I don’t buy the argument that households in the US, UK and European countries such as Spain and Italy have low saving ratios. They have low levels of liquid savings, yes – but they invest hugely in illiquid assets, particularly property, usually as a leveraged investment.and finally
If the elderly actually spent their savings, rather than living frugally to preserve capital, the release of that money into the economy would be a demand stimulus that would both raise inflation and arrest falling interest rates. And if those saving for retirement risked their money in young, growing enterprises rather than seeking low-risk passive investments in mature industries, property and government debt, it might dampen the cycle of asset price booms and busts and reverse the long-term trend of interest rates.As business owners we know about financing a project: it does not matter where it comes from (equity or debt - Modigliani-Miller - you always sell parts of your future business) it matters where it goes to. This should be obvious for everybody, when interest rates are low.
And it's true for an economy as a whole. It may be the lack of innovative ideas, but if an economy is unable to find a more productive use of savings (or debt) than blowing up asset bubbles…interest rates will continue to fall.
It's turning the price logic: if, at the green market, carrots become too expensive, we buy other vegetables. If houses get expensive they become objects of speculation and prices rise until the bubble bursts…the economy as a whole does not optimize risk.
As I have pointed out on previous posts...I doubt that the regulatory regime of risk minimization by centralization will be the right contribution of the financial system, but it happens and we will get used to it.
As quant supporting technology providers we know that some widely used models bear operational risk in a regime of negative values. And we offer better approaches and insight:
The Theory of Speculation
Black vs Bachelier revisited
When Variance Is Negative
Negative Eigenvalues in Practical Finance
Libor and the Negative Eigenvalue Trap
whilst following the regulatory requirement of central clearing and counterpart as well as margin rules empowered by the xVA Engine.
It's all embraced in our brand-new UnRisk Quant
Consider looking into it…ask the authors of A Workout in Computational Finance directly:
Negative interest rates are here to stay?!