When even Nelly cannot “make it rain”

Does any reasonable person believe the lack of economic expansion is being constrained by the present cost of borrowing? Ten year government bonds in Germany (European benchmark) yield negative 0.05%, Japan is below the water line at negative 0.245% and the US checks in around 1.56%. Presumably market participants are buying these bonds because they cannot find adequate investments yielding an after risk adjusted return greater than 0%.

“In the long run, we’re all dead” quipped Lord Keynes. Mr. Keynes is noted as the architect of our present economic framework. Hardly inspiring to know Keynes is dead, yet we’re living in his economic Petri dish. I would argue it has become the prevailing economic thought because this philosophy provides politicians “theoretical cover” to conduct infinite stimulus.

The signals are omnipresent- lack of growth, central bankers approaching monetary policy like a whimsical experiment, widening wealth gaps, currency devaluation presented as the foremost solution, among other examples.

What needs to be explicitly stated heretofore unrecognized by major media — central bankers are part of the problem. They are unable to solve all that ails and expanding their scope introduces tremendous financial risks.

Let’s quickly examine the latest thought experiment with negative interest rates. Negative interest rates will NOT help economic growth and it will rob you of savings and economic liberty.

What’s not yet acknowledged by most in this grand experiment is the negative feedback loop. The course that’s been set is a fight to the bottom. Let’s look at the sequence of events:

  • Global central banks react to slow growth by purchasing bonds issued from their governments. Consequently, interest rates fall.
  • With central banks buying government debt, without perceived consequence to rising rates, governments issue more debt.
  • As growth stalls and banks become reluctant to lend, central banks begin charging banks for deposits held, thus encouraging the banks to lend.
  • Banks respond by taking more credit risk (read: bad loans),
  • And/or, banks respond by increasing fees on commercial and retail accounts or passing along the cost of negative rates to you.
  • Marginal increase in credit no longer produces a respective economic gain,
  • Loans made to risky borrowers is not repaid.
  • Low rates over an extended time penalizes insurance companies, pensions, savers and retirees among others.
  • For pensions, low rates increase the strain as lower rates require more upfront cash for funding pensions that governments do not have. Consequently the debt burden grows, taxes are increased or expenses trimmed (programs eliminated and employees fired).
  • If you believe capital comes from savings and not debt like I do, then savers (capital providers) sit on the sidelines or take unnecessary risks that impair capital and future investment. All growth constraining.

Consider the next recession. Businesses fail and unemployment rises. Enter stage left — pitchforks and torches. Congress demands that something MUST BE DONE, but proceeds to push “more of the same.” Thus creating poorly allocated government directed stimulus plans leading to a greater debt burden and Central Banks supporting dubious public and private financing structures with bond purchases, guarantees, negative interest rates, an assortment of complex transactions (e.g. repo agreements) and yet unknown levers.

Can the game go on forever? I must ask, given the current path, at what point does this become silly? Is a -5% interest rate silly? What about constant currency devaluation to maintain global competitiveness? $50 Trillion in debt, is that too much? In an environment heading in this direction, how do I protect my ASSets? In the present war on cash, what is the true value of my labor worth?

If you believe we’re moving unabated in this direction, then you have no choice but to grow your financial education.