Negative interest rates are a calamitous misadventure
When the debt-laden world faces the next global downturn, it will need the full power of helicopter money, not interest rate gimmicks
The world's central banks should take a deep breath and step back from the calamitous misadventure of negative interest rates.
Whatever theoretical profit can be mined from this thin seam, it is entirely overwhelmed by the slow ruin of the banking system.
Huw Van Steenis, from Morgan Stanley, calls negative rates (NIRP) a "dangerous experiment" that undermines the mechanism of quantitative easing rather than reinforcing it, and ultimately induces banks to shrink their loan books - the exact opposite of what is intended.
The market verdict on the Bank of Japan and the European Central Bank speaks for itself. Bank equities have crashed by 32pc in Japan and by 26pc in the eurozone since early December.
"Financial markets increasingly view these experimental moves as desperate," said Scott Mather, from the giant bond fund Pimco.
The policy blunder is creating a false fear that central banks have run out ammunition. It is distracting attention from the real failings of the global policy regime: lack of willingness to launch a New Deal and inject money directly into the veins of the real economy through fiscal stimulus when needed, and arguably to do so with turbo-charged effect through central bank transfers rather than debt issuance.
Narayana Kocherlakota, ex-head of the Minneapolis Federal Reserve, reluctantly backs NIRP as deep as -3pc but calls it a "gigantic fiscal policy failure" that central banks must resort to such absurdities.
Roughly $7 trillion of debt is trading at negative rates. Western states can borrow for next to nothing until the 2030s, yet they refuse to repair their crumbling infrastructure and invest in their future dynamism from fear of fiscal deficits.
Mr Kocherlakota wants it done by old-fashioned borrowing. If you are worried about high debt ratios it can equally be done by "helicopter money", a plan proposed by Adair (Lord) Turner at a forum of the International Monetary Fund in November.
Let me be clear, I think the market ructions of recent weeks are a false alarm. We are not on the cusp of a global recession, and it is a first-order fallacy to suppose that a glut of cheap oil is bad for growth. The Atlanta Fed's instant tracker of US growth for the first quarter has jumped to 2.7pc. China's broad credit to the real economy reached a 33-month high of 14.6pc in January.
Global recessions typically begin when the world economy is running at 2pc above its natural speed limit, as you can see from the Pimco chart below. This forces the authorities to jam on the brakes to prevent overheating. We are nowhere near this level today. IMF data suggest that the global "output gap" is -1.2pc, leaving masses of headroom.
Yet this year's tremor is a foretaste of what to expect when the current global cycle really does sputter out - perhaps in 2017 - and we face the post-QE reckoning and the end of the China bubble with worldwide debt levels some 36pc of GDP higher than during the Lehman boom. Historically, it takes 300 to 500 basis points of rate cuts to break the fall once a global recession sets in, and that we do not have.
The Bank of Japan and the ECB appear determined to double down with even deeper negative rates over coming weeks, even though critics warn that NIRP is entrenching the deflation-trap by pulling down long-term bond yields and jamming the signalling system of financial markets.
They have already pulled away the trap floor on long-term bond rates, inadvertently causing a fresh rush into these safe-haven assets as funds sniff the prospect of much lower yields. Japan's 10-year rates fell below zero last week. This is hardly the way to arrest the deflation psychology of the Japanese people.Recently:
The distortions are now grotesque. The one-year euribor rate used in Spain to price floating mortgages (98pc of the total) is -0.012pc. This eats up the net interest margins of banks since they dare not charge depositors a fee, not yet at least. "It's not healthy, it's not sustainable, it's mad," said José María Roldán, head of the Spanish Banking Association....MORE
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That gets us back to January 20.