countries even more dependent on the collapsing EU structure. In fact, the issuance of Euro bonds will simply give more power to the unelected European bureaucracy. Removing loses is a policy that will only be applied to the large banking conglomerates and corporations, while the small ones will go bankrupt. Uniting capital markets will make it even more likely to cause a domino effect, should a member-state economy be contagious with some kind of internal crisis. Lastly, the belief that smaller banks and financial institutions were the cause of the recession is ludicrous. The crisis came from the mismanagement of private resources that took place in large banking institutions.
Of course this new scenario of low interest rates for a long time means a shake up in banking practices. The highlight of having zero percent or negative interest rates is that customers will have to pay banks for keeping their money in savings accounts. That’s right. Banks will start charging customers for deposits. Imagine yourself having to pay 1.5 to 2 percent interest rates on money deposited in a bank when returns on your investments are near zero.
While companies and individuals pay interests on their deposits and financial transactions, which in practice is a type of tax, large banking corporations will continue to be favoured with capitalisation of between 4% to 12%. That is the scenario where the tax payer rescues banking institutions as they charge fees to those same tax payers so they can keep their money in a “safe” place.
As for local, national or regional banks, the EU intends to prohibit banks them to buy sovereign bonds in their own country of origin, because it allegedly concentrates risk while strengthening dangerous loops between private and public debt. According to supporters of a single European bond market controlled by Brussels, allowing banks to buy bonds from national governments does very little to facilitate the emergence of a transnational European financial system, which is what the financial elite wants.
The idea of not having banks purchasing government bonds is all about European bankers amassing control of local, national and international banking systems. It is about consolidation and control. It has nothing to do with bringing about stability or controlling spending to benefit national economies. It is the financial elite telling the national governments that they cannot be trusted with their own finances, even though international banking cartels have been in control of those finances for over 100 years.
Financial elites are promoting the creation of Eurobonds, as supposed to keeping domestic bonds because as countries become in debt with a single European system of debt issuance, the European Central Bank will be able to exercise more power over national governments. National financial authorities will be substituted by European ones.
So all banks could buy Eurobonds, but no national bonds. Consequently, the value of national assets would be depreciated to a point where the very rich oligarchs can buy them for pennies on the euro, and in doing so, consolidate their ownership of resources all over Europe and the rest of the world. This is what was done during the Great Depression. Only the very rich, whose assets are safe and whose money coffers are exploding with cash will be able to purchase so-called risky assets, which in reality are real, valuable assets. For the rest of the population, all that will be left is poverty, dependency and misery.