There are various explanations for why interest rates around the world are as low as they are.

My favoured explanation is that it suits central banks to hold them below the rate of inflation, thus eroding the value of government debt and juicing asset prices.

But less cynical theories are available…

One is that the ageing and declining populations of Western countries is reducing demand. Because there will be fewer people’s needs to cater for in future, there’s less need for investment now – and therefore there’s less need to motivate people to save (by paying them interest) so others can borrow.

Another explanation is that low rates are driven by increasing inequality. Very wealthy people can’t help but save a high proportion of what they earn: there’s only so much you can spend, however expensive your tastes. They therefore don’t need encouragement, via higher interest rates, to defer spending. As well as being ineffective, higher interest rates would be damaging to the increasing number of people who’re reliant on borrowing to make ends meet: they need to borrow ever more as a proportion of their income, and they can only do that if rates keep falling.

(These theories are well summarised here.)

Which is correct? It doesn’t matter: when multiple explanations are pointing to the same outcome, you can have a good level of confidence about what’s going to happen.

None of these factors are going to be reversed, or at least not quickly: debts are still growing, population decline takes decades to turn around, and addressing inequality in a meaningful way will take enormous structural change.

So I’d plan for low interest rates (or more accurately, negative inflation-adjusted rates) to persist until something huge changes. How should you invest under these conditions? That’s a topic for next time.

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