FXStreet (Delhi) – Elwin de Groot, Senior Eurozone Strategist at Rabobank, notes that German finance minister Schaeuble was quoted as saying in a speech to an industry group in Berlin that “low interest rates are like a drug addiction”, which creates “problems” and that he would rather pay a small real interest rate than none at all.
Key Quotes
“Schaeuble’s comments are often a welcome and refreshing addition to the usual noise in financial markets and we actually have some sympathy with this line of thinking, because (i) (too) low rates have ignited global currency wars, (ii) low rates in developed countries have created new financial imbalances – where developed economies have ‘exported’ their (debt) problems to developing economies via capital flows, and (iii) too low rates may be distorting the allocation of capital more generally.”
“In other words, capital is not ending up in those areas (say, cutting edge investments) where it should have the highest impact on long-term growth. That last point, we admit, remains hard to prove, but with large corporates awash with cash, (real) interest rates close to record-lows, and investment-to-GDP ratios still close to record-lows in this phase of the economic cycle, we would argue that the opposite (i.e. that low rates are boosting investment and high-quality employment) is even harder to prove.”
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