Why Ultralow Interest Rates Are Here to Stay
Posted by hkarner - 15. Juli 2016
Source: The Wall Street Journal
While central-bank bond buying is the proximate cause of a plunge in U.S.
Treasury yields, the drop represents the cost of economic and political choices made over decades
Ultralow interest rates are here to stay.
Central-bank bond buying is the proximate cause for the plunge this month of the 10-year U.S. Treasury yield to its all-time low of 1.366%. But it would be a mistake to single out central bankers.
Slumping rates represent the cumulative cost of economic and political choices made over decades, ranging from an overreliance on debt-financed growth to creeping regulation. This sclerosis is the major driver of lower and lower interest rates, and the signs of it are evident just beneath the glossy surface of record stock and bond prices.
Companies have been borrowing at a record clip, thanks to low rates. Yet capital investment is sagging, while share buybacks have flourished in a return to the financial engineering that we were supposed to have forsworn. The Dodd-Frank financial overhaul shored up U.S. banks, but at the expense of tighter credit that has hampered recovery.
A longstanding decline in business formation has intensified in recent years, crimping new jobs and underscoring the sense that the postcrisis pursuit of stability is lulling the economy into prolonged stupor. While the U.S. is still a far cry from Japan, locked into a decades-long struggle to escape deflation, it is becoming clear that embracing risk aversion has its price.
“What we’ve got now is a more-stable, more-boring economy,” said Steven H. Strongin, head of global investment research at Goldman Sachs Group Inc. “The question is whether that’s where you want to end up.”
Amplifying these problems is the steady accumulation of debt. The financial collapse was supposed to presage an era of deleveraging that would result in a more balanced global economy. Instead, global debt levels are higher now than they were in 2007—a chronic problem that makes economies and markets everywhere less resilient.
Global debt hit 235% of gross domestic product at the end of 2015, the Bank for International Settlements estimates, up from 212% on the eve of the financial crisis. The figures reflect private, nonfinancial borrowing in the corporate and household sectors.
The increase has been most extreme in developing economies, where outstanding debt rocketed to 179% last year from 121% in 2007. The market’s obsession with the value of China’s yuan over the past year reflects concern over the buildup of debt there.
But even in the U.S., where substantial deleveraging has taken place in the household and banking sectors, total debt has been on the rise. U.S. debt hit 251% of GDP at the end of 2015, the BIS said, up from 228% in 2007. Government debt in the U.S. has risen to 100% of GDP from 60% over that span, reflecting in part the costs of cleaning up the 2008 meltdown.
U.S. growth was softening even before the crisis, largely reflecting debt that reached problem levels around the turn of the century, said Lacy Hunt, executive vice president at Hoisington Investment Management Co., which has $6.12 billion under management in Austin, Texas. The firm has been positioned since the fall of 1990 to benefit from declining U.S. interest rates, boosting the price of the long-term Treasury bonds Hoisington holds.
Borrowing for current consumption means that “you’re mortgaging your future revenues,” Mr. Hunt said.
That effect is evident in slumping U.S. economic performance. Inflation-adjusted U.S. median household income has fallen 7% from its 1999 high to $53,657. Food-stamp use has more than doubled, to 43.6 million people.
Slow growth and risk aversion have found their purest expression on Wall Street, where today’s hot product is the low-volatility stock portfolio promising slow and steady gains.
That promise is hard to keep in an age of low returns and crowded trades, but that isn’t the biggest problem, said Mr. Strongin of Goldman Sachs.
Buyers of highly valued technology stocks in 1999 at least sought out cutting-edge firms in a topsy-turvy economy. Purchasers of so-called minimum-volatilty, or minvol, portfolios are driving up prices in pursuit of sheer boringness, muffling the market’s capacity to pick winners.
“The tech bubble left us with the internet. What is the minvol bubble going to leave behind?” asks Mr. Strongin.