2013 International Book Awards Finalist, 2012 USA Best Books Awards Winner

Zero interest rates will not help Part II

What impact will the zero interest rate policy have on your consumption after retirement?

Pension savers exchange savings, in most cases, to more fixed-income securities in order to receive a predictable income to live on after retirement.

For example, let’s say you choose to live on $2,000 a month after retirement at 65, with the expectation of living until you’re 85, this would mean that for 20 years you will live on your savings. Let’s ignore taxes and inflation, which would only increase the demand for a higher yield.

If the interest rate is 5% on your capital after retirement, you would need a capital of just over $300,000 at the date of retirement. If the interest rate however is 0% on your capital after retirement, you would need a capital of $480,000 at the date of retirement.

If you receive a return of 0 percent then you would need another $180,000 in savings. With $300,000 you will only have a pension until you are 77 years old or alternatively $1,250 per month until the age of 85.

The lower the yield, the more you have to save until retirement or if you are already are retired, the lower the yield, the less you have you to consume.

Yes, but this is just for retirees, you may say.

With today’s inverted population pyramid, low birth rates and longer lifespan in the western world, Japan and soon China and Korea, we face a completely new society, with new problems and new solutions.

If the social welfare system doesn’t provide you with enough security and dividends on your savings no longer leave room for more consumption, then zero interest rates will not help! / Ulf Egestrand

“To pay off or not to pay off?”

A clear change in attitude has occurred among homebuyers in the United States. From having paid off their mortgages over 30 years, now one in four choose to set up a plan to pay off their debt within 15 to 20 years, as lower interest rates are allowing this.

At the same time, there are new thoughts in the financial market, that the U.S. government could possibly ignore parts of their loans. The U.S. government owns over 15% of their debt via their own Federal Reserve.

“The state has borrowed from itself, so why not just tear the bonds up? In this way, the debt immediately would be reduced by more than 2 trillion dollars.”

Money is not a mathematical or scientific phenomenon, but rather a phenomenon entirely based of trust between people. When someone gives you a 100-dollar bill you trust it has a value of one hundred dollars.

If the state asks the National Bank to print money against a bond that they at a later stage then tear up, what has happened to the trust? It is a huge risk that could lead to the destruction of the entire financial system and displays how fragile trust really is. Who wants to take the risk to go back to barter trading?

The whole idea with borrowing money is based on the concept that you can pay off the loan. A satisfied lender, a satisfied borrower is what is necessary to have a satisfied society where money functions in the form of payment and credit.

It is of absolute importance that before you borrow money, you have a plan for paying off the debt, rather than just allowing your loan to be shredded to pieces. Homebuyers in America seem to understand this attitude. / Ulf Egestrand