The rich get richer as rates go lower
We know that lower rates set by central banks help to stimulate economic growth by providing cheap money. On the flipside, banks also have the option to raise rates and quell too much economic euphoria that might also create undesirable inflation.
The COVID-19 pandemic has unfairly picked on the economically disadvantaged—and it appears that the monetary response of lower rates could further exacerbate wealth disparity.
If you want to do more of a deep dive (it’s very interesting, to say the least) into global demographic trends and interest rates and how they’ve shaped our past, and will likely shape our next few decades, check out “Inequality, Interest Rates, Aging, and the Role of Central Banks.”
From that link, Matthew C. Klein looks at the topic of savings rates of the rich and how they do not spur real economic growth, but rather drives down rates…
“The key insight is that the ultra-rich are different from you and me: they have much higher saving rates regardless of their age. No matter how expensive your tastes, there’s a limit to how much you can consume, which means any income above that threshold has to get saved. The ultra-rich therefore spend relatively small shares of their income on goods and services that directly provide jobs and incomes to others, instead accumulating stocks, bonds, art, trophy real estate, and other assets.”
Lower rates (borrowing costs) and those excess funds in the hands of the more wealthy can also lead to asset bubbles—see North American real estate and perhaps stock markets as well.
On the demographic trends for the rich nations, Klein notes…
“In the 1960s, total population growth in the major global economies (the ‘high-income countries’ plus China) averaged almost 2% a year. That slowed to just 1.2% a year by the 1980s, 0.9% a year by the 1990s, 0.6% a year by the 2000s, and just 0.4% by the eve of the pandemic. The combined population of these economies is projected to shrink starting in the 2030s, eventually falling nearly 20% from the projected 2030 peak by the end of the century.”
Klein offers that aging populations (demographics is destiny), continual wealth inequality and low interest rates are all part of the same phenomenon. It’s a negative feedback loop. He argues that the trends will continue without massive government policy initiatives to redistribute wealth.
Of course, free-market economists will fight him on that one, but it appears clear now that trickle-down economics is pure fantasy.
Dale: Time for you to talk about reducing one’s market risk before this fall’s correction.
Why does MoneySense post articles and email letters with links to what one would assume are articles related to the headlines.
When the email is opened and one wants to read the article it redirects to a subscriber only site and is not in anyway a free distribution.
Must of the content in the emails seem to solicit money in one way or another, so I guess I can see why it is called MoneySense.
I guess I will unsubscribe, hardly worth the space in my account.
Thanks CJL. As you know I have been putting the risks on the table for quite some time. I’ve also been suggesting (pointing out) that regular rebalancing is a form of taking some risk off the table.
And specifically I point out that IMHO the U.S. markets are terribly expensive by most every measure.
An investor may choose to de-risk even further if they find their personal situation warrants such a move.
But in the end, portfolio balance is the key, and investing within one’s risk tolerance level if paramount.