Interest rates

A big realignment is underway and that’s a good thing

However, when interest rates fall, as they have over the past two decades, it is a worrying sign that there is a dearth of potential investors looking to borrow to invest. That is, savers are forced to accept a lower price for their money lending service.

Our Reserve Bank governor, Philip Lowe, recently sketched this ominous scene: “The story of the past two decades – a decade and a half has been a very high appetite for saving globally and a depressed appetite for investing.

Illustration: Dionne GainCredit:

“So when everyone wants to save and no one wants to use your savings to start new businesses, you get a small return on your savings. This is the world we have been in. This is really why we had low interest rates until the pandemic. “

So where have all the productive investment opportunities gone? Are they really gone completely and forever? Fortunately, the answer is no.

From the start of last year, the global tide of low interest rates began to turn. Long-term interest rates in wholesale markets have started to rise. That is, where global investors once looked into the abyss and saw only darkness, they now see opportunities. It’s worth paying to borrow again.

As part of this rising tide, the US Federal Reserve is expected to raise official interest rates this year.

It might sound like scary news, but it isn’t. When interest rates start rising from ultra-low levels, it’s actually a sign that the balance between savers and investors is correcting, and policymakers are shifting official interest rates to reflect this. change of balance.

Higher interest rates, in this way, are not a sign of doom, but rather an indicator of growing confidence in the future success of the whole capitalist project; namely, the ability of humans to invent new ways of combining labor and capital to produce better products and services for consumers to consume – while employing those same consumers, leading to an increase in the standard of living for all.

The COVID pandemic has, of course, dealt a severe blow to all economies. But the truth is, those savings were already on the ropes before COVID. By delivering a brutal shock to the global economic system, COVID could yet constitute an important turning point.

COVID has certainly unleashed some of the same destructive power you might expect to see from a traditional recession. Unlike traditional recessions, it has also brought about a drastic change in the way humans work and live. Rarely have we seen a period in which there has been such widespread and rapid adoption of new technologies, such as teleconferencing, online shopping, and door-to-door delivery services.

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The stock markets started the new year in panic over the prospect of rising interest rates, especially in the United States. But it is surely the alternative – keeping rates ultra-low, increasing debt and creating asset bubbles – that would be of most concern. Markets should come to realize that a more sustainable economic recovery, based on growing investor confidence in future investment opportunities rather than favorable borrowing costs, is the best long-term prospect.

So don’t be fooled by the scary headlines on inflation and interest rates. A return to normal is not a bad thing, certainly not after the upheavals of the past two years.

It is still early days and COVID setbacks are to be expected, but there is every reason to suspect that a major realignment of economic fortunes has begun. And that would be really welcome.

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