Monday, April 06, 2015

The savings glut hypothesis...

 Is gaining some momentum. Very slowly, the idea of low returns to capital for a loooong time is becoming not just less unthinkable but more inevitable.

Third, we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time. In no big industrialised country do markets expect real interest rates to be much above zero in 2020 or inflation targets to be achieved. In the future, the priority must be promoting investment, not imposing austerity. The present system places the onus of adjustment on “borrowing” countries. The world now requires a symmetric system, with pressure also placed on “surplus” countries. [More]
I'm still working through what this means for farmers. Could Aaron spend his career believing that borrowing at 4% is to be expected? Will any project that can earn a 5% ROI be worth looking at?
For example, at a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades. [More]
It is looking to me more likely that this is indeed the future. Working through what this means for investing and saving, especially for retirement is not encouraging for many. If the best you can hope for is 3-4% return, the mountain of wealth needed to retire becomes immense.

Which, of course, tends to increase the savings glut, postpone consumption and - yep, you guessed it - reduce interest rates.

1 comment:

Anonymous said...

Great post John , Guys our age that farmed most of our careers with double digit interest rates really have a hard time believing how long interest has stayed so low . Will "cheap" interest hurt the young guys in the future as much as "high" interest hurt some of us by scaring us off from being buyers yrs. ago when interest rates dropped as we thought it would/could not stay low for long-regards-Kevin in ontario