The Puzzle Of Global Interest Rate Downtrend: Reiterating Zero Interest Rate Is A Long-Term Trend

In 2014, we first put forward the view that "zero interest rate is a long-term trend". Why is interest rate falling down for a long time? This report will reiterate our interest rate downtrend or trend from the perspective of crisis and deflation.

Demographic dividend disappeared, real estate inflection point, interest rate down for a long time.

In the medium term, real estate is a young consumer goods. With the increase in the proportion of middle-aged and elderly people over 45 years old, the proportion of young people is decreasing, and real estate consumption will gradually encounter inflection point.

This means that the profits and investments of the real estate industry chain that support the economy will slide, which will affect the economic growth of a country and drive the interest rate to decline for a long time.

Japan's population aging accelerated in 1990, corresponding to the zero interest rate after 2000, while the United States and Europe met the demographic dividend inflection point in about 2008-2010 years, and the interest rates in the US and Europe also dropped to zero.

Labor endowments decrease, long-term potential growth downwards, interest rates tend to fall.

In the long run, the disappearance of demographic dividend means the loss of labor force and the rising labor cost will also reduce the long-term investment return of enterprises, and the potential economic growth will decline, leading to long-term zero interest rates.

2) look at the trend of interest rates from the perspective of credit and deflation.

Persistent deflation is an important reason for us and Europe to implement zero interest rate or even negative interest rate.

In 2005, before the subprime crisis, the US PCE reached 2.5% compared to the same period last year, and the euro area reconciled CPI was 2-2.5% compared to the same period last year, and the CPI in China was also about 1.9-2%.

But in 2015, the US PCE fell to 0.3% compared to the same period last year, while Japan's CPI was only 0.2%, while the euro area CPI was moving between the positive and negative, and China's CPI also fell to 1.5% within the same period.

After the crisis, the world was in a deflationary situation, even though the central bank made all kinds of changes.

But with little effect on physical credit, deflation is getting deeper and deeper, and interest rates are dropping again and again under the liquidity trap.

Behind the global deflation is the lack of demand in developed countries, which is reflected in enterprises.

Low consumption and insufficient consumption.

After the real estate boom burst, enterprises and residents entered the deleveraging process in the face of high debt rate and low capital return rate. At the same time, the risk appetite of banks declined, the credit of enterprises declined sharply, the whole credit system shrinks, and the velocity of money circulation declines significantly.

The United States, Japan and Europe experienced deflation after encountering inflection points in the real estate cycle.

Deflation is not scary in itself, and it is scary to continue to deflate.

Once caught in deflation, deflation may strengthen itself if the expectations of enterprises and residents can not be changed and banks are encouraged to start lending again.

But European and Japanese examples seem to show that liquidity trap is deepening. No matter how much water the central bank puts, it will be difficult to boost demand for entities, deflation will continue, and easy to blow up the bubble of financial assets, reflecting the continued downward trend of Treasury yields, or even negative.

3) look at the trend of interest rate from the angle of leverage.

The government plus leverage and the central bank's substantial easing further push interest rates down.

In the context of the end of the real estate cycle and deflation, corporate departments and residents began to leverage. In order to improve deflation expectations and prevent rapid economic decline, government departments will increase leverage.

For example, Japan's private sector began to leverage in 1990, and rapidly increased leverage to government departments. At the end of 2015, the leverage level of Japanese government departments reached 220% of GDP.

At the same time, in order to boost domestic demand, expand credit and ease government pressure on leverage, the central bank often opted for substantial easing.

We see that the yields of us and Japanese government bonds are significantly negatively related to the proportion of government debt to GDP.

4) the current situation of our country: the economy is heading for a downward trend, long-term or deflation, and interest rates will remain low.

China's demographic dividend inflection point has passed, and the economy tends to go downhill.

China's population dependency ratio has also begun to pick up in recent years, indicating that the real estate golden period has passed.

In the 16 quarter of the 2 quarter, the economy went up and down, and the three demands weakened. Manufacturing and private investment grew for the first time.

At present, real estate demand is also gradually falling down, which means that the subsequent real estate investment is difficult to pick up. Infrastructure investment is the main force of the bottom economy, but it is difficult to sustain the economy.

There is still room for long-term interest rates in the short run.

The price of vegetables has risen in the wake of the floods, but the price of pork has dropped. Commodity price rebound has not been supported by demand, the price is limited, and short-term inflation has come to an end.

In the long run, similar to the United States, Japan and Europe, the aging of our population has arrived, the real estate golden period has passed, the economic potential growth has been reduced to the next level, and the growth rate of private investment reflecting the willingness of the private sector is even low, corresponding to the high M1 level, which means that the private sector will eventually leverage, and the risk of long-term deflation is greater than inflation.

If money continues to be loose in the future, and the funds will accelerate to be real and virtual, China's interest rate will still have a downward trend in the long run, and the new low is worth looking forward to.

Behind the global deflation is the lack of demand in developed countries, which is reflected in the low investment and inadequate consumption of residents.

After the real estate boom burst, enterprises and residents entered the deleveraging process in the face of high debt rate and low capital return rate. At the same time, banks' risk preference declined, business credit declined sharply, the whole credit system shrinks, and the circulation speed of money declined.

The United States, Japan and Europe experienced deflation after encountering inflection points in the real estate cycle.

Deflation is not terrible in itself. The terrible thing is persistent deflation.

Once caught in deflation, deflation may be self reinforcing if the expectations of enterprises and residents can not be changed and banks are encouraged to start lending again.

For example, Europe and Japan show that the liquidity trap is deepening. No matter how much water the central bank puts, it is difficult to boost the demand for entities, deflation continues, and easy to blow up the bubble of financial assets, reflecting the continued downward or even negative yields on treasury bonds.