NEGATIVE INTEREST RATES

NEGATIVE INTEREST RATES –

THERE’S A GATHERING STORM IN THE GLOBAL ECONOMY AND CENTRAL BANKS ARE RUNNING OUT OF OPTIONS

 

The Bank for International Settlements (BIS), known as the central banks’ central bank, is warning there is a “gathering storm” in the global economy, in part caused by governments around the world running out of monetary policy options.

The ability to raise or lower interest rates is the way governments, through their central banks, heat up or cool down economies. The lower the interest rate the easier it is to borrow money which helps expand an economy. Rates have been at zero for years now with no effect so numerous central banks are resorting to charging negative interest rates. Five central banks; Denmark, the Eurozone, Sweden, Switzerland, and Japan now have negative rates. Negative rates could become a reality for more and more countries.

Negative rates are the central banks way of saying to banks, “we don’t want your money. We want you to lend it out to consumers.” The problem is that having to pay to deposit funds with the central bank seriously affects the profitability of banks.

“The current environment for European banks is very, very bad.”

 – Peter Gamry, Head Equity Strategist at Saxo Bank

 

Investors are dumping shares of bank stocks touted as one of the best investment ideas just a few months ago.

Bottom line, declaring negative interest rates is a move of desperation. It is the Central Bank saying, “we don’t know what else to do to get the economy growing.” Like so much else these days, no one knows how this will turn out because it has never been tried before.

BIS chief Claudi Borio said in notes published Sunday;

The tension between the market’s tranquility produced by the easy money policy of central banks and the underlying economic vulnerabilities had to be resolved at some point. With the new year off to a turbulent start with one of the worst market sell offs since the financial crisis, we are witnessing the beginning of its resolution.

Will Negative rates come to the United States?

“We’re taking a look at them . . . I wouldn’t take those off the table,” Federal Reserve chair Janet Yellen said Thursday at a congressional hearing. Yellen also stressed that the US economy would have to get much worse before the Fed would contemplate such a move.

To be clear, regular investors are not being charged for saving their money, only banks. However, if you remember from the financial crisis of 2008, banks are important enough to our way of life that taxpayers had to bail them out. Anything that affects their viability, which negative rates could, is cause for anxiety.

Asset manager, Pimco, warned in a new report of “unknown consequences” and an apparent “chilling effect” on financial markets.

 

 

OTHER CLOUDS ON THE GLOBAL HORIZON ARE THE POSSIBLE EXIT FROM THE EUROZONE BY BRITAIN AND THE COLLAPSE OF THE WORLDWIDE SHIPPING TRADE.

The referendum on Britain’s membership in the European Economic Community has been called for June 23rd. If Britain exits the EEU the political and financial fallout for a Europe already destabilized by the influx of immigrants and weak economies could be disastrous. The EEU is the second largest economy in the world with a GDP of $14.3 trillion. If it stumbles, the world stumbles. The US economy depends greatly on European demand for our products. A contracting China is not going to be able to take up the slack.

Another sign of how the tectonic plates of the global economy are shifting is something called the Baltic Dry Index. This index measures the cost of shipping raw materials like coal, metal or fertilizers around the world. The higher the index the more demand for the products and ergo economic growth.

In 2010 the index was at 4000. In January it had fallen to an historic low of 400. The shipping industry is quite literally, stranded. It costs $8000 per day to operate a vessel but demand for product is so low operators are being reimbursed at $5000 per day. The international trade system is grinding to a halt.

Clarkson, the worlds’ largest shipbroker, has struck an intensely gloomy tone over the outlook for shipping markets, warning of “unprecedented challenges” with “no end in sight.”

While the flow of finance, goods, and services has slowed; the flow of digital information has increased. Whether that translates into economic growth remains to be seen.

Douglas Lippoldt, a senior trade economist with the bank HBSC says that since the global crisis, trade has lost two of its biggest drivers;

“In normal times it takes at least two cylinders to be firing;you need consumers and you need investors. So far we haven’t seen either.”

 

The Bankers are done. Now it’s up to Governments

The good news is that plenty of policies are left. The bad news is that central banks will need the help of governments. Until now, central bankers have had to do all of the heavy lifting because politicians have been shamefully reluctant to bite the hand that feeds them (i.e. corporations) or institutionally incapable of uniting around new policies.

 “If politicians fail to act now, while they still have time, a full blown crisis in markets will force action upon them. The greatest fear is that falling markets and stagnant economies hand political power to the populists who have grown strong upon the back of the crisis of 2008. Behind the worry that the central banks can no longer exert control is an even deeper fear. It is that liberal, centrist politicians are not up to the job.”

 – The Economist, February 20, 2016

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