Sep 10, 2019

The end of money as we know it

Illustration of a piggy bank on its back with X's for eyes

Illustration: Aïda Amer/Axios

The basic principles of investment are being upended, perhaps irreversibly, as the world enters an era of ultra-low and even negative interest rates.

What's happening: American consumers have seen the interest rates they're paid on savings accounts, bonds and CDs tumble this year, and in places where central banks have actually set negative rates — like Japan and the eurozone — some consumers are actually being forced to pay in order to save money.

Driving the news: The European Central Bank will meet this week to consider lowering its interest rate on deposits, which has stood at -0.4% since 2016.

  • Fearing that negative interest rates will soon mean average customers have to pay to keep money in banks, financial authorities from Germany, Denmark and Norway are independently speaking out against them.
  • “In the long run, negative rates ruin the financial system,” the CEO of Deutsche Bank, Christian Sewing, said at a conference last week, according to Bloomberg.
  • While the goal is to spur people to spend or take financial risk rather than save, the policies haven't worked, and new data shows that negative rates may be doing more harm than good.

The Federal Reserve is gearing up to cut interest rates for the second time this year when it meets later this month, and banks are already cutting rates on savings accounts.

  • Former Fed Chair Alan Greenspan said last week that it’s "only a matter of time" before negative rates come to the U.S.

The big picture: The low-to-negative interest rate environment poses a major problem for people looking to save for retirement. The traditional 60/40 portfolio (60% stocks and 40% bonds) that fund managers have used to craft retirement accounts for decades doesn't work in the long-term if bonds yield nothing or have negative rates.

"Young people ... are going to have to substantially increase their contributions" to retirement accounts if they hope to actually retire one day, Alicia Munnell, director of the Center for Retirement Research at Boston College, tells Axios.

  • Future retirees will also likely have to put more of their funds into stocks and other assets that are riskier and more likely to result in a loss of principal, meaning retirement assets will be less secure.

Between the lines: U.S. pension and retirement funds are currently underfunded by trillions of dollars, and states are already in a position where they’re either going to have to raise taxes or cut benefits for future retirees — or both, notes Jeffrey Hooke, a finance professor at Johns Hopkins University.

Negative interest rates will likely worsen that problem, forcing state governments to make some "tough decisions."

  • “Retirees, most of them think they’ll always get their money, but it may be the case in 5-10 years that some of them don’t,” Hooke tells Axios.
  • “It won’t be pleasant, but it may be necessary."

The bottom line: A fundamental element of our entire economic system — saving earns money and borrowing costs money — is being unhinged before our eyes.

Go deeper