Interest rates have plummeted in many western economies. Japan and Germany are, among others, countries, in which interest rates are particularly low, as seen by negative returns on government bonds. Both countries exhibit an advanced process of demographic aging.
Some people argue that low interest rates reflect the efforts of the pre-retirement cohorts to save for pension schemes. The large supply of money and the demand for investments drives house, bond and share prices and weighs on the interest level.
Once the numerous cohorts ("the baby boomers") reach retirement, they start to de-invest on a large scale, thus initiating a price decay of houses, shares and bonds ("asset melt down"). Interest rates were then to recover.
My question is: Do you think that such a scenario is likely? Are we living in a asset price bubble driven by the excess money of cohorts in the pre-retirement age? Or which alternative approach can account for the present low interest rates?
I recall the OECD doing work on this probably a decade ago. Then, they found little evidence to confirm this view. But then came "secular stagnation" and here the idea comes up again. I'm currently in China for work. The demographics are different, but only sort of. Of course, we are in a period of QE and its likes, too. Japan is an example, so is Germany, so is China.
I think that low interest rates are global phenomenon. Demography in Germany or Japan matters much less than China. For various reasons, Chinese save large part of their income, and this is in my opinion pushing interest rates down.
Thanks, Bernard H Casey and Peter Molnár for your contribution. Indeed, also China is quickly aging and as capital markets are closely connected, that should contribute considerably to the phenomenon.
one thing that happened at the end of the week was more monetary relaxation in China. You can read about it even in China Daily. Why is the givernment doing this? It is worried about slow growth. So, it is doing its own version of unorthodox monetary policy.
Yes, thjere is quite a lot of personal saving, but for good reason. One reason might be to pay for long-term care - which is a demographic issue.
Moreover, people will gradually adjust to low interest rates. More and more people will realize that borrowing makes more sense than lending, and this way shifting equilibrium to higher interest rates.
To my understanding, that is part of the present perplexity: Though interest rates are low, there is no sizeable increase in lending. According to theory, people should lend money as long as interest rates are lower than the return on land, thus avoiding negative interest rates. Real life is more complicated, though to some extend there is a push to real estate investments.
My question points to the demographic influence on savings tendency among the households, that may have been overlooked in the standard economics approach to interest rates.
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