Negative Interest Rate Absurdity and How It Screws Up the Economy
Negative-yielding debt surged to over $15 trillion earlier this month. This pile of negatively-yielding paper includes government and corporate bonds, along with some euro junk bonds.
In a recent episode of the Wolf Street Report, Wolf Richter called this “NIRP absurdity.” And it could be coming to America.
Negative interest rates started out as a short-term emergency experiment during the Great Recession. Now it has turned into the new normal. How will this end?
Last week, the European Central Bank began hinting at another, “shock and awe stimulus package,” as Richter called it. In an interview with the Wall Street Journal, Finnish central bank governor Olli Rehn raised the prospect of new easing measures. He said, “It’s important that we come up with a significant and impactful policy package in September. When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”
This, of course, would be on top of the shock and awe stimulus that the ECB has already unleashed. The entire German bond market, including the 30-year, now has negative yields. And yet the German economy has contracted two out of the last four quarters, despite negative rates from the ECB and negative yields on its own government bonds.
In other words, the German economy, the fourth largest in the world, is hitting the skids despite, or because of, negative yields. And now the ECB wants to flex its muscles to get yields to become even more negative.”
And as Richter points out, there are already folks who want the same prescription for the US economy.