Understand the markets this week: September 6, 2021


    The rich get richer when interest rates go down

    We know that lower central bank interest rates help stimulate economic growth by providing cheap money. On the flip side, banks also have the option to hike interest rates and suppress too much economic euphoria, which could also cause unwanted inflation.

    The COVID-19 pandemic wrongly selected the economically disadvantaged – and it seems that the monetary response to lower interest rates could further exacerbate wealth inequality.

    If you want to dig deeper into global demographic trends and interest rates (very interesting to say the least) and how they have shaped our past and likely will shape our decades to come, read “Inequality, Interest Rates, Aging, and the Role of Central Banks.”

    Starting from this link, Matthew C. Klein looks at the subject of savings rates for the rich and how they do not stimulate real economic growth, but rather lower interest rates …

    “The most important finding is that the ultra-rich are different from you and me: They have much higher savings rates regardless of their age. No matter how expensive your taste is, there is a limit to how much you can consume, which means that any income above that threshold must be saved. The ultra-rich therefore spend relatively small portions of their income on goods and services that directly create jobs and income for others, rather than amassing stocks, bonds, art, trophy properties and other assets. “

    Lower interest rates (borrowing costs) and those excess funds in the hands of the wealthier can also create asset bubbles – see North American real estate and perhaps stock markets as well.

    Regarding the demographic trends for the rich nations, Klein notes …

    “In the 1960s, total population growth in the major world economies (the ‘high income countries’ plus China) averaged nearly 2% per year. That slowed to just 1.2% per year in the 1980s, to 0.9% per year in the 1990s, to 0.6% per year in the 2000s, and to just 0.4% on the eve of the pandemic . The total population of these economies is expected to shrink from the 2030s and eventually drop by nearly 20% below the projected high for 2030 by the end of the century. “


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