Turn off the money tap - our economy is drowning

Since the global financial crisis, US savers alone have lost a whopping USD 470 billion in interest rate income, net of lower debt costs. This is just one upshot of central banks' unconventional monetary policies initially enacted to manage the crisis. New Swiss Re research, and our own financial repression index, reveals the quantified costs of these actions – and proposes solutions.

Policymakers did a commendable job of managing the 2007-2008 financial crisis. Their creative use of unorthodox monetary policies stabilised financial markets and restored economic confidence. But seven years later, the unconventional is becoming the norm. Low – and in some cases negative – yields are becoming a global trend. Prudential regulations for both banks and insurance companies that favour sovereign bonds only add fuel to the fire.  

This current state of financial repression* brings with it a whole host of unintended consequences: asset price bubbles, an impaired credit intermediation channel and increasing economic inequality are just a few. As well as developing our own financial repression index, Swiss Re has calculated the costs to those footing the bill – households and long-term investors – and published the results in its new report, Financial repression: the unintended consequences.

A domino effect

When it comes to private households, low interest rates result in a "tax" on savers as they do not earn interest on deposits that they otherwise would. In the case of negative interest rates, they even experience a devaluation of their savings. In the US, that has added up to a loss in interest income of USD 470 billion since the crisis. Meanwhile, the rich have gotten richer – by USD 3.7 million for the top 1% of households. Since the wealthiest 1% of US savers invest around 50% of their financial assets in equities, they have gained from the equity rally. In other words, financial repression has done nothing to address economic inequality.

Long-term investors, like re/insurance companies and pension funds, are also faced with an "opaque tax" on their investment income – as seen in the decline in running yields over recent years. Re/insurers' current high allocation to fixed income assets translates into roughly USD 20-40 billion in additional income that could have been generated over the 2008-2013 period for both US and European insurers. This also results in lower risk capital available to be put to work in the real economy.

Capital markets' ability to function well also comes under threat. Artificially low yields crowd long-term investors out of the market, preventing them from pumping savings into the real economy to stimulate growth. This reduces the diversification of funding sources to the economy, representing a risk for financial stability at large.

Infrastructure investment – the silver bullet?

To promote growth – especially when it comes to infrastructure investment – private market solutions are required for two reasons. First, since governments are constrained by their large debt burdens. Second, because private market solutions are often more efficient. Some USD 50-70 trillion will be needed for to pay for transportation, energy and construction projects globally through 2030.

Unlocking the large long-term investor asset base of around USD 75 trillion globally would not only help to fill this emerging financing gap, it would also boost economies' job growth and competitiveness and repair damage to the credit intermediation channel. But the lack of a tradable infrastructure asset class is preventing this capital from being deployed where it's needed – our own proposal on how to do this is presented in the publication. After all, we should not wait for tomorrow to see the effects of the policy actions taken to date. We must put in place the elements for more stable markets today.

For more information on Swiss Re's financial repression index, a more detailed analysis of the costs and an overview of the challenges associated with exiting monetary policy, please read the publication Financial repression: the unintended consequences. With this report, we want to weigh in on today's key public policy debate and preserve the important opportunities for long-term investors, which are also key to the healthy-functioning of the real economy.

Published 26 March 2015

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Re/insurance supports financial resilience by acting as a shock absorber and promoting growth through its core businesses. This is particularly important in a challenging and volatile macro-economic environment.

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