he headline on page 4 of my US print edition of the financial times read, Japan debates how to use negative rates windfall. The article highlights the perverse outcome from a government setting negative interest rates. Borrowers are paid, in effect, to borrow. And governments are the largest borrowers. And so the largest borrowers gain the biggest kickback for going further into debt! What a fiasco.
The intent of course is to encourage investment and spending. The problem is that firms have not responded to quantitative easing (QE), as it’s called. Research suggests that firms develop their investment patterns based on things like competitive strategy and overall economic climate. Firms have not responded to cheap money the way central bank’s wanted them too. That is, other than to use cheap cash to fund stock buy-backs, which elevates EPS that pay bosses bonuses, and increased mergers and acquisitions. In both cases such investments have nothing to do with economic or productive growth. QE has failed in this respect. Now the latest result will be increased public debt.
And such debt will become crippling as rates start their journey toward normalization, if they ever get there. With significant debt and growing (positive) interest rates goes higher and higher debt service payments. This will eat into any tax income from growth, leaving less for big brother to spend as economies start to grow again. So our leaders are playing with a double edged sword.
Our profligate, ‘we know best’ leaders are now going to print themselves more money to reward their abusive behavior. And we can’t stop it. In fact we must not. The whole point of negative interest rates comes down to this perverse behavior. To not complete this foul circle would be silly.
The reality is that these policies have not worked. Soon enough a leader will get voted in, someplace, that is so anti-establishment. That leader will defy all ‘normal’ rules of the day and upset the apple cart. In so doing this leader will help right the mess we are now in. I wonder who is silly enough to run for office and try this? I wonder….