You normally don’t see these two phrases in a single headline, but they are very much connecting. I thought of this this morning when I read a post called Retirement in the Liquidity Trap by Tim Duy. Commenting on a Wall Street Journal article about how U.S. retirees were suffering as a result of low interest rates, Duy writes:
I was a bit surprised that Whitehouse did not compare the current situation with that of Japan, where the elderly have long suffered from the impact of ultra low interest rates. Perhaps that part was left in on the editing room floor.
As with many polices, there are winners and losers, and the losers now are with those dependent on the once steady returns from ultra-safe assets.
Let me take that thinking one step further. Hemmed in by rates perpetually at zero percent, the Japanese elderly have taken to shoplifting to make ends meet. Here are two snippets describing this outbreak of theft in Japan:
- BBC News, 27 Jan 2011: Most of them stole food or clothes rather than luxury items, the NPA said. Japanese society is ageing rapidly and its economy remains stalled. More than 20% of the population are now over the age of 65 – a figure which is expected to rise to about 40% by 2050. A police official told the Mainichi newspaper that pensioners were shoplifting not just for financial reasons "but also out of a sense of isolation peculiar to the age".
- Bloomberg, 14 Nov 2008: More senior citizens are picking pockets and shoplifting in Japan to cope with cuts in government welfare spending and rising health-care costs in a fast-ageing society. Criminal offences by people 65 or older doubled to 48,605 in the five years to 2008, the most since police began compiling national statistics in 1978, a Ministry of Justice report said. Theft is the most common crime of senior citizens, many of whom face declining health, low incomes and a sense of isolation, the report said. Elderly crime may increase in parallel with poverty rates as Japan enters another recession and the budget deficit makes it harder for the government to provide a safety net for people on the fringes of society.
Remember, Japanese government debt to GDP is 200%. It’s not like the Bank of Japan would actually want to raise rates. As I wrote in March:
- Japan’s long-term rates reflect private portfolio preferences as determined by expected future interest rates (see MMT: Market discipline for fiscal imprudence and the term structure of interest rates). So 10-year rates are low because expected inflation and expected future short-term rates are low.
- Japan’s Debt to GDP is over 200%, meaning that any uptick in expected future short-term rates due to inflation would be disastrous in terms of interest due.
- So, to avoid this scenario, Japan must leave short-term interest rates at near zero percent or risk the crowding out of public spending that higher interest payments would entail. Only if the debt to GDP ratio declines significantly can it relax this stance.
So, this means the Japanese elderly have to save a lot to make ends meet in a retirement where long-term yields are minimal. Some have turned to theft.
Question: should we expect a different outcome in the U.S.? The last post I wrote on the housing and foreclosure crisis highlights a CBS video about declining house prices and a foreclosure epidemic in the U.S. Isn’t this an environment that lends itself to permanent zero? And If long rates are largely determined by expected future short rates, the longer short rates are at zero percent, the lower long rates will go. That’s toxic for bank interest margins. Look at 77 bank as an example.
Bill Gross is going on a treasury boycott because of negative real interest rates. All I’m saying is that low rates are challenging for all savers, especially the elderly who live off a fixed income, especially when the social safety net is eroded. That leads to an increase in net private sector savings and a lower velocity of money, an environment which necessarily means elevated budget deficits. If Japan is any guide, we should expect an epidemic of petty theft among America’s elderly in the coming decades. But, we should also expect fiscal shortfalls to be intractable. My solution would be to maintain (or boost) the level of Social Security and Medicare benefits, but means test them and increase minimum age requirements. Any other thoughts?