Because the recent interest rate cuts have brought nothing bottom line, Mr Mario Draghi, head of the European National Bank, reinforces the interest rate cuts. It has been already told by Einstein, that it is madness, always doing the same thing and expecting different results. It seems Mr Draghi did not perceive the Einstein cite. Meanwhile the ECB policy rate is at 0% and banks who want to park their cash in the ECB, a penalty interest rate of 0.4% must be paid. What should entrepreneurs do facing such kind interest rates?
Now Mr. Draghi although pursuing the noble intention to ease lending for the banks. This has did not work in the past and won’t work in the future either. Lending has primarily to do with trust in companies and countries. And confidence in some EU southern countries is still not satisfied yet. State household funded by the additional debt will be fueled by the 0% interest rate policy. Thus, the 0% policy degenerates into a painkiller instead of fighting the causes. Urgent but painful structural reforms are not tackled but postponed.
One of the problems might hit the banks themselves. Where liquidity could be stored against good interest earlier, today penalty interest must be paid. That is, banks will have to earn their money otherwise. A further increase in account management fees won’t be enough. Banks will demand higher interest rates and so the intentions of Draghi are taken ad absurdum. Quite apart from running the ludicrous penalty interest and intentions to buy up covered bonds and securitization (ABS) runs contrary all actions of the bank stabilization. “Redistribution policy to save zombie banks”, is saying the German Ifo President Hans-Werner Sinn on this topic.
For business owners, this means clearly financing will not be cheaper but more expensive and difficult. Even if banks can refinance cheaper, banks will not easily give loans given the world economic outlook. For enterprises the generation of equity is more important than ever. Even for small businesses is now professional reporting the need of the hour. If, namely because of an unexpected event, it should come to a crash of the financial markets, as we have seen in the USA, only the entrepreneurs will be able to act, if they have sufficient equity and sufficient cash. On the contrary, those who are well equipped with equity and cash, can turn the crises into a profitable business.
For your employees the 0% interest rate policy is also momentous. This interest rate policy is a “frontal assault on all savers,” said Wolfgang Gerke, President of the Bavarian Finance Centre. And not only that, the 0% interest rate turns out to be dramatic deterioration in building a pension. And it affects not only the traditional endowment life insurance. The insurance companies have enormous problems to offer products for retirement, because any reasonable interest has gone. Here insurance providers are tempted to integrate high-risk forms of investment into the structure of their insurance products, which will foster the bubbles on the financial sector.
The pensions fall already solely by the demographic change in the population. All the more the company pension plan must come into focus,. Although the contributions to a pension plan are now rising again due to the 0% base rate, the company pension scheme is in addition to the statutory and private pensions an important element in preventing poverty in old age. And just younger, better qualified workers know importance to a good occupational pension offer. Be sure to obtain advice as an entrepreneur, company pension schemes for the employers in Germany contain certain risks. Switzerland is here clearly the role modell, not only that the Swiss franc will probably increase its value. The Swiss three-pillar system for retirement consisting of the statutory AHV, the company BVG and private provision is in my view the most effective protection against poverty in old age.
In the Euro zone it will probably come to a shift into non-monetary assets. Speculative bubbles in real estate and in the stock markets are likely to unfold. Smart investors will behave counter-cyclically. In times of excessive prices they will form their cash and hold back to only invest when the bubble has burst. Choosing the right system for wealth creation is therefore still a challenge for the time to come.
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