How Low Interest Rates STYMIE Growth

by: Enzio von Pfeil

Low rates kill growth from a consumption as well as an investment angle.

  1. Conventional Wisdom

    Textbooks tell us that low interest rates ("rates") are good for growth: as they are not receiving anything on their deposits, consumers may as well blow it at the local shopping mall or online website. Meanwhile, cheap credit means that companies will invest more. Right? Not as of a certain point, that "point" being when rates turn negative.
  2. People Save More

    When rates are low, people have to save MORE just in order to keep their retirement savings on track: when rates are 10%, every $100 earns a dollar in interest. But when rates are zero, you get no return on your savings. So you have to stash-away more every month for retirement or looming outlays like college fees. Of course, where text books are right is that if you save more, you spend LESS. So down goes 2/3 of what drives GDP: private consumption (which, by the way, is driven very much by income-sensitive women.)
  3. More Junk Investing

    The other drawback of low rates is that the wrong companies are kept alive. These zombie leeches suck blood (i.e. credit) from those younger, vibrant companies needing money.
  4. Investment Implications

    Do NOT buy retailers in countries with low interest rates, where people have to save instead of consuming. Step in the consumer cyclicals of the Eurozone, Japan & China/Hong Kong. Do NOT buy into companies that are alive pretty much because their financing costs are low and thus they are kept alive on a low interest rate drip feed. Step in China's State-owned enterprises, and unhealthy companies in the Eurozone and Japan. Do NOT buy the yen or euro: with US rates rising, these two softies have to weaken. And do NOT buy long-dated yen or euro-denominated bonds: people chasing rates will keep driving down their yields. But DO buy the US market, which has a functioning business cycle, a functioning Economic Clock. There, the likelihood of rates rising is gaining timorous momentum meaning that: people need to save less for retirement AND unhealthy companies cannot keep living their charade existence. So go especially for undervalued consumer cyclicals. And DO buy American companies where the Economic Time - characterised by an excess demand or money as well as an excess demand for goods - is propelling corporate profits. We're thinking here of all sorts of undervalued cyclical stocks as well as banks, whose lending will pick up with a recovering economy/an improving Economic Time.