In business there is nothing so unsettling as uncertainty when it comes to new investment but what is it that ultimately drives the greatest of uncertainties -- projected consumer spending habits?
Since the credit crunch of 2008 central banks have struggled with deflation and the stunting effect it has had on global growth. Their only two responses have been to lower interest rates to near and sub zero levels and quantitative easing (QE) of money supply, a form of electronic money printing. The theory was that making money much cheaper and more plentiful to borrow it would encourage new investment in capital equipment and boost consumer spending. The reality, however, is painfully different and it is not hard to see why.
Central bankers have been feted as masters of the Universe but like emperors with no clothes they are fallible. It is not so much, as some aver, that these institutions lack both the tools and the power to have any meaningful effect but rather that central bankers have relied far too long on economic theory instead of reacting to the real causes of consumer reluctance to spend. So what are these forces ostensibly holding back consumer spending and thus desirable, moderate inflation and are we entering uncharted territory brought on by paradigm shift?
There are various causes but Larry Fink, chief executive of BlackRock, the world's largest asset management group, put his finger on one key issue that stems from a paradigm shift in post-war economics -- negative interest rates, which he warns risks hitting consumer spending and undermining the economic growth they are intended to encourage. He warned that not enough attention had been given to the effects of negative rates on spending habits, and a big concern here is the diminishing worth of pension schemes badly hit by prolonged, ultra low interest rates. If interest rates do not return to their long-term trend of 5% soon, instead of the current 2%, then consumers will have no choice but to save much harder to realize their ambitions of an adequate retirement income. As an example, Larry Fink says a typical 35-year old has to save three times as much to make the same retirement income when long-term interest rates are at 2% as when they are at 5%. When it becomes plain that adequate pensions can only be expected through much higher savings then cutbacks in day-to-day consumer spending for the long term are inevitable.
This alarming scenario is reflected perhaps, even more seriously in America. It appears that the US public pension shortfall of $3.4 trillion is three times larger than official figures suggested, and still growing, and that will pile pressure on cities and states to cut spending or raise taxes. If these pension funds go insolvent "they will create problems so disastrous that the fund officials assume the Federal government will have to bail them out," warned David Nunes, A US Congressman. But American pension savers should not hold their breath . In the British private sector pension industry when private companies go bust their pension liabilities are placed in a Government-backed pensions lifeboat but would-be pensioners are still expected to take a hit. Such a fate could easily hit future American pensioners. In order just to stop the $3.4 trillion deficit ballooning any more states and local governments would have to raise their current contributions rate of 7.3% of revenues to 17.5% of, warns Olivia Mitchell, a professor at the Wharton School, University of Pennsylvania.
What history undoubtedly makes clears since the credit crunch of 2008 is that no amount of zero or negative interest rates and QE have make any significant difference to galvanise the global economy into real recovery. Already countries like America and Britain are scaling back their optimistic global growth estimates from last year and yet countries like Japan are still wedded to the surely now bankrupt notion that monetary easing and dangerously low interest rates are the only solution. Japan's experience over the last 20 years surely proves that their monetary easing and derisory interest rates have failed lamentably, and the European Central Bank has failed to learn from Japan. This has profound implications for logisticians planning long-term investments in, for example, ports because their plans are based on endless, steady growth . Such optimistic growth projections are looking more dubious unless the wherewithal for consumers to spend more is provided by higher interest rates.
This crass attitude to near zero and negative interest rates has not only failed to galvanize global growth but also to lead to asset bubbles in property and stocks and dangerously high consumer indebtedness and this, in turn, could be dissuading the financial authorities from raising interest rates quickly and significantly to more normal long-term trends. In Britain, there is much concern that a sharp rise in interest rates would wreck the housing market, especially buy-to-let, but house buyers, if they have any sense, would organise their finances so that they could tolerate a much higher interest rate. Behind every mortgagee are five investors and given that these investors are earning derisory returns the cumulative effect of that, in terms of damping down consumer spending, is likely to far outweigh any cutbacks the mortgagees would have to make to counter higher interest rates.
Lawmakers and economists fear that the use of negative interest rates in Japan and Europe will damage consumer sentiment and the heath of banks, as if the banks were not unhealthy enough. There is now a serious risk that people will start to hoard cash. Already there is evidence of this in Switzerland, where the central bank introduced negative rates in December 2014, as the demand for bank notes has risen above normal levels. If financial Armageddon is to be prevented then surely interest rates must be raised now and sharply to return to the long-term trend of 5%.