Imtiaz A. Hussain
Conventional wisdom had it that, with too much money in the market, interest rates would dip, inviting new investors, thus reviving those rates eventually. That became market-economy inevitability. Something else is happening on the way to the market these days, though: it is still as liberal as before, but those rates refuse to climb, oftentimes even to budge.
Once a hopeful game plan - artificially slicing rates - no longer does the trick: since the Great Recession (after 2008-10), rates have been whittled down, even into negative territory without investors caring to bite. Where is all this happening? Why is the market playing mute? What do these signify?
Interest rates carry a rippling potential: whenever the strongest national economy catches the cough or experiences a spurt, weaker economies get the flu or bask in the sun. So it has been in industrialised countries: when the US Federal Reserve, the European Central Bank, or the Bank of Japan reduces their interest rates, other countries follow, though not in equal measure. Yet investors have been reluctant to borrow in these economies simply because consumers have not been spending. In spite of a spending culture littered with sales, the United States, for example, suddenly notices its consumers doing what German and Japanese consumers had a tradition of doing: saving. Complicating the puzzle, even the Germans and Japanese consumers either do not save proportionately as much, or simply cannot save, like before. If that missing element is confidence, as argued in the Wall Street Journal (Georgi Kanchev, Christopher Whittall, & Miho Inada, August 08, 2016), we still understand only half the picture, not all.
Take the case from another location on the economic/developmental spectrum, from a less developed country viewpoint, such as Bangladesh's. Part of that same "industrial country" script was also evident here: too much cash in the bank some five-odd years ago eventually led to tumbling interest rates from about two years back, yet investors remain as much in eclipse as the sun in a snowstorm. Huge public sector outlays have had to be adopted to offset this vacuum just to keep the economy stable. Instead of confidence, security seems to be the bug afflicting investors here. Both causal factors may arguably have a common denominator. Even then, the differences remain conspicuous: our interest rates have traditionally lingered not only higher than in the developed, industrialised countries, but strikingly, the difference between our interest rates and those of the industrialised countries seems to be getting proportionately larger over time even as they continue to be slashed: we were playing with double-digit rates for an extended period of time when the industrialised countries were barely managing half of our rates; today, as theirs dip to the zero-level, ours, whether 4.0 per cent or 5.0 per cent, or anywhere in between, hovers three, four, or even five times as much higher, if not more.
Comparing central bank interest rates exposes many different regimes. Within the G20, for example, Switzerland and Sweden had the lowest, that too, negative (-1.25 per cent and -.5 per cent in January 2015 and February 2016, respectively: it is difficult to get the rates for the same period of time for different countries and keep the same source), while the highest belonged to some of the troubled countries: Brazil, amid the market meltdown, had 14.25 per cent (July 2015), followed by 13 per cent in Argentina (August 2014), where the socialists were kicked out of office due to a tumbling economy; Russia had a 10.5 per cent (June 2016) rate when the petroleum price collapsed and Ukranian (Crimean) crisis deepened, much like Turkey's 7.5 per cent (February 2015) was registered at the peak of its Syrian immigration debacle, and South Africa's 7.0 per cent (March 2016) aligned with a year replete with corruption charges prior to an election.
Other mature economies fell somewhere in between, but far closer to the zero margin: Australia's 1.5 per cent (August 2016), Canada's .5 per cent (July 2015), China's 4.35 per cent (October 2015), the Eurozone's zero rate (March 2016), Great Britain's .25 per cent (August 2016, its lowest in 322 years), Japan's .1 (October 2010), New Zealand's 2.0 per cent August 2016), and the United States with .25 per cent (December 2015).
Some emerging markets had higher rates than the DC bloc: in addition to China's 4.35 per cent, India had 6.5 per cent (April 2016), and Indonesia 6.5 per cent (June 2016). Others kept a low rate in this group: South Korea's 1.25 per cent (June 2016), and Saudi Arabia's 2.0 per cent (January 2009).
Outside the G20, Bangladesh had 7.75 per cent (January 2012), but this has been declining ever since. Sajjadur Rahman noted how commercial banks offer 6.0 per cent at best for term deposit and 6.5 per cent for five-year bonds (The Daily Star, August 16, 2016, B1), only to find government savings instruments wagering 5.0 per cent more (as compared to 7.0 per cent more in mid-2015). In fact, over a 3-odd year spell, he notes the rates falling appreciably: from 13.45 per cent to 11.52 for 5-year family savings certificates, from 13.19 per cent to 11.28 for 3-year Bangladesh Savings Certificates, from 13.24 to 11.28 for post-office savings certificates, and so forth. Downward mobility has been the name of the global interest-rate game, along with drastic variations.
Nowhere are such variations more conspicuous than with those of outlying countries. Compare Bangladesh's 7.75 per cent to the 27 per cent in Malawi (November 2015), 26 per cent in Ghana (November 2015), and 20 per cent in Belorussia (July 2016), among those countries with the highest; and 1.5 per cent in Thailand (April 2015), 1.0 per cent in the United Arab Emirates (January 2000), and 0.5 per cent in each of Bahrain and Hong Kong (September 2009 and December 2008, respectively), among the lowest. In between are our neighbours: 3.0 per cent in Malaysia (July 2016), 3.0 per cent in The Philippines (June 2016), 5.75 per cent (May 2016) in Pakistan, and 7.0 per cent in Sri Lanka (July 2016).
One cannot escape a "sinking feeling" in developed countries, where the bulk of the exports of less developed countries go. The "fine-line" that is typically associated with the spurt of certain emerging economies, and the "gone-case" tag of countries with political crises driving interest rates upwards (Brazil, Russia, Turkey, and the like), may depict greater economic, political, or social volatility, but it is the DC "sinking feeling" that will not only inflict more global damage, but also for a longer spell.
Implications for savings represent a portrait of concerns. Rahman points out how the surge in Bangladesh savings is distorting the market: not just a liquidity spike, but also the spiralling future government liabilities. In other countries, we see traditional spending countries suddenly on a savings splurge, while traditional savings countries show mixed responses: some have lowered their appetite, others splurging still. Just in this century, Switzerland's savings, as a ratio of disposable household income, boomed from 14 per cent in 2000 to 20.1 per cent in 2016, Sweden's from literally zero to 16.5 per cent, and Denmark's from -5 per cent to 8.1 per cent. For the most significant spending country, the United States, where "sales" have become a synonym of a "market," that ratio fell from 6.0 per cent to 5.2 per cent, while Germany and Japan, the classic savings countries, that rate went up marginally, in the former from 9.9 per cent to 10.4 per cent, but declined precipitously in Japan, where the longest DC recession still continues (from 1989), from 9.0 per cent to 2.1.
Neo-liberal governmental intervention will no more creep in through the back door, but boldly through the front, and in multiple forms, to keep both customers and investors satisfied: interest rate manipulations; resort to "helicopter money" (cash bonuses) to jumpstart a sagging economy; public works, particularly of the infrastructural type; and so forth. As past consumer habits evaporate, over-flowing confidence-lowering causes seem set to dominate the picture. This may not be the century for any nirvana anywhere outside a Robinson Crusoe economy.
Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.