Way back in 2005, shortly before he became chair of the Federal Reserve, economist Ben Bernanke proposed that the world was seeing a long-term glut of savings. With the world awash in cash as a result of massive numbers of people in the developing world entering the job market, and as the Baby Boom generation (and others) hit its peak earning years, and as relatively low inflation and rising real wages freed up more cash for many consumers, long-term interest rates would stay low and remain low for longer.
The thesis looks, in retrospect, to have been massively correct. The global economy did experience a long period of extraordinarily low interest rates, with interest rates turning negative for important chunks of the the world.
Now, it looks like the long-term trend has gone into reverse. We’re headed into a period of cash scarcity.
The global savings glut is drying up. And corporate borrowers, consumers, and governments will be forced to pay higher interest rates to access a smaller pile of global savings.
A real red flag on this trend is the coming Bank of Japan decision to raise the country’s interest rates above 0% for the first time since July 2006. The country’s benchmark rate has been in negative territory since 2016.
The reasons for the reversal read like a negative version of the factors that created the savings glut 20 years ago. On the demographic front, we’ve moved from a period where younger people entering the work force gave a boost to global earnings and savings (especially in China and India) to a period when we’re seeing surging costs to provide for aging populations (especially in China). In addition slowing growth in China’s economy in general–and a still developing debt crisis in that country’s real estate (and local government) credit markets–are forcing China’s government to draw down China’s pool of cash from domestic savers. A fragmented global economy where countries compete for cash will just add to the problem. None of the economic analysis that I’ve seen fully includes the cash needed to address global climate change.
“We are entering an era of greater geopolitical rivalry and more transactional economic relations” that will depress the global supply of savings, former European Central Bank President and Italian Prime Minister Mario Draghi said in a recent speech. “The downward pressure on global real rates that has marked much of the era of globalization should be reversed.”
Bloomberg reports that Hanover Provident founder Robert Dugger and Chicago Fed economists Robert Barsky and Matthew Easton suggest the savings glut crested some years ago. The beginnings of the reversal of that trend, though, were masked by the especially easy money policies at the Federal Reserve and other central banks coming out of the 2007-09 financial crisis. The pandemic subsequently triggered an even greater gusher of cash.
How high might interest rates climb in a long period of savings scarcity. Julian Brigden, co-founder of Macro Intelligence 2 Partners, told Bloomberg that the fair value yield for the 10-year Treasury note could rise to around 8% by about 2050 from roughly 3% now.
The long-term implications are sobering. An 8% Treasury yield would pummel financial markets and send stock prices tumbling. Economies would slow as companies struggled to find cash to invest and to pay interest on their debt. The housing market? Nothing good. Would global central banks try to fight the trend with loose money policies? Almost certainly for a while until they faced a buyers’ strike in the bond markets. What would happen to government spending priorities as interest payments on national debt soared? Would economies slow so much that inflation would fall and prices might actually go into deflation?
So many questions.
And lots of time–but not forever–to figure out what to do as an investor.
I’m going to be returning to this long-term theme over and over again in coming months.Look for suggestions on strategies for long-term investors
In the meantime, maybe reconsider the purchase of any 50- to 100-year bonds?
