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In the European countries and in the USA, there is wide spread opinion, that given the present
debt levels of countries and governments, that such governments should not stimulate their
economies, which are in recession, with huge deficit spending programs.
Many say that you cannot buy economic growth anymore by governments executing huge
deficit spending programs. This would only increase the government indebtedness and would
drive governments further into financial difficulty and immobility. As the governments have
run out of tools to stimulate their economies, what is left? Well, we all see it:
In the USA at first, also in the United Kingdom, and in Japan, and now also in Euroland, the
same is happening everywhere: The Central Banks are trying to help out and to stimulate the
economies, with the limited tools they have: the buzzword is “quantitative easing”.
The result of this is, that the countries are flooded with money and as an intended
consequence, the interest rates have fallen to the ultra-low levels, which mankind has never
seen before. The question for many people is: Does the system get out of control and balance?
The critique against this worldwide quantitative easing and ultra-low interest rates is brief and
simple:
1. Interest rates being ultra-low are losing their function to allocate the scarce capital in
the economies to the points of highest return and efficiencies. The compass for
economics and profitability is being lost. Investments are increasingly flowing into
higher risky asset classes and new asset bubbles may arise which will burst sooner or
later. So new financial crises will be created.
2. The main beneficiaries of the ultra-low interest rates are the governments, indeed, by
making their interest expense burden lower than it would be with normal interest rates
levels.
3. There are also many losers due to these ultra-low interest rates:
These are all the savers, in fact the broad mass of people and individuals, who are
saving money, many of them with the purpose of having some financial reserves for
the case that retirement pensions will not be sufficient.
Losers are also insurance companies, pension companies, pension funds, the business
of which is, to increase over time the capital, they received as premiums from the
insured, so that in future they can pay the pensions, which they have contracted with
the insured people, and they build this capital by investing predominantly into bond
securities, which now carry almost no interest any more.
This phenomenon, that the savers and the pension insurance industry are losers, due to the
quantitative easing, has a name: It is called “financial repression”. It is described with clarity
by economists and economic professors. And it is not a new phenomenon.
After the second world war, the then over-indebted United States used the instrument of
financial repression to get itself out of the government over-indebtedness over a period of
almost 20 years. Interest rates in this period were often lower than the inflation rate for a long
time. Both, continued inflation, and good annual growth rates of GDP, then continuously
decreased the relative indebtedness of the USA.
IGTA eJournal | Summer 2015 | 19