“Derail an expansion and deepen a subsequent recession.”
When the yield of 10-year Japanese government bonds fell below zero, it marked a new milestone in the negative yield absurdity: it pushed the amount of global government debt sporting a negative return for investors to over $7 trillion.
Which means investors buying this government debt are willing to pay the government for the privilege even if that government is fiscally in worse shape than Greece! But “investors” is a funny word these days of central-bank craziness: the entity that buys every Japanese government bond that isn’t nailed down is the Bank of Japan.
The ECB too is still gobbling up government debt, as Bank of England Governor Mark Carney noted dryly in his speech on Friday at the G20 conference in Shanghai:
The largest four central banks bought assets worth $1.2 trillion in 2015, similar to the amounts purchased post-Lehman and during the 2013 euro-area crisis. Adjusting for lower government debt issuance, that leaves an unprecedented flow of net QE, with only $400 billion of additional government debt sold to the private sector, compared to $3 trillion in 2010.
And these QE-crazed central banks buy most of it negative yields.
Carney – who has never been shy about inflicting “unconventional monetary policies” on the economy and its denizens – went on to slam negative interest rates just when the chief negative-interest-rate perpetrators, let’s call them NIRPs, were hoping for a little love and solidarity.
He warned that the global economy, despite or because of years of QE, ZIRP, and NIRP, is dogged by a “weak global outlook” and “sluggishness of global demand”:
The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium. For the past seven years, growth has serially disappointed – sometimes spectacularly, as in the depths of the global financial and euro crises; more often than not grindingly as past debts weigh on activity
It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change and productivity growth.
Then he defended “monetary stimulus” and the great things it has accomplished since the Financial Crisis. So the economic results are crummy. But hey, it’s the governments’ fault, he said: “Global growth has disappointed because the innovation and ambition of global monetary policy has not been matched by structural measures.”
He has a theory about why the markets swooned: “Necessary changes in the stance of monetary policy removed the complacent assumption that “all bad news is good news” (because it brought renewed stimulus) that many felt underpinned markets.”
But these low interest rates have a cost: they’re “bringing forward demand to today from tomorrow.” And “having brought forward demand for years, tomorrow is now yesterday.”
So they front-loaded consumption and a jump in asset prices – the “wealth effect.” What’s left behind is a pile of debt.
However, the effect of QE on the wealth channel cannot last forever. Monetary neutrality means real asset prices are not boosted indefinitely by such policies; their economic effects must ultimately unwind.
Said differently, unless an improvement in fundamentals boosts the underlying cash flows of these assets, real valuations will fall back.
But NIRP can’t solve the problem. Already, in countries that together produce about a quarter of global output, “policy rates are literally through the floor.” And yet, financial markets have plunged, and banks are in trouble.
However, it is critical that stimulus measures are structured to boost domestic demand, particularly from sectors of the economy with healthy balance sheets. There are limits to the extent to which negative rates can achieve this.
For example, banks might not pass negative policy rates fully through to their retail customers, shutting off the cash flow and credit channels and thereby limiting the boost to domestic demand. That is associated with a commonly expressed concern that negative rates reduce banks’ profitability.
So negative interest rates are effective in only one way: via the exchange rate – or as he says, “via beggar-thy-neighbor” – which might be “an attractive route to boost activity” for an individual country. “But for the world as a whole,” this “transfer of demand weakness elsewhere is ultimately a zero sum game.
Even that might not work anymore as the yen has jumped since the BOJ introduced negative deposit rates!
As this zero-sum-game pushes savings into the global markets, global equilibrium rates decline even more, “pulling the global economy closer to a liquidity trap.” Because…
At the global zero bound, there is no free lunch.
For monetary easing to work at a global level it cannot rely on simply moving scarce demand from one country to another.
And it doesn’t take a genius to recognize that a prolonged period of low interest rates can lead to a build-up of vulnerabilities which could derail an expansion and deepen a subsequent recession.
The NIRP absurdity is jackhammering into the foundation of the global economy that has already been damaged by the distortions caused by years of QE and zero-interest-rate policies. Even among central banks enamored with “unconventional monetary policies,” NIRP is starting to raise some ugly questions that seem to reduce their appetite for it.
The fact that megabanks, the very entities central banks coddle and protect at all costs, are wheezing and begging for mercy is likely giving central bankers the willies. Even at the Fed, where NIRP keeps popping up, the discussion is marked by a definite lack of enthusiasm for what might turn out to be one of the most toxic policies ever – not just for savers, bondholders, and stockholders, or the entire economy, but for banks!
“Distress” in bonds is spiraling into Financial Crisis conditions. Read… Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained”