Windhoek — As much as the current debate concerns inflation or deflation, a similar debate is slowly emerging around interest rates.

As you know, in the USA interest rates are effectively zero and in Euroland, negative. This is the outcome of the so-called ZIRP (Zero interest rate policy) the Federal Reserve was forced to adopt in August last year when the world's financial boat almost sank.

Because of the risky and unpredictable nature of equities and other markets, the US treasuries market continued to be viewed as a safe haven, but yields there are generally in the order of 2% to 2.5%.

So, after inflation, real yield comes in at less than 1% or max 1.5%. If the US bond market manages to keep the confidence of investors, interest rates will stay low, but if the reverse happens, the market will start punishing treasuries and bonds. Discounts will have to be bigger and yields will go up. In effect, this will be a signal from the private sector that confidence in the sovereign market is lost and that capital can only be attracted if the yield is higher.

But yield in bonds relate to interest rates on the commercial side, so eventually the market will force interest rates up irrespective of what the Federal Reserve does. In that case, there will probably be a strong correlation between real interest rates and inflation. If that happens, a gradual but excruciatingly slow recovery process will start and continue mostly sideways for the at least the next ten years. Beyond that is anybody's guess.

The other camp in the debate argues the opposite. They say, since there is no substitute international trade currency, the US dollar will continue to be viewed as a safe haven, funds will not stop flowing into US treasuries and bonds and the Federal Reserve will have the power to set and control interest rates. From this it flows that interest rates will be able to remain zero or negative. This scenario is also foreseen to carry on for many years, perhaps also ten years or more but such claims are highly tentative.

Somewhere between these two viewpoints (conjectures) sits the ordinary retiree who until now, lived off a pension that was invested in various low-risk and risk-free fixed-income investments all yielding a more or less comfortable nominal yield of 2% to 2.5% above inflation. (This applies to the US market.) These are not sterling returns but they are safe - rock solid safe - and most pensioners sort of make do on those kind of returns.

What has happened lately is actually scary. Returns are gradually decreasing, inflation is stable but the spread between inflation and nominal yield is also shrinking, meaning slowly but surely, year by year the pensioner's purchasing power decreases.

Or to put it differently, when the Federal Reserve adopted ZIRP as an emergency strategy, it effectively destroyed yield. So the nest egg in the old sense has become obsolete since it does not provide the yield (in the form of monthly interest) to pensioners who depend on that income. What happens is that pensioners are forced to liquidate capital just to survive thereby further reducing the value of their savings. Retirement can become a living hell when inflation destroys the purchasing power of capital but it can be equally destructive when zero yield forces pensioners to start using their precious capital.

Enters a country like Namibia. The latest Treasury Bill auction (Thursday this week) sold TB's for an effective 7.91% yield. This is also not sterling but it is a sight better than what American, European and Japanese pensioners have to accept. Also, an income from the return on a local TB is tax free.

What that translates to in purchasing power becomes clear when one considers the best 12 month fixed-deposit rate at commercial banks is currently just over 8%. This is subject to a straight 10% Withholding Tax bringing the effective yield down to around 7.3%. If the pensioner earns more than N$30,000 per year, he has to pay income tax on that money according to his tax bracket which can be anything between 17% and 35%. Not an easy life being a pensioner!

There is only one reason why I relate this anecdotal comparison of yields between foreign markets and our own. Earlier in the week I spoke to two astute analysts in Cape Town whom I have come to know over almost 20 years. They generally know what they are talking about and have been spot on with their predictions, most of the times. This is the scary part.

They say, the US Federal Reserve, the Japanese Central Bank and the European Central Bank collectively have basically destroyed the concept of yield. It will not be obvious in the domestic market in this year or next or even in four or five years, but before another decade has turned, they expect African markets to be at the same point - zero interest rate, zero yield, and perhaps a prolonged deflationary environment. Not a rosy prospect for pensioners.