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Overnight money: Generation of savers is experiencing a meltdown in interest rates

AAt the beginning of December, millions of Germans will get it in black and white: That’s how difficult it is to generate returns with secure forms of investment. At the beginning of the last month, Germany’s largest insurance company, Allianz Leben, publishes the so-called total return for the coming year: customers of the classic policies will only be credited 2.3 percent for 2021. This year it was 2.5 percent, twelve months ago 2.8 percent. A decade ago there was almost twice as much current interest.

To many savers, 2.3 percent may sound like paradise. But the apparently good-sounding numbers only distract from the fact that German citizens are now suffering from a real interest rate misery. Interest on credit is disappearing from the lives of Germans, and no private saver can earn two percent these days with safe investments, even if he is committed for so long.

With their long-term bonds, insurance companies are still drawing on the more profitable earlier times. In addition, the insurance companies are increasingly generating income from other investments such as infrastructure projects. But when it comes to interest rates for money invested safely, there is one negative record after another in Germany, and that shakes the soul of savers for a long time.

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Source: WORLD infographic

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For 55 months now, long-dated bonds have paid less than inflation saps purchasing power: the real return is negative and remains negative. A whole generation of savers is experiencing a veritable meltdown in interest rates. It is a historic upheaval with far-reaching consequences for investment and provision.

Not even inflation rates at or below zero, which have existed in Germany since July thanks to the VAT cut, can provide lasting relief. The yield on ten-year government bonds (also known as Bunds) is minus 0.53 percent, namely below the official inflation rate, which the statisticians located at minus 0.3 percent in November.

Negative real returns on the savings account have also existed in previous decades, but the current situation is new: savers can choose long maturities, can set their money for as long as it takes and give it away (e.g. entrusting it to the state), secure returns above inflation do not find them anymore.

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Source: WORLD infographic

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The interest rate development of the ten-year Bund confirms the historic turning point: never in post-war history have buyers of these government bonds, which have a top credit rating of AAA, suffered a decline in purchasing power for so long.

“Savers find themselves in a difficult situation,” says economist and author Daniel Stelter, describing the situation. “It may be that real interest rates were also negative in the 1970s, but at that time you could make money by switching to other bonds,” says Stelter. At that time there were alternatives that no longer exist today.

The expert alludes to the fact that savings accounts have meant a decline in purchasing power over extended periods of time in past decades. At that time, however, investors had the option of switching to government bonds with a longer term and significantly higher interest rates, thereby securing a real return. Usually, the interest rate increases with the length of the commitment.

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Source: WORLD infographic

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In the 1970s, for example, Bunds with a ten-year maturity yielded between six and ten percent. Even though inflation was consistently higher than it is today due to the oil crisis and the wage-price spiral, thanks to the high interest paid by cross-country skiers, the bottom line is that there is usually a return. The economic logic behind it: the longer savers give away their money, the more they have to be compensated for it – with higher interest rates.

That has changed fundamentally. In 2014, the European Central Bank (ECB) introduced penalty interest rates for the first time for credit institutions that park excess money in the ECB’s accounts. The monetary authorities wanted to get the banks to bring more liquidity into the real economy in the short term.

Only the measure, which was actually intended for a short term, has now become a permanent feature. The penalty interest rate is now minus 0.5 percent. Since the private financial institutions are something like the relay station of the monetary system, this has pushed the entire interest structure down: Not only short-term interest rates, also long-term ones are eroding. Since 2016, the real return has also been negative at the “long end”, that is, even on ten-year papers.

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Many German citizens react to this with a certain perplexity. Instead of concluding long-term savings bonds or time deposits, investors prefer to leave the money in the current account as so-called sight deposits: “The proportion of sight deposits has been climbing for years and has reached a peak this year,” says Michael Stappel, Head of Macroeconomics at DZ Bank in Frankfurt. It’s about more than two trillion euros.

According to his calculations, more than 28 percent of all financial assets in Germany now consist of bank deposits or cash. “It is understandable that in view of the interest rate level, private households are hardly prepared to commit themselves to fixed-income forms of investment such as corresponding bank deposits or bonds in the long term,” says the economist.

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It gives savers little hope that interest rates will soon normalize again. “The corona-related monetary policy is pushing the hoped-for increase in interest rates into the distance,” says Stappel. The DZ banker once calculated the financial loss suffered by the German citizens due to the de facto abolished credit interest.

Since 2014 alone, private households have suffered interest losses on deposits, pension funds and insurance of more than 600 billion euros. This means that interest income is shrinking despite the massive increase in financial assets.

Those who buy on credit are among the winners

However, there are also winners of the low interest rates, namely those German citizens who borrow money to buy a property, for a new car or for consumer wishes. According to Stappels calculations, the meltdown in interest rates brought them savings and thus a welfare gain of around 299 billion euros. The bottom line was a loss of more than 300 billion euros.

Stelter also observes the new world of interest rates with suspicion. He sees a large-scale redistribution from which not least the state as the largest debtor will benefit. From his point of view, however, investors and self-decision makers lose out: “It is a real transfer from creditor to debtor, which you can see in the interest savings of the state, which then ramblers about black zero,” says Stelter.

The problem could get worse in the future, namely if inflation does unexpectedly return. This seems to have been defeated at the moment, in fact the statisticians have not measured any price increases with their methods since August 2020. However, special effects also have an effect here, especially the Corona-related reduction in VAT.

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In addition, there is the drop in the oil price, which has made fuel and heating oil significantly cheaper this year. Economists like Stelter warn, however, against declaring the risk of an abrupt decline in purchasing power to be dead and overcome. “Demographics, climate policy, helicopter money, all of this could lead to inflation in the coming years,” warns the critic with a view to the political constellations in Europe.

For many insurance companies, too, their life policies are now more of a burden than good business. Many customers still have old contracts with high interest rate commitments that corporations have to fulfill, even if the capital market is no longer offering that much. In the best of times, policy savers were promised four percent.

Some insurance companies are therefore selling the business completely, others like Allianz want to rebuild the life insurance product in order to adapt it to the new investment conditions in the misery of interest rates. Under these circumstances, nobody wants to make firm commitments for secure returns.

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