On Friday there was an interesting article in the printed edition of the US Financial Times. It was written by Claire Jones in Frankfurt: Below Zero – Policymakers find Negative Rages Cuts Both Ways. As you can tell the article looks at the implication of negative interest rates. One impact is that such rates have led to banks eating into the margins as they have, so far, not passed onto their customers (us, the consumer) the cost of saving money. I suspect that is soon to come, however.
But the really interesting point in the article is this: the very purchasing by the Fed and other central banks of government bonds, with the goal of depressing long term rates under the auspices of quantitative easing, has squeezes out the private sectors appetite for the same assets. As the article says, “Bank borrow short and lend long. Yet other extreme monetary policies, such as the purchase of government bonds under quantitative easing, have lowered longer-term rates for businesses and households. That limits opportunities for banks to charge higher rates to their customers, or build profits by buying riskier assets.”
It’s the last sentence that is quite simply breathtaking in its simplicity and consequence. We may have started quantitative tightening but we still operate at the extreme end of being quantitatively eased. There are trillions of dollars on the Fed’s balance sheet that need to be sold, if the free market for bonds is to operate normally again. The Fed has played matchmaker and right now banks are stuck between a rock and a hard place. The Fed has backed the wrong horse by raising rates and not signaling to sell its balance sheet assets. Both choices lead to a depressed stock market and even a weaker dollar – not a bad thing if signaled and orchestrated. And that’s the other problem. The central banks around the world are not coordinating their actions. They are locked in a beggar-thy-neighbor race to the bottom for setting currency levels driven by interest rates changes, in a selfish attempt to drive exports and inflation.
If this were a party game, we would all be at each others’ throats. It’s pretty close to that now.