Central Bank Experiment with Negative Interest Rates Not Working – Negative Wage-Price Spiral Forming

You have to realize that even though several central banks have taken their overnight or interbank rates negative (e.g. Japan, Euro-zone, others etc.) the actual interest rates to commercial and personal sectors remains positive or zero.  Real interest rates for you or I are not negative.  You then have to understand the point of negative interest rates is to help spur growth.  If it costs money to park excess funds with a bank, surely you would prefer to deploy the money and build something or invest in some initiative?  Wrong.  A report on the front page of the US print edition of the Financial Times (see Japan’s negative interest rates backfire amid Union climb down on pay claim) explains the perverse unintended consequences of negative rebates on wage demands. A union in Japan has just jettisoned its demands for a wage increase.  As such the very need for inflation is undermined and so deflation will again be the talk of the town.  We are seeing the formation of a negative wage-price spiral in that prices fall, and so wages fall, and so on.  Economists have been very much aware of the usual and positive wage-price spiral.  We are seeing the evil twin emerge before our very eyes.

And if that was not enough, other stories point to the fact that the market is expecting the ECB to further deepen their own negative interest rates.  Hang on folks, it’s gonna be a bumpy ride.


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