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Low interest rates – opportunities and risks

Low interest rates at the ECB - But what does that actually mean?

In November 2019, Christine Lagarde took office as the new ECB President. The anxious question of many economists is: “Will there be low interest rates in the future too?

Most experts are assuming a clear “yes”, so that a loose monetary policy will continue to be pursued both within the European Union and in other economic areas.

But what does that actually mean? And what are the advantages and disadvantages? The issue is indeed complex and has a major impact on people’s everyday lives.

Low interest rates are a problem, especially when it comes to investment. The result is that alternative forms of investment such as crowd investing and investment in the maritime sector are gaining in importance, because here it is simply possible to achieve slightly better interest rates.

What is interest anyway?

Low interest rates today (2020) mean a maximum of one percent on fixed-term deposits with established banks, less than one percent guaranteed growth in life insurance policies and, in some cases, zero percent on savings books and current accounts.

But what does “interest” actually mean and how does it come about?

In general, this is a term that goes back to the Latin “census”, which means “estimate”. In concrete terms, this refers to a fee that always falls due when capital is lent. The interest is collected by the creditor, while the debtor has to pay and the Sumerians and Babylonians already knew interest in pre-Christian times.

The first regulations are recorded for ancient Greece to put usury to the trade and also the ancient Romans set maximum interest rates. In the history of mankind, interest rates were sometimes even forbidden, which is still the case in some cultures today. The Italian economist Ferdinando Galiani put it in a nutshell when he called interest the “fruit of money”.

Today, a whole series of different interest rates can be distinguished, but they are generally interrelated. People talk about market interest rates, interest rates of central banks, interest rates of banks and savings banks as well as legal interest rates, and a whole series of interest rate theories – some of which are contradictory – have long existed.

Why low interest rates?

Anyone looking into recent German history sees a period of high interest rates, especially in the 1970s.

For investors, this means that both savings books and fixed-term deposits paid off, and life insurance policies were also booming. On the other hand, the acquisition of real estate was associated with high loan interest rates and companies also had to dig deep into their pockets for the purpose of financing themselves with loans. One can infer from this that both high and low interest rates always have advantages and disadvantages and that it is important to position oneself cleverly.

In simple terms, low interest rates today serve the purpose of keeping the economy going. Against the backdrop of the banking and financial crisis from 2007 to 2009, key interest rates were lowered by the European Central Bank (ECB), the US Federal Reserve and the Japanese and British central banks. This process is called interest rate structuring and of 4.25 percent key interest rate in 2008 is now zero percent, with commercial banks even having to pay 0.4 percent if they place their money with the central bank.

With the low interest rates, money is to be put into circulation and the highly indebted states are always in a position to service their loans. The same should – in theory – also apply to companies and private investors who incur debts, for example to modernize or acquire residential property.

Low interest rates as a curse and a blessing

However, low interest rates alone cannot ensure economic growth.

If there are no prospects, cheap money is not worth it either, as it would not be possible to invest profitably. In other words, an optimal interest rate policy would precisely differentiate and take account of the respective economic power.

Today, low interest rates lead to a situation that even banks and leading economists call the “wrong world”. The scenario is unique because in the entire past, debt has cost money while money has generated interest income. Today it is partly the other way around.

Why not raise the interest rate?

However, an interest rate hike is not in sight in the short and medium term. The problem is seen in the fact that the economy could simply come to a halt and private consumption would also collapse.

The result would be falling prices on the stock markets and economies, which would again have to pay interest on their immense debts. There are many critics of interest rate policy who, for example, see price bubbles in equities and real estate, as everyone is now investing in these supposedly high-yield forms of investment.

On the other hand, the savings rate is falling because it is simply no longer worth putting money aside. The old age provision of many humans is in danger and it exists besides the incentive to produce always new debts.


How can low interest rates be avoided?

Low interest rates can be seen as positive or negative, depending on one’s point of view. It is important to deal intelligently with the current situation and to make the right decisions.

One possibility would be to produce debt and buy real estate, for example. This approach has been very successful in the first few years since the beginning of the low-interest phase, as can be seen from the significant rise in real estate prices in Germany. But what does it look like now? Some experts believe that houses and flats, especially in conurbations, no longer offer greater potential for value appreciation.

Of course, this point of view could also be disputed, and yet the combination of debt and an investment that is no longer considered “dead certain” is not everyone’s cup of tea. Above all, however, the loans taken out offer the security of low interest rates only if they are fixed for as long as possible. However, low interest rates are not a natural phenomenon, but can also rise again, which could then lead to overindebtedness.

The fact that investments such as life insurance, time deposits or savings books do not make sense at present is even admitted by the banks. Not even a compensation of the likewise low inflation rate is possible, so that one should leave the fingers of it here. More exciting is the stock market, which has been in a constant high flight for many decades.

Anyone who entered the market a few years ago is generating enormous returns, but here, too, the question arises as to the right time to do so and whether the crash might not come at some point. Pure scaremongering? Hardly, because even public TV stations ask whether a “stock market crash à la 1929 is on its way?

Maritime investments as new forms of financial investment

With the dawn of the “digital age”, a whole series of new forms of investment have come into the world, with which low interest rates can at least partly be circumvented.

Crowdinvesting is a particularly exciting method, in which concrete entrepreneurial plans are made possible by the money of numerous individual investors.

The advantages are obvious and consist above all in returns which – depending on the type of investment – are significantly higher than the hardly available interest rates of the banks. One example is maritime investments or investments in ships. Depending on the project, six-and-a-half to seven percent returns are paid per year and there is also the option of investing as little as 500 euros. In contrast to many banks, no “fees” have to be paid; instead, the money is forwarded one-to-one directly to the shipping company.

Investments in the maritime sector are generally made by granting a subordinated loan, which of course entails risks as well as opportunities. If you like, you act like an entrepreneur and ensure that the money works in the truest sense of the word. A crowdinvestment can be used both to build new ships and to bring existing ships up to the state of the art.

The latter is necessary above all because the environmental requirements in international shipping have drastically changed and tightened in recent years. It will soon no longer be possible to sail the world’s oceans with old ships, which is why the modernisation of fleets will also increase the chances of competition.

The fact is that around 90 percent of global trade is in ships and the industry continues to grow. Accordingly, transport capacities are always in demand and will probably continue to be so in the future. In most cases, long-term contracts already exist, so that revenues are already bubbling over and this situation does not change even after the crowd investment.

Low interest rates at six and a half percent are also not to be feared, especially since both the sales value and the pure steel value of the ship can be used as collateral.

Further forms of alternative investments

In recent years, low interest rates have attracted the attention of the media to a whole series of alternative forms of investment. Crypto currencies and Bitcoins and the partly fairytale profits that can be made with these purely digital investments are talked about everywhere.

However, the blockchain technology behind it is highly controversial and consumes enormous resources of energy. Furthermore, the accounts for the crypto currencies are not always secure and have been attacked by hackers in the past. So this is not a “tangible” investment, but a construct that is difficult to see through and not transparent in all areas.

In addition, the market for Bitcoin and Co. is highly volatile. Price fluctuations in both directions are enormous and you really need good nerves to participate here.

Gold, on the other hand, can be owned, looked at and put in your pocket. The precious metal has been regarded as a means of payment and an investment since the beginning of mankind and has experienced a real revival through low interest rates. Investments are made either directly in physical gold in the form of coins or bars or in gold funds and other securities. The problem is only that gold does not yield any return and thus represents “dead capital”.

Furthermore, there are also considerable fluctuations here and the actual worldwide demand is manageable. Gold is therefore only valuable as long as it is recognized as valuable and not out of itself.

A further problematic aspect lies in the conditions under which gold is extracted and which in very few cases are environmentally friendly and resource-saving. So if you are looking for an ethically and ecologically sound investment, you are not in the right place. Low interest rates in the sense of the word are to be expected anyway with gold, because one obtains a profit only if again is sold.

The same applies, of course, to the many material assets that are repeatedly brought into the field. An old-timer, expensive wine, a luxury watch or a limited filling of a single malt whisky may be lucrative in individual cases and designer furniture or records are also considered a possible investment. One should then also be familiar with the material and not buy indiscriminately.

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