from Birch Gold Group:
Pension programs may suffer due to a new round of currency wars that are poised to begin between the ECB (European Central Bank) and the U.S.
Last week, the ECB made the first move by lowering its already negative benchmark rate by another 10 basis points to -0.50%.
Dave Gonigam described the ECB’s move in a recent “5 Minute Forecast”:
The ECB will also resume its “quantitative easing” after a pause of only eight months — buying both government bonds and corporate bonds to the tune of $22 billion a month.
Referring to the easing monetary policy, Jim Rickards said, “The decision aims in part at weakening the euro relative to the dollar. Washington is certain to fight back… and a new round of currency wars will soon be underway.”
Now, the Federal Reserve has retaliated, approving its own rate cut of 25 basis points at this week’s FOMC Meeting. The latest cut drops the Fed’s target rate range to 1.75% to 2.00%.
It’s this new trend of monetary easing that could brew big trouble for pension programs in the U.S. Yet this week’s cut in rates probably won’t be enough for POTUS (emphasis ours):
The Fed’s approach may make some market pros unhappy, and it will certainly disappoint President Donald Trump, who said the Fed were “boneheads” and called for zero or even negative rates.
While ZIRP (Zero Interest Rate Policy) or NIRP (Negative Interest Rate Policy) may temporarily stimulate the economy, it could spell disaster for pension programs.
Potential for Negative Rates Creates New “Pension Tension”
Who would invest in something that does not provide a return and, in fact, costs the investor money? Pension funds may have to.
And here’s why: Pension funds are required to invest a certain portion of their funds into fixed investments like bonds.
So if the Fed were to cut rates below zero, Gonigam notes that pension programs may “have no choice but to buy negative-yielding debt… even if it destroys their returns.”
Public pension plans are already severely underfunded, so anything that further jeopardizes their ability to generate positive returns could be catastrophic.
Not to mention that more tax increases may be in the cards if state and local pension programs get desperate.
And even though domestic interest rates are still positive (for now), corporate pensions are taking a hit, thanks to Treasuries taking a dive in August. Corporate pensions ended August underfunded with only 82% of the funds needed to pay obligations.
That’s getting frighteningly close to the limit of 80% that companies often use as a time to use cash flow to bolster their pensions.
Corporations that are focused on shoring up pensions aren’t using those funds to grow their businesses or pay out dividends.
If rates do end up going negative, it would make things exponentially worse for all corporate pensions and pension holders.