World’s Biggest Financial Experiment is a Bummer

How many readers know that around 1 billion people in Europe, USA and Japan are being subjected to the world’s biggest financial experiment without any democratic process?

How many readers understand that this experiment has been a spectacular failure so far? 

This experiment in having interest rates at near to or below zero has lasted for years even when the economies of some countries have been booming!

Independent Nordic economists say that this is a social experiment we have never one before, and the first results are many negative effects according to Fredrik Andersson, Associate Professor and Lars Jonung, Professor at Lund University.

They continue that our economies are now at risk to prolonged economic depression, we have seen soaring house prices and fast increases in share prices, with spiralling high levels of housing debt, and an increase in the wealth and income gap. In addition many inefficient and badly managed companies that would have normally disappeared have survived because funding has been so cheap.

As a result of the financial crisis in 2007/2008, central banks have decided to lower short-term interest rates to around zero. They made this decision for a variety of reasons: they wanted to help economic recovery in Europe, in the United States and in developed countries in Asia. 

They also wanted to help some very weak economies with huge debts like Greece, Spain, Ireland and Portugal that needed time to recover with ultra low rates. In America the Federal Reserve reduced interest rates to help house buyers and real estate developers manage through the debt crisis – many of them had too much debt and were exposed to ruin. 

Low interest rates were followed by further actions like Quantitive Easing where the central banks in Japan, the United States and Europe started to buy trillions of dollars of government and corporate bonds, as well as offering cheap loans to their banks. 

Interest rates are still around zero after all these years and now with a weaker global economy there is no room to cut interest rates to revive the economic activity. Trump is still demanding low rates because he is a real estate owner, but the rest of us suffer. 

Pensions are smaller because safe bond investment do not yield a positive return over inflation. Investors have been flocking to high risk bonds in search of returns where the risk of loss is seriously underestimated by brokers.

Younger people cannot afford to buy a home, and those with debts, (and debt exposure has increased in these developed countries), will cringe when rates eventually move higher. Household debt in Sweden in relation to income is twice as high as Germany and 70% higher than in the USA.

The wealth gap has increased between the haves and have-nots – those with share investments and homes have seen their wealth rise.  

According to Jesper Rangvid, Professor of Finance at the Copenhagen Business School, every financial crises is very costly. Although traditional indicators of financial instability have not been flashing red, house prices and household debt levels in the Nordic region are high. Low interest rates are causes for concern. He continues by stating that there is little room for monetary policy to soften the blow from a recession. Should interest rates rise (rapidly), high levels of household debt and house prices will be causes for concern. Should interest rates stay low, profitability of banks will be squeezed. 

This experiment is risky and the costs are already being seen and none of this was chosen by our politicians but by a few grey-haired men in these few central banks. Now we have populist politicians like Trump trying to jump on this bandwagon, but that is another story.

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