An article in today’s New York Times  pointed out the price savers are paying through lower income on their savings as a result of the Federal Reserve’s near-zero interest rate policy. Not only does this policy favor borrowers, it clearly favors banks (at the expense of their depositors) amid the banks’ efforts to rebuild capital and profitability.
Such low rates will be counterproductive, however, if carried on too long in an era when consumers, businesses, and banks must de-leverage to right their balance sheets. Consumer spending, especially, ran way out on the proverbial debt limb. That limb has now broken off, and consumers are scrambling to survive the fall. In fact, the lower the interest rates, the more consumers must save and the less they will spend.
If you are a borrower with good credit and equity support, these are some of the best of times with home mortgage and corporate bond interest rates at record lows.
If you are a net saver, your investment options are poor, bad and worse. Bond yields are low and stock prices stagnant. Hard assets (gold, real estate) may look attractive but low/no inflation or out-right deflation are seldom kind to such assets.
How should owner/CEOs think about their companies’ strategies in this kind of environment?
It’s a time to be cautious but opportunistic:
- There will continue to be winners and losers – The continuing success of Apple’s gadget sales demonstrates that consumers will find the money to buy the things they want. Companies with second-rate or me-too products will likely continue to struggle.
- Nothing lasts forever – Just as the good times came to an abrupt end, the current malaise will also improve but over time. Any sharp economic improvement will require significant catalysts in the form of major innovations and/or dramatically more favorable governmental policy. Look for inflection points; be ready.
- You make money when you buy or invest, not when you sell – While there are “get lucky” exceptions, most investment returns result from buying the right assets at the right price. Be patient. Liquidity is your friend, not your enemy.
 “Falling Rates Aid Debtors, but Hamper Savers” at http://www.nytimes.com/2010/09/09/business/economy/09rates.html