As I was attempting to dry off from the torrential rainfall occurring in Chicago this AM, I had this thought: Why are interest rates so low?
Are the Granthams and Grosses of the world correct in their deflation scenarios?
Let’s look at all the reasons for low rates.
Some are stand alone, some are related:
- Slow or decelerating European and US economic growth.
- European sovereign debt crisis.
- European bank crisis.
- China tightening to contain inflation.
- No or slow demand for money.
- Lots of money around from central banks.
- Large amount of free reserves at the Federal Reserve
- Large amount of cash on US companies balance sheets.
- Uncertainty for business over policy issues like health care, taxes and Fin Reg.
- Uncertainty for business over future sales as they don’t believe growth will continue.
- Uncertainty for business to hire due to uncertainty over sales.
- Uncertainty for consumers as unemployment stays high.
- Uncertainty for consumers due to soft housing market and foreclosures.
- Uncertainty for banks over $1.4 trillion commercial real estate loans due between 2010-2014.
- Lack of self-sustaining growth cycle where business hires due to increase in sales that in-turn fuel confidence by consumers to spend….and reinforce the cycle.
While one can argue that the worst of the European sovereign debt and banking crisis is over, you could then add in expected slow growth from austerity measures.
All of this contributes to the extremely low interest rates that the US and Europe are experiencing. The countervailing argument to this is that global earningsfor companies have been very strong and the central banks remain very easy. Also, credit conditions have improved dramatically over the last 6 weeks. Yet, you can have great credit and a deflation racked economy as Japan can attest