I thought I’d share a situation with you that in many ways epitomizes some underlying issues with the current economy. I am involved in a volunteer organization that regularly gives out scholarships to university students. Since I was involved in the organization in the mid-90s, up until a couple of years ago, the scholarship fund has managed to sustain a reasonable, though not profligate, level of scholarship and bursary awards to students. These monies came mostly though not exclusively from interest on the principal fund. The fund was topped up each year through small transfers from the organization’s general operating budget, and through these two mechanisms has managed to have its award amounts keep pace with CPI inflation for the past 15 years.
Until late 2008 that is. At that point interest payments started to dwindle. Now, two years in, more and more higher interest investments have matured and the only option available for the cash, given the scholarship fund’s requirement to retain capital, is re-investing in (now) lower interest vehicles. This has led to the organization scrambling to solicit private sector donations to the fund to cover the shortfall, or consider reducing the number or value of awarded scholarships.
The experience of this organization is, in many ways, akin to any other business or family who is using its capital to produce income. As interest rates remain low, incomes start to dwindle and the tough choice appears: start eating into the capital to fund operations, take more risks with this capital, or find other ways of producing income such as taking on another job, accepting donations, or delaying retirement. The difference with a volunteer organization, perhaps, is there isn’t any finger to point for past mistakes. This is simply a case of trying to manage ongoing operations of a conservative fund and there’s no easy way out.
In itself, the financial issues of this scholarship fund are deflationary: more money must be sucked in, ex dwindling interest income, to maintain existing operations or operations start to come under pressure. I think, in general, this background deflationary meme is hidden from most of us still young who aren’t overly concerned with funding retirement in the near future. The longer low interest rates remain, however, the more stressed those with fixed income will feel. If interest rates don’t rise soon, funding the future will start to become a more prevalent concern, realized through reduced spending, increased risk, delaying retirement, and, to the glee of many here I’m sure, accelerated liquidation of existing assets.
