Pensioners and savers warned that low interest rates are here to stay
Savers and investors haven't got used to the fact that the world is in a protracted period of low interest rates, the chief economist at Citigroup has warned.
While good news for borrowers perhaps, Willem Buiter said the regime of low interest rates would last for years.
And he claimed the pressures posed by a fall in global inflation aren't diminishing, but are increasing.
"We have to get used to an environment of secularly low real, and to a certain extent, also nominal interest rates," he told reporters in Dublin.
"And I don't think that the world has adjusted to this yet, that people have lowered their aspirations or declared themselves willing to compensate savers and investors who lose, through the tax transfer mechanism."
Mr Buiter said that when people saved for retirement prior to the crash, they would have put their money in a fund that had a target rate of 7pc and which had an "acceptable level of risk." The risk-free rate was likely around 4pc.
But now he said the nominal risk-free rate is zero or half of 1pc, meaning the higher rate risk would bring a yield of around 3.5pc.
"Governor [Glenn] Stephens of the Reserve Bank of Australia made a speech that wasn't taken very kindly by pensioners, but it was the hard truth," Mr Buiter said.
"He said people who save for retirement have the following choices. You either save more, or you work longer or you put up with a significantly lower standard of living in retirement or you get somebody else to make up the difference created by the decline in the risk-free rate of return through taxes and transfers.
"It's the only way to get out of this box. That's where the political debate has to be.
"Are we going to compensate the savers that have lost, or are we just going to tell them markets go up, markets go down, tough luck?"
He added people don't believe that the risk-free real rate has actually gone down, and that it isn't a temporary blip.
"There are decisions being taken that underestimate the amount of risk that is being taken on," he said. "And this is going to be the driver of the next financial crisis.
"Because the regime of low interest rates is going to last for years. Globally growth last year and this year is below potential output growth. Global disinflationary pressures are not diminishing, they're increasing."