The Danger of Plunging Interest Rates and Delayed Buying

Writ large, frugality like hers may be one explanation there’s almost $16 trillion of debt worldwide with a yield of less than zero. Patience, thrift, and caution might be too much of a good thing, contributing to a glut of savings. People no longer have to be bribed with a high interest rate to save rather than consume. The yield on 30-year U.S. Treasury bonds, while not negative, fell to a record low on Aug. 14.

The question is what’s changed. Is it the people or their circumstances? Negative interest rates are such a new phenomenon that speculation on their cause is wide-ranging. Former Federal Reserve Chairman Alan Greenspan and Joachim Fels, global economic adviser at Pacific Investment Management Co., a large bond-fund manager, say they’re open to the possibility that people’s core habits have changed, making them consumption in the future as much as or more than consumption in the present. Economic forces may have “altered people’s time preferences,” Greenspan said in a recent Bloomberg interview. He added that he expects people to eventually revert to old spending habits. “These changes won’t be forever.”

An alternate explanation is that circumstances, not people, have changed. For example, if people are saving more because longevity has increased, that’s not a personality change. It’s a rational response to the growing chance of living past 100. Another theory is that rather than being more patient, people are saving more as a precaution, because they were “scarred by the financial crisis,” says Andrea Ferrero, an economist at Oxford University.

The notion that today’s low interest rates are a function of oversaving seems to conflict with a rise in some types of debt, such as student loans. In reality, they’re two parts of the same phenomenon, namely “secular stagnation,” says Harvard economist Lawrence Summers. Excess savings have to be invested somewhere, and since there’s a dearth of demand for conventional projects such as factories, some of the money finds its way into things like private financing of students’ educations, he says. Rates on those loans are higher than investors can get elsewhere.

Summers and Lukasz Rachel, a senior economist at the Bank of England, attempt to sort out the factors contributing to low rates in a paper they wrote for a conference this spring at the Brookings Institution. They focus on the so-called neutral rate, which will prevail when the economy is running at its maximum noninflationary pace. They estimate that the neutral rate, stripping out inflation, for six major economies—Canada, France, Germany, Japan, the U.K., and the U.S.—fell from 3.6% in 1971 to just 0.4% in 2017.

They conclude that government policy, often condemned as profligate, has actually kept advanced economies out of a chronic slump by providing a boost to spending. As low as interest rates are today, they would be even lower if not for the upward pressure from government policies, they say. Government deficits and the resulting increase in borrowing push up the neutral rate by 1.2 percentage points, they estimate. Social security and old-age health-care programs in the six countries add 2.3 percentage points to the neutral rate, they calculate. Those programs transfer money to retirees, who have a higher propensity to consume rather than save their income.

But those upward pushes have been more than offset by downward forces in the private sector. The biggest is weak productivity growth, which, according to one model they use, knocks 1.8 percentage points off the neutral rate. The theory underlying that model is that when productivity is weak, the economy grows more slowly. When people foresee dimmer prospects, they save more so they don’t run out of money when they’re old. The estimate of 1.8 percentage points is probably on the high side, Summers says.

Weak population growth knocks more than half a percentage point off the neutral rate, Summers and Rachel calculate, mainly because there’s less need for investment in housing, schools, and so on. They also theorize that economic inequality increases savings: Rich people save more because they’ve run out of things to buy, while people closer to the edge need to save as a cushion against greater income volatility and uncertainty. Interactions between effects is an additional 1.1 percentage points. “For example, aging in the world of low growth is worse than just the sum of aging and impact from growth,” Rachel writes in an email. The authors leave a final 1.4 percentage points of the drop in the neutral rate unexplained. Summers says one factor there is probably a reduction in the cost of production goods, “exemplified by the fact that an iPhone has more power than the biggest computers of a generation ago.”

Several commentators, including Bloomberg’s Joe Weisenthal, have argued recently that negative rates are just a way of charging for keeping people’s money safe. But that’s nothing new. The reason that idea is being talked about now is that the price of safety is no longer masked by other factors that used to push up rates, such as strong growth in productivity, population, and prices. And, perhaps, impatience. —With Liz Capo McCormick

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