The logic of ZIRP (zero interest rate policy) pursued by most major western central banks is simple: make credit so cheap that more money is borrowed and invested, thus reviving growth.
But barring the US and UK, this policy has not delivered – in Europe or Japan.
One of the big failures of global monetary policy has been the post-2008
trend towards near-zero interest rates, and now, even negative interest rates.
They have delivered little in terms of growth.
The logic of ZIRP (zero interest rate policy) pursued by most major
western central banks is simple: make credit so cheap that more money is borrowed
and invested, thus reviving growth. But barring the US and UK, this policy has
not delivered – in Europe or Japan. Now, with Brexit, Britain’s impending exit
from the European Union, both Britain and the US too may delay raising interest
rates. So ZIRP rules, more or less,
The question is: why has eight years of ZIRP yielded a mouse?
The answer may partly lie in demographics. Most of the countries where
ZIRP is failing have a population age structure that is skewed towards the old.
When the proportion of the old grows in a population, savings and consumption
trends change radically.
Ask yourself: if you are a retired person, and you depend on earnings on
investment to meet your expenses, will you save more or spend more if returns on
investment turn negative? If your nest-egg is going to earn zilch, it means you
have to eat into your capital to spend. So logically you will spend less.
Some 33 percent of Japanese are over 60 years old, and 26 percent above
65. And with the Bank of Japan running ZIRP or negative rates, both household savings
and consumption are weak.
Not only that, the drop in consumption forced an increase in corporate
savings, as companies stopped investing and saved more themselves. As FT
Alphaville wrote in December last year, “businesses have less need to spend on
capex when the outlook for sales growth in bleak. An aging, much less shrinking,
population reduces household savings and household spending. In America, people
aged 75 and older spend about half what those aged 35-54 spend.”
When corporate savings grow due to a reduction in investment, how will
Apart from the Bank of Japan, the European Central Bank, Sweden,
Denmark, and Switzerland have already moved to negative rates. German bonds have
sometimes touched yields that were negative.
Now consider the demographics: Germany, 21.1 percent above 65, Italy (21
percent), Sweden (19.8 percent), Denmark (18.4 percent), France (18.3 percent),
Switzerland (17.5 percent). And the UK? 17.5 percent.
So ZIRP is not necessarily a panacea for restoring growth as originally
thought, thanks to the demography of the countries trying this medicine.
A more psychic reason for many rich countries being immune to monetary therapy
is this possibility: could it be that when a population reaches a certain level
of prosperity, its commitment to work hard and aspire to grow comes down?