The Journal notes today that rock-bottom and negative interest rates worldwide are encouraging citizens to save – rather than spend – more. Savings rates are rising fast in Germany, Japan, Denmark, Switzerland, and Sweden, all countries with negative interest-rate policies and negative-yielding government bonds. In three of those five nations, citizens are now saving a greater percentage of their income than at any point since the Organization for Economic Cooperation began tracking in 1995.
It’s not just individuals, either. Companies in Japan, Europe, and elsewhere are boosting their cash holdings even as yields on cash and cash-like investments are plunging. Cash and bank deposits held by Japanese corporations jumped more than 8% earlier this year, the fastest rise since the 1990s.
Even here in the U.S., the personal-savings rate has remained elevated throughout the entire post-2009 environment. Take a look at this chart, and you’ll see that it has been hovering in the 5% to 6% range for years, despite some of the lowest yields in history on U.S. bonds and bank accounts. (Note: The spike in late 2012 stems from a change in tax policy, which resulted in a temporary surge in dividend payouts.)
This wasn’t “supposed” to happen. Many of the world’s central banks cut short-term rates to zero, then below zero, because they predicted that this would encourage companies and individuals to borrow and spend more. That this would boost economic growth.
But it appears many individuals are just hoarding funds. Companies that are raising money are mostly doing so for financial engineering purposes (i.e. stock buybacks), rather than to invest in their businesses.
Why? It goes back to the simple point I made at the outset, and which the Journal puts this way:
“Interest payments on savings accounts in the eurozone are at the lowest levels since 2000, according to ECB data. In the early 1990s, it took nine years for a German saver to double his or her capital as interest income piled up, according to Hans Joachim Reinke, chief executive of Frankfurt-based Union Investment. Now, savers … would have to wait 500 years for that to happen.”
The economist crowd will respond by saying “So what?” They’ll tell you the benefit of lower borrowing costs outweighs the drawback of lower interest earnings. But three straight quarters of lackluster GDP, lousy business investment, tame retail sales – and now, incontrovertible evidence of higher savings rates – suggest that central banks aren’t getting much bang for their NIRP/ZIRP buck.
So what do you think, and what are you doing in your own life? Are you increasing your 401k, IRA, or savings account contributions because yields are so low? Or are you borrowing more thanks to rock-bottom interest rates? Are low/negative rates helping your financial situation more than hurting it? Or is it the other way around? Use the comment section as your outlet on this important topic.
Until next time,
Yesterday’s column on the lack of infrastructure spending – and the reasons behind it – really struck a nerve. Dozens of you weighed in, blaming everything from political incompetence to failing pensions to the inability to shoulder a higher tax burden for the current state of affairs.
Reader Bob said: “This is a real problem. We need to spend on infrastructure but the states can’t afford it because taxpayers won’t pay for it. My flip answer would be to have the federal government print more money and give grants to the states, or issue 30/50-year Treasury bonds to finance the improvements.
“Some projects lend themselves to private sponsorship and/or public/private partnerships where entities issue long-term debt, make the improvements, and get repaid from tolls for usage of the infrastructure like bridges and roads or fees from rail, sewer, water airport, etc. utilization.”
Reader Carl said the problem is that governments already have so much debt, they can’t afford to take on more – even at rock-bottom interest rates: “Taken as a whole, the government is already spending much more than it receives. The growing debt has to be paid by future citizens. What we borrow, even at 0%, also has to be paid by future citizens. There may be sophisticated economic theories that justify low-cost borrowing, but the average voter senses that the enormous debt is a world-wrecking bomb that needs to be defused.
“Personally, I won’t vote for a dollar to save ‘starving orphans’ – politicians need to prioritize our society’s needs and make tough decisions on where to spend the trillions they already have. We’ve been suckered into funding ‘vital’ initiatives before, only to find that money is fungible. That new debt or tax only freed up money for some other stupid vote-buying program.”
Reader BW blamed the pension-funding problems I recently wrote about for lackluster infrastructure spending: “You are discussing the symptom and not the problem(s). Government employee union activities have driven compensation and retirement costs through the roof by organizing against the taxpaying citizens.
“The investment returns on retirement system endowments do not meet projections. So governments are funneling any additional tax revenues into covering pension-funding shortfalls, leaving infrastructure needs unmet because the taxpayers are rejecting bond issues.”
Reader Dave W. also cited the pension issue, saying: “Spending continues to increase in cities and states, it just all goes to pensions and healthcare. And no, I don’t want my taxes raised to pay for more bureaucracy, pensions, and healthcare costs.”
Reader Lucy H. blamed regulation, and particularly environmental regulations, for part of the reduction in spending. Her comments: “Unfortunately, immense amounts of public money are wasted on the rigorous environmental permitting process needed to start new infrastructure projects, even for existing structures. There has to be rational compromise in terms of saving the environment versus allowing infrastructure projects to move forward economically.
“It took a couple of years for us and our associates to justify the building of a small pier for emergency boats. Why? Issues such as the potential effect of the shadow of the boat on the small patch of coral present and the effects of construction noise on the scant marine life, even though this was in a working harbor with ocean liners docking nearby.”
As for misallocation of funds, Reader F151 brought up the post-recession stimulus debacle: “In 2009, President Obama approved the expenditure of almost $1 trillion for ‘shovel-ready’ infrastructure projects. It was later reported that approximately only 3% of that huge sum was funneled to such projects.
“Most of the rest of the loot was distributed to unions, unemployment funds, government agencies, political friends and other black holes that resulted in little to show … except increased bureaucracy, corruption and more debt. THAT is why the citizenry are leery of new bonds costing billions of dollars.”
Thank you for sharing your views on this important topic. Clearly, the bad experience of the Obama stimulus program has left a bad taste in people’s mouths … and the pension struggles are making it much tougher for states and cities to find money to spend on needed infrastructure. I don’t know what could change this depressing state of affairs. But low rates certainly don’t seem to be helping.
Anything else you want to add? Then hit up the comment section and fire away.
The IPO market has decelerated sharply in the last year and a half as part of the turn in the credit cycle I’ve been harping on. Just one example: Only nine U.S. tech companies have gone public so far this year. That compares to 16 last year, and a multi-year high of 32 in 2014.
As a result, many development-stage firms decide to sell out at lower valuations to deep-pocketed corporations. The latest example came this week, when Amazon (AMZN) competitor Jet.com sold itself to Wal-Mart Stores (WMT). It needed to because it was burning through tens of millions of dollars per month and the public markets wouldn’t reward the firm with a rich enough valuation and a never-ending supply of cash.
In the latest sign that credit-quality concerns don’t matter at all anymore as long as central banks are buying yields on debt issued by troubled peripheral European nations that are falling below notable benchmark levels. Ten-year notes issued by “PIIGS” nation Spain are now trading below 1% for the first time ever, while Irish yields are down to just 37 basis points.
Lingering computer problems at Delta Air Lines (DAL) caused another 250 flight cancellations today, following 1,000 cancellations on Monday. The company offered $200 travel vouchers and waived change fees for stranded passengers, and it blamed the problems on an issue with power supply at its Atlanta home base.
Now you know the burrito/Tex-Mex food craze is getting serious – Burger King (owned by Restaurant Brands International (QSR)) is introducing the “Whopperito”. It will take the same ingredients found in the traditional Whopper and wrap them up in a burrito, replacing mayonnaise with queso sauce. Yum!
What does the IPO slump mean for the overall stock market? Can you believe these “PIIGS” countries are borrowing for peanuts again? Any thoughts on Delta’s ongoing computer problems? And is your mouth watering at the thought of this strange burger/burrito hybrid? Let me know in the comment section.
Until next time,