Something’s got to give
The secular stagnation that is infecting our economies brings with it the germs of instability and financial torment. Since interest rates and monetary creation are the only weapons still at the disposal of the only public institutions that still wield some sort of power in our modern world, their initiation with a view to relaunching our economies is in reality only exacerbating the problems. It is a whole Ponzi scheme which is establishing itself in a situation of zero and negative rates, which is literally pushing investors and speculators to take more risks with the sole aim of generating a more favourable differential in terms of profitability.
We therefore find ourselves in a paradoxical situation where – although motivated by the commendable objective of recovering growth –, central banks are creating a speculative bubble- and financial crisis-spitting hydra. In other words, – now at the current stage of negative rates and cuts to quantitative rates – central banks’ monetary policy might ultimately be harmful for growth, for employment and for production. So here we are in an environment where the process of forming/imploding bubbles has been multiplying at a frenzied rate since the mid-1980s. This is since interest rates began their tumble from a historic peak higher than 21% in 1981 to sinking under the zero level that it’s at today. From the crash of 1987 to the subprimes of 2007, and passing by the 2008/2009 implosion of Spanish and Irish real estate mega bubbles, the conclusion seems obvious (and disheartening for central banks), being that very low interest rates promote a whole range of risky business.
However, these same establishments do not wield the power that is ascribed to them. In other terms, the current level of the miniscule (negative, even) real rates is imposed upon them by a combination of factors that escapes their control and that these establishments must at present submit to. It is on the one hand the demography which pulls interest rates downwards, as is the case in Japan and Germany. On the other hand it is high-tech business’ declining need for capital which is putting intense downward pressure on the price of money.
It is the escalation of inequalities which is concentrating the mass of wealth in a few privileged hands who save a lot more than they spend, which ends up working to constrict interest rates. The rich getting even richer also brings about an unhealthy spiral since the collapse in rates swells and bloats stock market valuations even more which, in turn, only benefit a few privileged folk. This is a phenomenon which acts to further reduce the real interest rate because of the increase in savings being made. The only ones who were still able to make use of a certain driver in order to lessen the shocks – central banks –, now find themselves almost powerless.
The system is thus rotting from the inside.