For issuers of debt (borrowers), interest rates are the cost to borrow funds; for buyers of debt (lenders), it is the rate of return they get for lending money.
After the 2008 financial crisis, central banks dropped interest rates to the lowest levels in recorded history. This was great for overleveraged entities that borrowed too much since they could now refinance their high debts at cheaper rates; however, for a large class of lenders—especially global pension funds—this made it nearly impossible to meet their rate of return requirements.
Martin Armstrong believes this is the next global crisis in the making, a topic that he’s been regularly warning about at Armstrong Economics, and which he’ll also be discussing at this year’s World Economic Conference.
Here’s what he told FS Insider listeners last week…
Pension Funds in the Crosshairs
The Federal Reserve and other central banks lowered rates to such dramatic levels after 2008 that we ended with the lowest levels in 5,000 years of recorded history.
Since then, the Fed now realizes that it needs to normalize not because the economy is heating up, Armstrong said, but for a very simple reason: pension funds are going to go bust.
“That’s the next crisis,” he said. “You can see it coming. It’s like a train coming down the tracks.”
Pension funds generally need 7 to 8 percent returns to break even, and buying 10-year bond at 3 percent means they’re locking in a guaranteed loss. Going forward, these losses will continue to grow and eventually lead to some form of a bailout.
401K Confiscation Possible
One possible “solution” that may be sought out in the years ahead, Martin told listeners, is to subsidize state pensions with private 401Ks.
In California, CalPERS is hemorrhaging money and may not be solvent indefinitely. California’s government is talking about raising taxes to bail out the state pension system, and effectively requiring private 401Ks to be turned over for administration by CalPERS.
The other possibility is that politicians might try to mandate that pensions buy government securities.
“If they lost money managing the state employee pension funds, what are they going to do with everybody else’s? They’re just going to take money from the private side to pay off the public side.”