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GBIM Newsletter Quarter 4 2016 – A New Era for Interest Rates?

Posted: 31st Jan 2017  /  By: GBIM
Categories: General News  /  Comments: 0

The referendum has pushed us towards the Brexit door, and Donald Trump may shut the gate on immigrants and free global trade. So where does that leave us – is this a new threshold? If so, have economic fundamentals dramatically changed? Has the outlook for inflation and interest rates changed? Will central banks behave differently?

A New Threshold?
It is very likely that we are about to embark upon a new set of socio-political rules in the developed economies. Globalisation has helped the global economy enormously. Hundreds of millions of people have had their living standards substantially improved, most of them in developing nations. The problem is that in developed nations the spoils have been pocketed by the winners, and the losers (mainly non-skilled workers) have not been supported by the liberal elites that have governed the process.

Brexit, Trump and Marine Le Pen are among the clearest manifestations of the pent-up exasperation that has been building. Giving people access to debt, rather than jobs, training or self-respect, is a failed policy. The debts are too high, and the people restive.

Will greater localism in politics emerge? Whether this is the re-construction of the EU or other supra-national bodies, or the devolution of Scotland or Catalonia, or an increase in the number of mayors in England, or protectionist trade policies, or blaming immigration, the potential is growing. But in an era of low growth this can only cause a redistribution of the spoils. There is no new growth paradigm hidden in the closed coal mines.

The “New Normal”

This summer government bond yields fell to their lowest levels in history. Being the result of precautionary behaviour, either by policy makers or by investors, this was not an expression of confidence or optimism. Since 2009 we have argued that interest rates would remain lower for longer, often defying general expectations. We still believe that growth and inflation should remain low for a very long time.

There are four major reasons for this, which cannot be eliminated without massive disruption: the enormous amounts of debt already outstanding can only depress the potential for future growth; technology is disrupting incumbent businesses and jobs at an accelerating rate; globalisation has created an over-supply of workers and production; and demographics is constraining consumption growth, as the post-war generations move into retirement and birth rates have fallen sharply.

These are very powerful, long term factors and it is very difficult to see how policy makers can have a major impact on this without causing a substantial disruption to economies and financial systems either by massive write-offs of debt, or by extreme measures of protectionism. There is nothing they can realistically do about demographics or technological development.

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