This article was updated on April 29
Ever since the financial crisis in 2008-2009, many people have been wondering when interest rates will start to rise globally.
With close to 0%, or even negative, interest rates across much of the world, will we ever get back to 5%-6% interest rates?
Nobody can predict the future, but this article will explain some reasons why interest rates will probably stay low for another decade or two.
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1. We are in a crisis.
We aren’t just in a crisis, we are in a worse economic crisis than 2008-2009.
Just a few months ago, US and UK unemployment was at close to record lows, with decent growth in many major economies.
That was then. Now, due to the government shutdowns, rather than the virus itself, we are looking at huge falls in GDP and mass unemployment.
The hope is this will be a temporary measure, and these figures will go down again once the economy starts to go up.
That may be the case, but the emergency measures will likely stay for a few years.
It is unlikely the economy could stomach any increases in interest rates.
2. The economy wasn’t able to stomach interest rate rises before (the 2009-2019 period)
This crisis will come and go. However, even during 2008-2019, despite relatively robust growth, interest rates only went up to just over 2% in the US.
In the Eurozone, Japan and Switzerland, interest rates didn’t even claim to 1%.
3.Inflation isn’t a big concern right now
With oil trading at $20-$30 and demand falling off a click, it is unlikely that rising inflation will mean higher interest rates, anytime soon.
What could happen is a political movement for more localisation of supply chains, given the crisis and climate change.
In other words, consumers might be prepared to pay more for products to be manufactured closer to home.
If factories are brought home to developed countries, that could be inflationary.
Already the Japanese government is paying manufacturers to come home from China, and other governments could follow suit.
Localization alone, however, is unlikely to make inflation a problem.
QE and falling interest rates didn’t cause consumer price inflation after 2008-2009, and is unlikely to do so again, despite the bigger intervention this time around.
4. There is not a big risk of capital flight and dumping
In times of economic uncertainty, investors are interested in tried and tested assets such as US Treasury bonds, the USD and indeed US Stock Markets for the medium-long term.
So whilst it is true that many investors will decide to invest in stocks and maybe real estate due to these 0% interest rates, very few people are likely to dumb US Dollars, Euros or even Pound Sterling in favour of emerging market banks giving 5% rates.
5.There isn’t an obvious place to go (short-term).
In the short-term, there aren’t any obvious places to go apart from cash and bonds.
Gold has been stagnant since the times of Christ in inflation adjusted terms, and went down during the worse of the crisis in 2008 and 2020.
Gold’s 2000-2011 bull run was only interrupted by 2008-2009, and again with this crisis, gold fell during the worst of the panic.
Other commodities such as oil, gold and platinum have tended to do worse during economic crisis.
Housing is struggling now, because it is harder to find tenants that will pay, in such a market.
So whilst there is an obvious long-term play (stock market investments as markets have gone down in value), there isn’t an obvious ultra-safe alternative to USD right now for short-term positions.
That makes it more likely that a repeat of 2008-2009 will happen.
Namely, that the intervention from central banks, will push up asset prices like stocks medium-term, but won’t cause a run on any of the major currencies.
If a government debt crisis happens, it is more likely to happen in the emerging world, or be in the corporate debt market.
6. Japan and the Eurozone
Japan has had government debt of about 200% of GDP for quite some time, and the Japanese Yen has been stable.
Some naysayers claim that the Japanese population own most of their debt as opposed to non-Japanese people, implying that nationalism might lead to investors keeping hold of their Yen.
The fact of the matter is that the USD is the world’s reserve currency.
That trumps any other arguments about US debt. Realistically, the US could sustain a debt 2x-3x bigger than the one they have.
The flight to safety (USD) and the riskiness of several developing economies, will probably make the world more reliant on USD for a few years than it already is.
Likewise, with the Eurozone, rising debt levels haven’t affected the value of the currency.
In a debt-deflation situation, like in Japan or the Eurozone, big inflation is unlikely given the dynamics at play.
This crisis isn’t exactly going to make these factors better. In fact, many people and businesses are likely to become more risk adverse.
In practice that means saving more (and therefore spending less) and only investing in safe, long-term, investments, such as index and bond funds.
Less people are likely to want to engage in risky business expansion investments, that are key for GDP growth.
A technical term for this is “secular stagnation” – a combination of low private sector growth, deflation or close to 0% inflation and low productivity growth.
Even in terms of my own network, which is anecdotal evidence, I am noticing two trends. There are some that have more cash than before, and there are those that are getting rid of cash.
These people take the Ray Dalio view that “cash is trash” and have decided to take advantage of falling markets.
One commonality, however, is most of them have scalled back riskier private equity or business expansion investing, preferring more standard investments, like the S&P500 index and Tresuries.
7. Official support for hikes has gone down
On most of the major central bank boards, support for hiking interest rates has gone down.
There is now close to 100% agreement now that rates need to stay lower for longer.
Central bank agreement about hiking rates, rising inflation and/or rising growth are three factors that are needed for rate hikes.
None of those factors are likely to be present for a long-time.
Nobody really knows when interest rates will rise. However, given the current conditions are deflationary rather than inflation, it is very unlikely that central banks will be able to rise interest rates back to their 2000-2008 levels, anytime soon.
The countermeasures that governments and central banks have enacted, are likely to help deflationary preassures, but just like in 2008, are unlikely to cause consumer price inflation.
This is especially the case in the developed world. In a few years time, some trends like localisation of supply chains could push up inflation slightly.
What is much more likely, is that the intervention will cause asset price inflation, as people get fed up with getting 0% in the bank.
That could lead to higher medium-term valuations for stocks and some types of real estate.