Interest rates will fall in the coming months, at least that is what the expectations of analysts and experts in the financial markets say, who follow the central banks every day.
Before the end of the first half of the year, the Federal Reserve Bank of the United States is likely to reduce its interest rate and end the restrictive cycle, which took rates to levels not seen in decades, given the rebound of inflation.
The same thing could happen in Mexico, today the market consensus even indicates that this month during its meeting on the 21st, Banxico could cut the rate for the first time since 2021. although last week several members of the governing board pointed out that it could be premature and therefore a big mistake. In any case, interest rates are going to drop across the planet in the coming months.
But it is highly probable that an era has also ended, that of extremely low rates. In fact, it is expected that even if interest rates fall, levels close to absolute zero or even zero will no longer be seen, What’s more, they could probably rise again moderately or strongly, depending on money market conditions.
The era of low rates and easy credit is over
In the next decade, excessively low rates and easy credit will be over, this era will be left behind because the other erathat of excess global financial savings will also have come to an end.
This is how this excess of global savings will begin to disappear in the next decade and, with this, interest rates will be pressured upwards. (less demand for liquidity equals higher cost of money).
Some unexpected factors, such as wars and the great pandemic, as well as the inflationary surge that can be renewed at any moment in the face of an unusual economy running almost at full speed, will put pressure on nominal rates around the world. Loans at low interest rates, in many cases close to absolute zero, will be a thing of the past.
This excess of global savings was detected and analyzed by Ben Bernanke himself, president of the Fed between 2006 and 2014. According to his studies, the excess of global savings was a phenomenon that had been going on for years when it was detected and one of the most relevant causes was the propensity to save the Baby Boomer generation, the generation with the greatest savings in the history of the worldand also perhaps the most conscious of the importance of preparing to face a decent retirement in economic terms.
Other factors also had a decisive influence; for example, the Chinese development model based on savings, which led that country to be the great power that displaced Japan at the beginning of the century in second place in the world. This nation became the world’s factory and, with it, generated billions of dollars in investments due to its enormous demand for raw materials.
But in recent months there has been an upward trend in long-term interest rates around the world. Economists and experts say that this is not free and that they are the first signs of what is to come, and also the first signs of the end of the era of cheap money and easy credit.
Last October, an article from the International Monetary Fund (IMF) warned about the concern that the increase in long-term rates was beginning to generate throughout the world.
At that time, the interest rate on US Treasury bonds reached its highest level since 2007, the same was true for bonds in Europe and Latin America, since then there is no big difference and the concern remains, many explanations are pouredbut the truth is that long-term rates remain high and, if they remain high, they mean many things, including higher borrowing costs for companies and governments, higher credit costs for mortgages, and lower demand for credit due to their high costs.
Several things could also explain the end of the era of excess global savings, but according to experts and analysts consulted by Bloomberg, there is a determining factor in understanding what is happening and where we are going.
Baby Boomers’ savings will stop flowing into the economy
We mentioned that Baby Boomers are probably the generation with the most savings in the world, the one that has become more aware for years of how important it is to face a decent retirement.
For years, the members of this generation have prepared for the moment of retirement and this has arrived, towards the year 2030, for which there is very little time left, A high percentage of this generation will have retired, and it is estimated that by 2035, practically all of them will be retired or unfortunately will have died.; That is to say, the next decade will leave the generation that has saved the most in the history of humanity out of the savings market.
The savings of the Baby Boomers will little by little stop flowing into the financial markets because they will begin to stop being long-term savings for become available short-term resources for their owners to spend money as required.
Some optimists believe that a new economy will emerge due to the power of demand that this generation will have for products and services appropriate to their age; But while this happens and, considering that savings will be eroded little by little, interest rates in financial markets will tend to rise due to the lower availability of resources.
From savings to deficit
The aging of the world population, the Chinese economy in difficulties and the increasingly fragmented global economy are the factors that, according to the economists consulted by Bloomberg, threaten to convert the excess of savings, identified and explained by Bernanke almost 20 years ago, in a global fiscal deficit.
As a natural result, there will be a reversal of the decades-long trend towards lower interest rates, as businesses, households and governments around the world are forced to pay more and more through credit, for global savings. that decreases. And that would not be all, the same experts point out that spending and investment in weapons will continue to rise in the face of NATO rearmament, as will defense spending in other countries, which usually turns global finances into deficit. Welcome to a new era.
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