Should egalitarians fear low interest rates?
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Low interest rates create winners and losers. Debtors benefit as real debt shrinks, while creditors suffer. Asset-holders’ outcomes depend on balance-sheet maturity.
"....A recent paper by Adrien Auclert of Stanford University sets out a framework for judging who wins and who loses from changes in monetary policy. Three channels must be considered. One concerns the impact of lower rates on the macroeconomy—the effect trumpeted by central banks. Another concerns the higher inflation that lower rates might cause. That hurts creditors and benefits debtors, who see the real value of their obligations shrink. The third channel concerns asset prices. It is wrong to claim that asset-holders generally benefit when rates fall, says Mr Auclert. What matters is the full picture of an individual’s assets and liabilities. The latter he defines to include future consumption plans (such as whether the homeowner wants to stay in his house, or whether the retired person seeks to maintain a steady standard of living). Only by looking at an individual’s balance-sheet in full can you judge whether he wins or loses from low rates—or whether, in the jargon, he has “unhedged interest-rate exposure”. The crucial question is whether someone’s assets and liabilities mature at different points in time. People with short-dated assets but long-dated liabilities—for example a saver with lots of cash in the bank to fund a purchase ten years hence—do badly when rates fall. They are the euthanised “rentiers”, who must save more to fund spending later (a rare example of lower rates depressing consumption). But those who wish to spend today and hold long-dated assets, such as long-term government bonds, do well. What does this framework imply for rich and poor? Mr Auclert presents some evidence that Americans who are older, or whose incomes are higher, tend to be on the losing end of asset-price effects when rates fall. But he says it is hard to measure the effect precisely. A recent working paper by Panagiota Tzamourani of the Bundesbank finds that within the euro area, average unhedged interest exposure varies a lot between countries, seemingly in line with the prevalence of floating-rate mortgages. But Ms Tzamourani also finds that younger households and those with low net wealth benefit from lower rates almost everywhere...."
Economist Staff, "Should egalitarians fear low interest rates?,"The Economist, July 11, 2019, https://www.economist.com/finance-and-economics/2019/07/11/should-egalitarians-fear-low-interest-rates