(Continued from Part 1.)
While we’re on the subject of interest rates, lets explore low interest rates. I’ve mentioned that the government, through the Fed, has kept them artificially low since about 2008. Now, the general thought was that low interest rates would stimulate the economy. Low interest rates mean that you can buy that bigger house, or new car. It also means that businesses can expand because the risk on a loan is lower. It means that new businesses can start up because people can more easily qualify for a loan, and their payments are relatively low, so its easier for them to pay it back. And all these things are true, to a certain extent. There are downsides to low interest rates that are very rarely mentioned. The most obvious is your savings account – no matter how much you put into it you don’t get enough interest out of it to keep up with the cost of living. This encourages people to invest their money in things like the stock market in an attempt to get a higher return on their money, cause let’s face it, your savings alone aren’t going to get you any kind of retirement.
Even people that don’t invest in the stock market per se, actually do invest in the stock market, by putting their money into company retirement plans, or other retirement plans. You see, it’s simple math! To be able to pay you the money that they are guaranteeing for your retirement these plans need more than what you are putting in. They need a higher rate of return. If they could just put your money in a savings account and make 10% over the years, maybe they would be able to pay you your retirement benefits. (But then again, so could you) But, there’s no way that they could ever pay you out even a fraction of what they supposedly owe you at 2% or less – the numbers just don’t add up. As a result, pension funds have had to venture into riskier and riskier investments over the years in an attempt to show, at least on paper, that they were able to meet their obligations. And it’s not only private pensions, government and union pensions are also in the same situation.
Two recent examples of potential pension fund crises are the revelation that there are numerous government pension funds, including the veterans fund, that are heavily invested in Chinese stocks, owned and manipulated by the Chinese government. The other one is the Ontario Teachers Federation pension fund that had $865 million invested in FTX. You’ve gotta wonder how they’re going to resolve that one. So, much like globalization, low interest rates work great to stimulate the economy….until they don’t.Continue reading“Pessimist or a Realist? Our Present Situation – Part 2, by The Lone Canadian”
