An article today by Reuters looks into why it is taking so long for the West to start growing at a decent rate. The arguments are very intriguing and makes for a good read for any investor looking at retirement, as it provides an insight on what the world may look like a few years from now, in particular in terms of what may happen to interest rates or where investment opportunities may lie.
It argues that there are two main causes at the root of the West’s stagnation:
1- a glut of global savings, which depresses interest rates (too much money makes it cheap)
2- a shriveling of income accruing to labor in the Western economies, which depresses consumption
Both causes can be tracked down to China, which has amassed $3.7 trillion in reserves, and has depressed the cost of labor as it has grabbed the lion’s share of the global production of manufactured goods at rock-bottom prices.
The consequences of these factors are huge. For starters, it forces central banks to keep lowering interest rates down to zero, essentially eliminating the main instrument that monetary authorities have to revive economic activity and fight against quickly falling inflation.
The zero-rate policy also has propped up asset prices, which benefit the rich and widens the income gap. This, in turn, depresses consumption even more, making corporations reluctant to increase production and instead making them more likely to hoard cash. This increases the glut of savings and keeps the pressure on interest rates in a perverse feedback loop.
The conclusion of the article is that the solution to what ails the West cannot be found in monetary policy alone. The West’s problems are rooted in social, political and demographic causes that cannot be tackled by financial means.
The article ends on an optimistic note. Read it here:
Written by: Raul Elizaldeby