When cash earns nothing


How do investors react to the tearing up of economic text-books?

They pile into markets and take on higher risks on the assumption that if markets stumble, a central banker will step in and make interest rates so low that even a negative yielding investment looks good.

There’s a lot of words and ideas in that paragraph. It is intentional. Money only makes sense in our post-Global Financial Crisis if you look at everything from a relative sense. Otherwise, it becomes a rather confusing mess. Nothing better embodies the mess than does the global move towards zero or even negative, interest rates.

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“Zero” is not the usual target for financial plans…
A link to a website that lists the differences between short-term interest rates and longer-term interest rates in various countries. The table shown highlights the expectation of low inflation/low growth across developed nations globally.

Here’s an example.

IF bank deposits earn you 0.5% and term deposits earn you 1.8% then a million dollars in the bank will earn something between $5,000 and $18,000. Not that long ago, term deposits were paying 5%, and that same million dollars generated $50,000 of secure, regular income.

I am told that inflation has been ‘tamed’. Even as a leashed animal, inflation runs at 1.9%. The result is a loss of purchasing power. So next years’ income will buy a little bit less of the things you want than last years’ income bought.

Faced with this declining income, many people are turning to higher risk investments, such as property and shares.

Those property and shares rise in value as the interest rates fall, so falling rates reward the shift to higher risk assets.

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When heading towards ground zero, it pays to take a few precautions…

The purpose of all this is to stimulate national economic growth, foster employment and boost economic activity.

When the global crisis hit, way back in 2007/8, the USA Federal Reserve took drastic measures to stop its financial system spiralling into a depression. Those measures worked – but nobody has come up with a way of reversing the measures taken. Each time a central banker tries to point the monetary system back to something resembling a version of historical ‘normal’, markets cascade downwards as risky assets are abandoned in favour of ‘safe havens’.

The end result is that interest rates keep going lower and lower, but the impact becomes less and less.

There is no easy solution. Governments are generally hamstrung from making large, risky steps to foster economic activity (and have a rather bad track record even when they do). Central bankers have little choice but to follow their mandates, and keep dropping interest rates – even if those rates move to negative territory. You and I both know that negative interest rates just don’t make sense. They distort all the logic we grew up with.

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If governments had access to unconstrained levels of cash, how would it be spent? Is extra government spending a solution to low economic growth?

When musing about such matters, I do wonder if the aim of the central bankers is of less importance today than it was in the past? “Consumption” isn’t growing as much as policy-makers would like. “Growth” isn’t happening at the rate that keeps policy settings stable. But what if a reducing consumption is a good thing? What if growth simply propels us faster down the route of environmental degradation?

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Perhaps less consumption could be seen as a good thing?

Perhaps it is time to rethink the objectives of a developed society? Not in a simplistic way, but in a nuanced, one-step-at-a-time way. Maybe this is actually an opportunity to stop, sit back and do a bit of an audit on how we are going as a society?

Frankly, I don’t want to see Australia follow the global money-flow so that we simply join the herd of lemmings streaming towards some unknown horizon. Moving towards some system that pays people to borrow money and removes the incentive to save for tomorrow, seems to me a pathway to very bad outcomes.

In the meanwhile, we financial planners try to plan for the worst, while hoping for the best. It’s just that the worst has become rather worse than we’d previously planned for.

The image below contains a link to the ABC website article that considers the ramifications of Australia moving to zero or even negative interest rates.

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The Great Disclaimer
Please remember the Great Disclaimer – this post and this site do not provide personal financial advice. This is general advice only, and is not to be used as a basis for making a financial decision. Personal financial advice can only be provided by a suitably qualified adviser, after due investigation of your financial situation, preferences and objectives. Any such recommendation must be in writing, in the form of a Statement of Advice. Please see the government run website moneysmart.gov.au for further information. Alternatively, please note my site links below..


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