I had a conversation with a friend today and the comment arose about negative interest rates – I explained that they were a negative for a reason but the impact is bizarre in that the Banks will pay you to borrow money.
He was shocked – in fact dumbfounded – a real WTF moment – so that it could register.
I needed to explain that variable rate loans for example are tied to a central point – as an example the well known London Interbank Offer Rate (LIBOR). The loan rate may be fixed at say 2 percent above LIBOR and this rate adjusted on a monthly basis.
If rates go negative – let us say for example 5 percent – then that would equate to the borrower receiving 3 percent interest being paid by the bank.
Silence – stunned silence.
The stupidity of the situation is that the purpose of negative interest rates are being pushed so low in Europe – in fact, in the negative territory – so that some banks are paying borrowers to take loans – yes from Denmark to Switzerland some borrowers are very happy.
If you read the prior article on this blog about Quantitative Easing then you will be aware of its purpose – the ‘cash-strapped’ governments in Europe are paying almost nothing to borrow money by selling their sovereign bonds.
That’s helping bolster their finances – the intention was that businesses would be paying very little to borrow – so they can invest and expand at little cost with the vain hope of increasing employment.
The flow on would be that savers are finding it doesn’t pay much to save money by depositing it in the bank or putting it in a money fund, so they ‘may’ be more inclined to spend it – and help boost economic growth.
All of this ‘Modern Monetary Theory’ has no empirical evidence to support the alleged efficacy of this proposition – and much to the contrary – It should come as no surprise that it doesn’t work as advertised – and no surprise that the conflicted practitioners of dogmatic interventionism don’t care whether it works for society or not.
It works for them personally – as a means to an end – lower the value of the currency – deflate the value of the currency to defer investors – in the vain hope of stimulating domestic economy.
On a prior article I indicated that the Eurozone was in deflation – Quantitive Easing (QE) and low or negative interest rates will have this affect – principally due to the ‘confidence’ of the consumer.
These policies hurt savers – whilst the desire is to force consumers to spend the contrary indicators – are that debt is being repaid.
This action or reaction to the stupidity of the situation is no more evident in the commercial arena than the losses posted by Deutsche Bank and Credit Suisse. Please note that I have only read the headlines of the losses and capital raising a but it does not surprise me – in view of the deflation factor on assets (bonds) and currencies.
A report issued by Bank of America supports this prognosis – please note that my comments are in italics – in that it states
“The easing bias of central banks in Europe over the last week has exacerbated the shortage of positive-yielding assets. Negative-yielding government debt in the Eurozone has jumped from €2tr to €2.6tr over the last week and now stands at a record high. The previous peak in negative-yielding government debt was €2.4tr, reached in April this year prior to the “Bundshock” – I highlighted this in an April article – in that smart money is seeking short term liquidity (cash) – thereby creating volatility in the Bond markets.“
Charts courtesy of Bloomberg
“The problem of low inflation remains evident. Swiss inflation has collapsed into very negative territory, albeit precipitated by the SNB abandoning their currency peg earlier in the year. While Danish inflation has moved away from zero post big rate cuts in 2015, it is still hovering at just 0.5%. And Swedish inflation has been stuck around zero since early 2013. The Eurozone itself is in deflation.
Charts courtesy of BoA
“The problem of low inflation remains evident. Swiss inflation has collapsed into very negative territory, albeit precipitated by the SNB abandoning their currency peg earlier in the year. While Danish inflation has moved away from zero post big rate cuts in 2015, it is still hovering at just 0.5%. And Swedish inflation has been stuck around zero since early 2013.”
Charts courtesy of BoA
“Yet, household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”
Charts courtesy of BoA
“For now, negative rates as a policy tool remain a “work in progress”, judging by the current inflation levels across Europe. But the rise in household savings rates amid so much central bank support is paradoxical to us, and mimics what we highlighted in the credit market earlier this year. Companies in Europe are deleveraging, not releveraging, and are buying back bonds not stock.”
Despite NIRP, therefore, “animal spirits” across companies and consumers in Europe have yet to be stirred.
Animal spirits from my point of view is greed – if one looks at the US Equity Markets over the past several months the majority of capital raising by these listed public companies is not for productive assets but for ‘share buy-backs’.
Using cheap funds to buy back – or maintain – or increase a share price. This from my point of view is a simple statement of the incompetence of the CEO’s that run these companies.
It is in their interests to maintain or increase the share price rather than increase internal performance of the company.
History shows us that the last massive borrowing and share buyback practices were prior to the 2008 financial crisis.
Empirical evidence on QE and negative interest rates is now in – the problem though is who will be inclined to read history to understand the shortcomings of this inane theory?