"The sky is falling", said Chicken Little. This quote came to mind when I was musing about our bargain basement interest rates.
Britain had cut its central lending rate to 0.5%, the lowest in 300 years allegedly, and I started asking myself: "Are falling interest rates such a great thing?"
As someone who may be getting a significantly larger mortgage later this year I’ve been salivating at the sight of the official cash rate freefalling. Something deep down inside me is nervous, however. I'm sure I'm not the only one.
Then there's talk of "quantitative easing" otherwise known as printing money, that's going on around the world. That's scary stuff say some commentators.
This conundrum needed a fine brain attuned with good economic knowledge, so I telephoned Brian Gaynor, economist and New Zealand Herald columnist to see what light he had to shed on it.
In general a drop in interest rates should be a good thing says Gaynor. It makes money cheaper to borrow for businesses so they can expand. It also gives consumers with mortgage and consumer debt more money in their pockets to spend. The trouble is that if those of us with mortgages choose to save our windfall – which is exactly what I'm doing currently – and not spend it, then we're not helping business pull out of recession.
Then there's those people, mainly older, who rely on fixed income investments to live. Those people are hurting hard. What's more, they don't have the money to spend any more.
Gaynor has a good point when he says that low interest economies don't always do well. Just look at Japan, which has had low interest rates for years but stayed in the economic doldrums. "Low interest rates are meant to stimulate economic activity," says Gaynor. "But if you look at history, times are usually better when interest rates are higher."
As I wrote this blog on March 12, Bloomberg reported that record-low rates haven't' yet bolstered our consumer spending.
When last year the spectre of "deflation" began appearing in the news media for the first time in years, Chicken Little's fable was often quoted.
The word "deflation" always strikes fear into my heart. My parents came from the depression generation and they must have lectured me on the subject whilst still in the womb. Deflation hurts businesses and can end up in a spiral that leads to increased unemployment ala the Great Depression. Of course we live in a different era and central governments know better than they did in the 1930s. So it's highly unlikely to happen. But never say never.
Another thing that Gaynor said that sunk in – because I feel for the older generation – was that the credit crunch and the interest rate falls are resulting in a wholesale transfer of wealth to the younger generations from the old.
Finally, these interest rates won't stay the same forever. And that's something that every investor should be mulling over.
Of course if you're on a fixed rate, then your savings are earning less, but your mortgage rate isn’t going down.