How Debt, Deleveraging and Demographics Could Fuel Very Low Interest Rates for a Long Time
As many of your customers head into retirement, they do not realize that low interest rates and deflation may be just as big a risk as inflation. Deflation means the decline in the overall price of goods and services. Many of you may wonder why low interest rates and declining prices would be a problem. Before I jump into all of this, let me first talk about why we may be seeing deflationary pressures on our horizon. There are three major factors: Debt, Deleveraging, and Demographics. Let’s take a look at each one.
DEBT: As I write this, the United States Government is nearing $19 trillion in national debt. For every citizen in the U.S., this is nearly $60,000 of debt per person.1 Well, what is debt? Debt is simply taking from our future to spend it today. So, by definition, our future is going to be $19 trillion less than what it could, would, or should be. Despite this grim outlook, when you look around the world, we might be the cleanest shirt in the dirty laundry. Debt, Deleveraging, and Demographics are the three main reasons for why we are seeing deflationary pressures on the worldwide economy. The world debt clock shows that governments around the world are over $57 Trillion in debt. Look at Europe – Greece, Portugal, Spain, and Italy are in terrible shape with no real end in sight. The Greek situation is not solved. Not even close. And, if Europe’s debt bomb explodes, it could cause a global depression. Japan is in even worse shape than Greece – but we never hear about Japan. Their debt to GDP ratio is significantly worse than Greece. The reason you never hear about Japan is because most of their debt is held by their own people. However, Japan has been in a deflationary economy for over 25 years. Think about 25 years of a 0% interest rate environment. In late January 2016, the Bank of Japan voted 5-4 to cut interest rates below zero. This is now the fourth country in the world to have adopted negative interest rates (Denmark has -.65%, Switzerland has -.75%, and Sweden has -1.1%). Understand that this amount of debt will reduce global growth for DECADES! It is highly DEFLATIONARY.
DELEVERAGING: Look, most of you have some debt. You have student loans, auto loans, and credit card debt. Let me ask you, what happens when you are paying off YOUR debt? What aren’t you doing with your money? You are not spending or saving it. Let me ask you another question: How do GOVERNMENTS get OUT of debt? There are three ways, but we normally only hear of two – raise taxes and cut spending. The third one is growth – we rarely hear about this one. What happens to an economy when you raise taxes and cut spending? You STRANGLE the economy! This deleveraging, or paying off debt, is highly DEFLATIONARY!
DEMOGRAPHICS: As 78 million Baby Boomers head into retirement, we all are witness to the aging population in the U.S. While Americans age, Europe is older, Japan is very old, and China will get old before they get rich! Did you know that there are more adult diapers than baby diapers now sold in Japan? In China, over 20% of the population is over the age of 55. By the year 2050 in China, the number of people considered “senior” will equal Europe’s total population.2 According to a Harvard study, by the year 2030, they expect over 133 million of the population in the U.S. will be above the age of 50, an increase of 70% from the year 2000.3 Here is the economic problem: Old people don’t spend any money! Think about it, how much money do your grandparents spend? Almost nothing! Well, that’s going to be you in 30 years! Who will buy all of these big houses? Who will spend money to keep the economy growing? The millennials? Nope. They are loaded up with student loans, aren’t making the wages of their parents, and they don’t WANT a big home!
Debt, Deleveraging, and Demographics are the three main reasons for why we are seeing deflationary pressures on the worldwide economy. Now, you must be thinking, who brought Debbie Downer to the party? I thought Tom was going to talk about solutions! Look, the life insurance market was built for times like these. If you go back to the Great Depression, what industry pulled this country out of the Great Depression? The banks? Nope, they were failing. The brokers? Nope, they were going under. It was the life insurance industry that pulled this country though the Great Depression. Why? Because our products were BUILT for markets like these! Life insurance and annuities can offer an unmatched solution that other products cannot. These products are based on math and science, not based on someone’s opinion.Life insurance and annuities can offer an unmatched solution that other products cannot. These products are based on math and science, not based on someone’s opinion.
If you have been watching the financial networks, you might be thinking that interest rates are going up. I beg to differ. Interest rates are going to remain very, very low for a very, very long time. See, some people think the Federal Reserve sets interest rates. Despite that popular opinion, in reality, the MARKET sets interest rates. The Fed sets the overnight lending rate, which typically does not have an effect on your clients. Did you see what happened to the 10-year U.S. Government Bond and the 30-year U.S. Government Bond when the Fed raised rates? They both went DOWN! The market told the Fed to go pound sand. China is slowing rapidly, oil prices are plunging, and the dollar is soaring. All of these are risks the market is digesting. There are hedge funds taking huge positions that the Chinese currency will devalue as much as 40%! If that were to happen, the dollar would soar, oil prices would go below $20, and the world economy would likely be headed for a recession if not a depression. You would see LOWER rates, not higher. You could possibly see negative interest rates here and even more quantitative easing (money printing). I can’t predict the future, but the bond market does every day. Look at the 30-year U.S. Government Bond. Right now it is under 2.8%! What is that telling you? It is predicting that interest rates are going to stay very, very low for the next 30 years!
So, what does this mean for you? It simply means that the products you can sell today are going to be GREAT VALUES in the future! You think these rates are low? Let me tell you, when interest rates go negative here, these life and annuity products will be great values for your clients. You need to change your paradigms – people are going to live FAR longer than you think and rates are going to be much lower than you think. Markets are NOT going to be providing 12% returns over the next 30 years. Buckle up your seatbelts – we are heading into some turbulent times! The advisors who continue to promote life insurance and annuities will be protecting their clients and providing them with great products for our deflationary and low interest rate future!
These are not normal times and you no longer can “go with the flow.” You and your clients have to be aware more than ever before. In these times of volatility and uncertainty, your clients are looking for stability and certainty. The guarantees of annuities and life insurance matter today more than ever. Interest rates are likely to stay low and maybe go lower, the markets will continue to be volatile, guaranteed products will allow your clients to retire with peace of mind.
2 Hodin, Michael, “How China Can Deal with Its Rapidly Aging Population,” The Fiscal Times, November 3, 2015, http://www.thefiscaltimes.com/Columns/2015/11/03/How-China-Can-Deal-Its-Rapidly-Aging-Population
3 “Housing America’s Older Adults: Meeting the Needs of an Aging Population,” Joint Center for Housing Studies of Harvard University, 2014, http://www.jchs.harvard.edu/housing-americas-older-adults-embargoed
Tom Hegna, CLU, ChFC, CASL, is an author, speaker and economist and host of a popular public television show. As a former Fortune 100 senior executive, Tom has dedicated his entire career to helping retirees obtain a “happily ever after” retirement. He has been featured on FoxBusiness, American College Wealth Channel Magazine, Round the Table, Advisor Today and GAMA Magazine. Tom is also a retired U.S. Army Reserves Lieutenant Colonel. He currently lives in Arizona with his wife and children.