United States' Federal Reserve wields a significant influence on capital and its availability across the globe. Leverage has been a necessary part of economic growth for companies and nations. What does the future look like in which monetary policies are able to drive economic growth, and what are the unintended consequences?
The Economist's The World in 2015 has a few interesting thoughts based on the following premise:
"… over time long-term interest rates are highly correlated to long-term growth (see chart), and growth looks likely to be much lower in the coming decade than in the recent past."
I believe calling the chart below "highly" correlated is a going too far. If it were highly correlated, then the prediction of economic downturns would have been significantly easier and that is not the case.
The big question is why would the above statement be true? Here are a few viable comments from the article I agree with:
"… the world has a glut of savings and a dearth of investment, and it is the job of interest rates to bring the two into balance. Before the crisis the oversupply of savings could be traced to emerging markets, in particular China. Domestic savings in emerging markets rose from 24% of GDP in the 1990s to above 33% by 2008—and stayed there. That is more than enough to meet the (steep) investment needs of those countries, so they ploughed the excess into rich-country bond markets, pushing down interest rates. China’s current-account surplus has since shrunk, but the euro zone, bludgeoned by austerity, tight credit and weak investment in Germany, has taken its place: its current-account surplus in 2015 will exceed China’s. The global savings glut will put a lid on interest rates."
If the above represents thoughts on emerging economies driven capital movement, here is perspective on developed markets:
"A slower-growing economy needs fewer stores, factories and offices, depresses the return on capital and thus leads to lower investment. Slower-growing productivity holds back incomes and discourages consumer borrowing."
And so going against conventional wisdom upon which many an investors have been hedging their bets, the Economist states their claim:
"… the end of the Fed’s monetary morphine will not spell the end of low interest rates."
Read the complete article here. I am looking forward to seeing how things play out in 2016 and further out.