211812020 Get acy for global economy's dreadtul future: Save more, work longer, and expect less -The Economie Times Tue Ecoxomic Tats Bie tor Nome > Hematinal » Gunaee Q ity + ctose fh fee Sm ‘tang Toon Equy Diack 12.72% ce ramaas v-6120 ‘il Soa RettePove | iy Someone Phe-oe Tn Get ready for global economy's dreadful future: Save more, work longer, and expect less 1 Ae PATE: FE 6,200,064 AM IST GERMANY: Imagine a mortgage that pays you the interest, not the other way around. Or ‘a savings account where it’s the bank, not the saver, who collects interes. Welcome to the upside-down world of utralow and negative interest rates that Is taking hold in many parts ofthe world where economic growih has been sluggish. Now more than a decade old, economists think it could be a feature ofthe global economy for years te.come and change the way people save and invest. "This will mean that we must save mor , work longer, and expect less," said Olivia Mitchell, an economics professor al the Wharton Business School atthe University of Pennsylvania ‘The latost chapters the drop in interest rates on some bank deposits below zero as ie central banks, particularly in Europe and Japan, try to support the economy amid Uncertainty about trade by making borrowing cheaper to spur spending and investment. ig change: Official data released Friday showed that Germany's growth ground to a halt atthe end of The end of Fiveten Plans: Allyou nee te know last year. Economists think there are also longer-term factors causing low rates, such as aging populations in rich countries and high rates of ssavings in China and other emerging economies. Low rates frst hitin the wake ofthe global financial crisis. The U.S. Federal Reserve, Bank of England, Bank of Japan, and European Central Bank slashed rates close to zero, In 2014, the ECB went negative, Ultra-ow rates have helped push up stock markets to record highs, as vanishing returns on safe assets lead to a search for returns elsewhere. Pushing people to invest in riskier assets is part of the stimulus effect central banks are tying to impart. But there are also fears that very low rates can cause markets to bubble up, and crash back down with painful consequences. So fr, the dire predictions havent come true. The current bull market in U.S. stocks turns 11 years old on March 9. In Germany, some banks are now telling companies and others with large amounts of cash thal they must pay a rate on large deposits, Instead of accruing interest. The penalty typically applies to big accounts, such as mare than 600,000 auras ($555,000), according to financial website Biallo.de, Banks are doing this because they themselves have to pay a 0.5% penally on deposits they hold at the European Central Bank. f banks can’ find a home for depositor money, it winds up in thelr ECB holdings and results in their being charged, ‘Small depositors lke individual consumers are so far not being charged on savings. The idea is politically toxic, especially in Germany. But the low rate environment raises questions about preserving wealth, especally for those trying to Save for retrement. German ewsmedia are full of stories about “penalty rates"and criticism ofthe European Central Bank for, as they put il, exproprating savers. Gerhard Michel, a fnancial coach in Duesseldorf, says people need to be aware that inflation eats away at savings even in more normal times, though people may be lass aware af it when rates are above zero, Ifyou look att historically, poople with savings accounts never had any kind of interesting performance," he said. “The inflation rate ruins any retums on the government bond market or the savings market - and it has always been that way historically. What shocks people now is that people must say the word zero, or even negative, interest.” -ntps:feconomictimes indiatimes. com/news/ntemationalbusin Inegatve-interestrates-turn-saving-borraving-upside-downiprntatcey741408... 1/3,211812020 Get acy for global economy's dreadtul future: Save more, work longer, and expect less -The Economie Times ‘Michel, who is 53, teaches his coachees about value investing, a more time-consuming approach that analyzes financial statements to look for companies the market may be underestimating. is approach with his own money: "will buy stocks until the end of my days.” Four trilion euros worth of government bonds ofthe 19 countries that use the euro now yield less than zero. Trillons more in Japanese and other government bonds trade below zero around the world. Even Greece, which defaulted on government bonds in 2012 and carries the highest debt load in Europe, was able to sell three-month notes at a negative rate. Why, in fact, would anyone pay for the privilege of buying a bond? ‘One way of viewing the phenomenon is that the investor is paying for the safely of the investment. Or buyers may hope to sell the bond ata profit. That is possible ifrates go even lower - as some analysts think they wil (On the postive side of the ledger, low or negative interest rates can make it easier for companies and consumers to borrow, stmulating ‘economic activity. The European Central Bank says its policies created 11 millon new jobs since 2013. In the U.S., home sales have picked up as mortgage rates have fallen to 3.7%. ‘Now, even some home buyers can get into the negative rates game. Denmark's Jyske Bank offers a minus 0.5% interest mortgage while stil making a profit Customers must make monthly principal payments, but the sum they owe is whittled down month by month by the negative rate over the Ife ofthe mortgage. The bank is able to fund the morigage by selling a bond at minus 0.5%, passing the rate to the customer, ané making money on modest mortgage fees, ‘The Danish bank is unusual in offering the negative rate, but mortgage rates for credit-worthy borrowers are also nol far above zero in Germany. For instance, a 10-year mortgage with a large down payment can cary interest of ony 0.7%. Its worth noting that real interest rates - in other words, wien official and market rates are below the rate of inflation - have been negative at several points in history, such as in the 1970s, when inflation in the developed world ran into double dig. What's unusual today is thal the actual quoted rates are below zero and that rales have been low for so long Interest rates are always a tradeofl, says economist Adalbert Winkler, professor of intemational and development finance at the Frankfurt School of Finance & Management. “Low real rates favor borrowers like mortgage holders at the expense of savers, and when rates rise i's the other way around.” "This Is always the case when you have expansionary monetary policy and it doesn't make sense to deny that,” he sald. Low rates make it easier for governments to borrow and buld infrastructure that can spur economic growth, although poltical pressures have meant that Europe's biggest economy, Germany, prefers to balance its budget than borrow, Other governments, such as Italy, are constrained by high det [Negative rates have not yet appeared in the United States, but they could ifthe economy stumbles into recession, some economists say. The Federal Reserve would almost certainly cut the short-term rate to neatly zero, as it did for seven years beginning inthe Great Recession, ‘Since the U.S. 10-year yield is already very low by historical standards, at 1.6%, it wouldn't take much to push it below zero, said Ryan ‘Sweet, senior economist at Moody's Analytics. The Fed may try to prevent it from happening, possibly by selling Treasuries, but it's not lear they would succeed. "We're not immune toil" he sald, “That's a kind of Alice in Wonderland-type world that we don’t want to go into." So far, Federal Reserve officials have downplayed the potential for negative rates in the U.S. "That's nota tool we're looking at," Federal Reserve Chair Jerome Powell said Tuesday during a congressional hearing. He cited research that negative rates can hurt banks’ profits and restrain their wilingness to lend. The German Economic institute in Cologne studied multiple factors believed to cause low rates and concluded its not just due to central banks but represents a longer-term trend. So low of negative rates could be around for years, hitpssleconomitimes incltines.convnewsiintemationalbusinessinegative-interestrates-turr-saving-borraving-upside-downiprntatcle/741408.... 2/3,211812020 Get acy for global economy's dreadtul future: Save more, work longer, and expect less -The Economie Times \With that in mind, Mitchell, the professor, persuaded her two daughtars to save 18% of their salaries when they found their fist jobs. "We're ina very diferent capital market regime now than in the last 30 years," she said Stay on top of business naws with The Economic Times App, DownlonditNow! hitpssleconomitimes incltines.convnewsiintemationalbusinessinegative-interestrates-turr-saving-borraving-upside-downiprntatce/741408.... 313,