Since the beginning of the Great Recession in 2008, the central banks of major industrialized countries have been keeping interest rates unusually low to "help revive the economy."
It is true that when interest rates are low, consumers, businesses and governments are encouraged to borrow very cheaply and thus to spend and invest more, which supports economic activity in the short term.
The obvious flipside to this is, of course, that those who depend on investments for their earnings and incomes have major problems finding a decent return.
The yields on traditionally safe fixed-income investments, such as government bonds, will get you less than the rate of inflation these days. This means that, in real terms, you are in effect losing money.
This is a very bad way for retirees to safeguard the value of their savings. It also puts financial institutions such as pension funds and insurance companies, which depend on fixed-income investments to meet their long-term obligations, in a difficult situation.
With such low rates, they have no guarantee of a return on investments with a 20- or 30-year time horizon. They either have to put aside a lot more reserves to counter the risk, demand higher fees for products with long-term benefits, or even discontinue some of them, as insurance companies have done recently.
But this ultra-loose monetary policy has other consequences for the economy as a whole that are, gradually, becoming more obvious.
The low rates, coupled with the massive money creation engineered by central banks (what is referred to in the jargon as 'quantitative easing') are giving economic factors the false impression that there are a lot of savings around to be borrowed, when that's actually not the case, or not as much.
Saved resources are those set aside instead of being immediately consumed. Printing pieces of paper with dead politicians on them cannot, logically, add real savings to the economy.
In Canada, households have reacted to these low rates by getting deeper into debt. At a level surpassing 150% of disposable income, we are actually more indebted than Americans were just before the crisis. And there is increasing talk of a real estate bubble. Finance Minister Jim Flaherty just announced another tightening of mortgage rules.
There's also talk of bubbles in various other sectors of the world economy, but certainly the biggest bubble of all is the government sector bubble. Government spending has been up, up, up, almost everywhere for the past five years, and most of this new spending is paid for by debt, made easier by central banks.
The main debate right now in Europe is which governments are going to have to be bailed out – with money that other governments don't really have, of course, and that will also ultimately be created out of thin air by central banks.
So, essentially, what central banks have been doing with this low-rate policy is encouraging everyone to spend and pile up debt, while discouraging us to save. But they've patched up the lack of real savings by creating phony savings.
Anyone with two cents of common sense knows that this cannot be a solid foundation for a sound economy.
Given all of this, it's probably not a coincidence that after more than four years of such policy, the global economic situation remains as uncertain as ever.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Il signe ce texte à titre personnel.
* Cette chronique est publiée dans les journaux de Sun Media, tant dans ses quotidiens présents dans plusieurs des marchés urbains canadiens les plus importants (Toronto, Ottawa, Calgary, Edmonton, Winnipeg et London) que dans ses 28 quotidiens régionaux.