September 15, 2016

For governments to take advantage of current low rates in order to build infrastructure, is not a sure great thing.

Sir, Trevor Greetham argues that the government, taking advantage of current conditions, should take on debt and invest in infrastructure, all in order to stimulate nominal growth through government spending while suppressing interest rates; meaning that it should on purpose pursue a policy of transferring wealth from savers to borrowers.” “Hammond should not let the low gilt yields go to waste”. September 15.

Sir, I am not sure that is a constructive way of thinking. Greetham mentions that a big reason for the low interest rates on government bonds is “pension fund buying”. I assume he would not dare to complain if, when he retires, he does not get the pension he expected.

But worse, another reason for the low interest rates is the risk weighted capital requirements for banks; which diverts credit from 100% risk weighted SMEs and entrepreneurs, to the 0% risk weighted government. That sounds like a very doubtful way of how to build future.

And that’s even ignoring the possibilities of much infrastructure investments ending up in bridges to nowhere.

@PerKurowski ©