<<<	articles
Long life and low interest rates Samuel Brittan Financial Times 27/01/06 There is an old Chinese proverb: be careful what you wish for; it may be granted. Around the middle of the 20th century there was nothing that policymakers, pundits and medical scientists wanted more than sustainable low interest rates and medical advances which would prolong life. Now both have been achieved, the perversity of the human race is making them seem a tragedy rather than a triumph. The most important financial aim of John Maynard Keynes, the British economist, was to achieve permanently low long-term interest rates. He hoped that by encouraging investment and economic growth they would help secure full employment. It was this rather than demand management or budget deficits, with which he was popularly associated, that was his real driving impulse. His goal would have been shared by many practitioners. For instance, Neville Chamberlain, who was a much better chancellor than he was prime minister, converted £2bn of the 5 per cent War Loan to 3½ per cent in 1932. Unfortunately, Hugh Dalton, the postwar Labour chancellor, launched a fresh cheap money drive at the worst possible time. Less needs to be said about longevity. The medical profession has long taken it for granted that the preservation of life was its aim, so long as the promulgation of the life span was paralleled by an improvement of health in later years. Yet now that both these aims are much nearer fulfilment than ever before, the doom-mongers are out in force, moaning about the effect of low yields and longer life spans on the pensions industry. Would we, however, be happier with the earlier sort of crisis which was marked by falling gilt-edged prices, yields approaching double digits and governments unable to finance their debts without resorting to the printing press? Would we prefer the position of some former republics of the Soviet Union where life expectation has actually fallen since 1989? The so-called problem of the British gilts market is but a wrinkle on the surface of events. For most of the last 25 years the world real long-term rate of interest has varied between 2 per cent and 4 per cent. The yield on 20-year US indexed Treasury bonds is now hovering at about the bottom of this range. The yield on British indexed gilts has fallen still further to well below 1 per cent. There are clearly specific British factors. Pension funds have been pushed into seeking fixed-interest stocks by an excess of regulatory zeal. Toby Nangle of Baring Asset Management persuasively argues that prospective legislative and accounting changes will produce a similar shock in the US. Meanwhile, the British government has been too slow in adjusting the profile of its borrowing to accommodate investor preferences for the long end. In fact, it is missing an opportunity for a conversion operation that might “lock in” low interest payments on the national debt for many years to come. Much of the current discussion was anticipated by Mervyn King, the governor of the Bank of England, in a speech on January 16 which dwelt on the international rather than the parochial aspect. He gave two possible explanations for depressed long-term real interest rates. The first was a glut of world saving in relation to perceived investment opportunities. This arose mainly in Asia, but was driving down interest rates in the west and helping to finance payments and budget deficits in the US and the UK. The second explanation related to the increase in the world money supply and other forms of liquidity which were driving up asset prices, commodity prices and gold. On the surface they appear to be two opposite interpretations of what is happening. A savings glut is normally associated with depressed conditions (one should avoid overusing the misleading word “deflation”). On the other hand, the excess liquidity diagnosis would point to eventual inflation. The excess savings explanation would justify the expansionary financial policies that governments and central banks have either willingly adopted or been forced into. The excess liquidity explanation would suggest that the authorities have been too expansionary and that they need to become decidedly more restrictive before inflationary expectations really take off. The two explanations may not, however, be as contradictory as they seem. While long-term double digit expansion of money and credit would be dangerous, a temporary departure from orthodoxy might be just what the doctor ordered in the face of recessionary dangers. Even Milton Friedman at the beginning of his career used to say that a “clear and present danger” would justify departure from money supply rules – and that was long before the present multiplication of different kinds of money and near-money which makes monitoring so difficult. Perhaps the first thing we need is to cheer up. The second is to overcome fuddy-duddy objections to obvious reforms in government security market management. But third, and moving away from financial markets as such, the need is to index normal retirement ages to longevity to prevent what should be a blessing for the human race turning into a curse.
<<<	articles
Published on www.samuelbrittan.co.uk Contact - samuel dot brittan at ft dot com