To raise, or not to raise? That is the question. Okay, so William Shakespeare may not exactly have been impressed, but clearly today’s economists and investors are deeply concerned about this increasingly pertinent question. And now, all eyes are on this week’s Federal Open Market Committee (FOMC) meeting where afterwards, the US will set interest rate policy which may or may not include an increase in the benchmark Federal Funds rate.

Central bankers around the world seem convinced that holding interest rates down lower for longer represents the best path towards reigniting the moribund global economy. Indeed, governments have historically manipulated rates to smooth out economic cycles, reducing them during periods of softer growth and raising them when the outlook becomes brighter and inflation is more of an issue.

The stimulative effect of lower interest rates seems clear. Automobile and home sales, for example, usually experience greater demand when the cost of financing these big-ticket items becomes cheaper.

Lower mortgage rates bring new home buyers into the market and allow existing homeowners to move up. Rising home prices increase the value of what is many consumers’ largest asset. Stock prices are also generally improved by lower rates. Rising investment portfolios and more valuable homes contribute to the so-called ‘wealth effect’ leading to improved confidence and greater consumer spending during normal times.

In the corporate sector, lower interest rates reduce borrowing costs, providing most companies with an immediate increase in their bottom line earnings. Many public companies are also using the low rate environment to float debt and use the proceeds to buy back their own stock.

To a large extent, the recent stock market run up can be attributed stock buy-backs which reduce outstanding shares and make the remaining shares more valuable. As well, merger and acquisition (M&A) activity has been picking up now that deals are easier to finance.

But can we have too much of a good thing? An increasing number of business leaders have begun to think so. Historically, interest rate manipulation has been an important tool for providing economic stabilisation, but this time around, rates have been extraordinarily low for extraordinarily long and it may be causing some serious problems which could take an even longer time to resolve.

Let’s take a look at some of the arguments against lower for longer interest rates. First of all, low rates punish savers, especially those with a smaller nest egg. According to Bankrate.com, the average rate of interest offered on a three-month bank certificate of deposit is a mere 0.6 per cent, about the same as six years ago. Savers must now work harder than ever to prepare for retirement and other anticipated future expenditures.

With incomes generally remaining stagnant, consumer saving comes at the expense of consumption. In other words, excessive saving reduces overall demand for goods and services and acts as drag on the economy.

On a broader level, global retirement funds are in jeopardy. A large percentage of pension funds have become underfunded in recent years and more are becoming so each year that rates remain near zero. The Association for Retirement Research estimates pensions (both public and private) are underfunded by up to $4 trillion.

These schemes were typically offered to employees as ‘defined benefit’ plans which guarantee a specific payout to participants, regardless of what is actually earned by the plan sponsors. Because the ultimate plan benefits were set when rates were much higher, the low-rate environment reduces the asset earnings potential far below expected plan liabilities — in some cases, even to the point of impending bankruptcy.

While massive share buy-backs combined with robust M&A activity have helped the stock market hit new highs this summer, the reallocation of corporate cash flow has been diverting funds from business investment.

As shareholders demand higher dividends to offset the slim yields provided by the bond market returning cash to shareholders has become the path of least resistance. However, neglecting investment in research and development for the future in favour of financial engineering can work for only so long.

And finally, low interest rates throw a lifeline to marginal companies which would otherwise likely be swept from existence. Normally, weak companies are ultimately locked out of the financial markets allowing better players to take over. Financial Darwinism and the creative destruction of inefficient business models has been going on for centuries and works over time but not so well when government effectively allows ‘zombie’ corporations to exist.

But perhaps more difficult to discern is the degree to which zombie government leaders have been allowed to exist. In the US for example, the current administration has doubled the size of the national debt over the past eight years to a staggering $20 trillion with very little to show for the credit binge. And yet, the total interest expense paid on the mounting debt pile has not increased much, thanks to America’s artificially orchestrated low interest rates.

Similar policies in Europe and Japan, where negative rates are the norm, allow leaders to overspend while ignoring yawning budget gaps, at least for now. Perhaps, if citizens felt the immediate pain of governments’ ongoing policy blunders they would elect more responsible leaders.

At this summer’s annual meeting in Jackson Hole, Wyoming, Federal Reserve chairwoman Janet Yellen said the case to raise interest rates is getting stronger as the US economy approaches the central bank’s goals. Yellen said the economy is “nearing” the Fed’s goals of full employment and stable prices.

While the Fed appears to be getting closer to moving rates up, perhaps the rationale should be reconsidered. Creating jobs in a few credit-dependent sectors by making it easier to borrow and harder to save is not the way to prosperity.

The long game should be an intelligent deleveraging of government balance sheets combined with normalising interest rates. Allowing rates to be set in the free market by rational investors rather than by irrational central bankers with an agenda could be the “slings and arrows” to better (if not outrageous) fortunes.

Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. He can be contacted at 441-292-5000. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.