ABBA's song "Money, money, money" does a good job of highlighting one consequence of today's financially repressed* state. That is, it's a rich man's world. Wealthier people benefit from the equity rally since they tend to invest more of their money in equities. Average and low wealth holders on the other hand are penalised as record low interest rates mean they lose out on interest income. Sweden's central bank was the latest to take its main policy rate even deeper into negative territory to minus 0.35 percent early July.
And there's more. With around 9.5 trillion euros in assets under management, European insurers' investment portfolio combined currently represents more than half of European GDP making it the largest institutional investor[i]. But the sector's ability and need to invest long-term – which makes it a critical provider of funding for the economy – is put under pressure. The environment of financial repression, which favours government bonds, results in a global search for yield. "That possibly leads to a misallocation of resources," explains Douglas Flint, HSBC Chairman, in our new video.
"We feel there is too much intervention from the public side. We are crowded out of the market," says Guido Fürer, Swiss Re Group Chief Investment Officer. For example, in Switzerland there are very few long-dated government bonds that actually match insurers' long-term liabilities (claims).
In our video, Jean-Claude Trichet, G30 member and former European Cental Bank President, also shares his concerns over the great monetary experiment and the potential consequences, and says that a focus on long-term investments is absolutely critical for ensuring financial stability.
"Infrastructure projects would provide a good solution if securities used to fund projects were more easily tradable," says Fürer.
- Watch the video
- Read more in our publication "Financial repression: The unintended consequences"
* Financial repression describes official policies which direct funds to markets that would otherwise go elsewhere. It represents a tax on savers and a transfer of benefits from lenders to borrowers through negative or below market real interest rates. It also reduces the diversification of funding sources to the economy, representing a risk for financial stability.
[i] European Insurance in Figures, December 2014
Location: Zurich, Switzerland