Courtesy of Mish.
I received an interesting email on Saturday from Bob Hoye at Institutional Advisors regarding “Currency Wars”.
Bob writes …
Currency wars are very much the talk of the times. This was also the case in the last postbubble contraction when many countries sought to enhance exports through depreciation. And “beggar thy neighbour” policy was a feature of the early 1930s as well.
This time around it is an intelligentsia stricken by the fear of deflation, trying to ramp up anything that trades. But commodity markets and producer prices have not been “accommodating” central bankers. Instead there has been rampant inflation in financial assets, which has reached excessive levels of speculation. Clearly, it is a “beggar thy taxpayer” policy.
Currency Wars and QE Strain Life Insurance Companies and Taxpayers
Bob gets credit for the phrase “beggar thy taxpayer” but I have been thinking along those lines for quite some time.
Pension plan assumptions are always on my mind and a Financial Times article earlier this month puts a spotlight on the problem. Please consider Draghi’s QE Strains German life Assurers.
In a report published on Wednesday, Moody’s said the “profitability and solvency” of the industry in Germany would come under further strain from the European Central Bank’s bond buying.
German life companies, which have estimated liabilities of more than €700bn, sell policies that offer annual guaranteed returns to policyholders, who use the products to save for retirement.
Similar products are sold across Europe, but the guarantees have been particularly generous in Germany.
The ECB’s plan to buy €60bn worth of bonds each month has further depressed yields, giving the industry greater concerns. The yield on Germany’s benchmark 10-year bond has fallen to 0.35 per cent
To help cope with the pressure, insurers have been reducing the returns they pledge to policyholders. The maximum guarantee sanctioned by authorities in Germany is now 1.25 per cent. The industry has also sought to sell more products that have no guarantees — effectively placing the investment risks with policyholders instead of shareholders.
However, the insurers still need to meet commitments from policies sold in previous years, for which the guarantees have been as high as 4 per cent.
Negative Returns With 4% Promises
…
