Keynesian Monetary Policy keeps Interest Rates low and Bankrupts Pension Funds

Posted by PITHOCRATES - November 10th, 2012

Week in Review

For a long time Keynesians in government said borrowing money was not a big deal for governments.  At first it was people owing money to themselves.  No big deal, right?  As the people would never call those loans in.  Then it was foreign investors buying a nation’s sovereign debt.  No big deal, right?  As long as the additional cost of borrowing didn’t increase dramatically for the next issue of debt what was the harm?  Well, as long as you didn’t live off of your savings or a pension it was hard to see the harm.  But if you did live on a fixed interest income or a pension you saw a HUGE amount of harm (see British company pension deficits soar past 230 billion pounds – report by Sarah Mortimer posted 11/7/2012 on Reuters).

“Things have got much worse for defined benefit (DB) final salary pensions,” said Mel Duffield, head of research at the National Association of Pension Funds (NAPF).

“Our fear is that the firms might decide to close these pensions altogether, further undermining the UK’s ability to save for its old age,” Duffield said…

Repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts – a staple investment for pension funds – making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

Keynesians are all for taxing, borrowing, printing and spending.  For they think there is no harm that government spending can’t overcome.  But there is.  First of all when the government borrows money it pulls investment capital out of the private economy.  Raising the cost of borrowing for business.  But it’s even worse when the government starts printing money to lower the interest rates even further.  Because retirees live off of the interest of their savings.  As do pension plans.  When the government keeps interest rates artificially low to ‘stimulate economic activity’ it neither stimulates economic activity nor provides a livable income for retirees.  As the resulting price inflation eats up their savings at an accelerated pace.

This is the cost of excessive government spending.  Passing the bill for today’s spending onto future generations.  And destroying the retirement of today’s retirees.  And future retirees.  As their pension funds become so underfunded that business can no longer maintain them.  And abandon them.  Having the state pick up the cost of these retirees.  Guaranteeing these retirees will get even less in retirement as the government struggles to pay these pensions in an expanding budget amidst falling tax revenues thanks to an aging population.  And if you want to get an idea of just how this can get just take a look at Greece.


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