Negative Rates, Plunging Yields and a “Fix” for the Economy, by Mike Whitney

Very interesting article by Mike Whitney, an acquaintance of mine. I do not understand economics very well, but some of you may understand it better than I do. Anyway, I think the diagnosis, etiology and treatment are correct.

Negative Rates, Plunging Yields and a “Fix” for the Economy

By Mike Whitney
Global Research, June 17, 2016
CounterPunch

On Tuesday, the 10-year German bund slipped into the bizarro-world of negative rates where lenders actually pay the government to borrow their money. Aside from turning capitalism on its head, negative rates illustrate the muddled thinking of central bankers who continue to believe they can spur growth by reducing the cost of cash. Regrettably, the evidence suggests otherwise.

At present, there is more than $10 trillion of government sovereign debt with negative rates,  but no sign of a credit expansion anywhere. Also, global GDP has slowed to a crawl indicating that negative rates are not having any meaningful impact on growth. So if negative rates are really as great as central bankers seem to think, it certainly doesn’t show up in the data.  Here’s how the editors of the Wall Street Journal summed it up:

“Negative interest rates reflect a lack of confidence in options for private investment. They also discourage savings that can be invested in profitable ventures. A negative 10-year bond is less a sign of monetary wizardry than of economic policy failure.”

(“Money for Nothing,” Wall Street Journal)

Bingo. Negative rates merely underscore the fact that policymakers are clueless when it comes to fixing the economy. They’re a sign of desperation.

In the last two weeks, long-term bond yields have been falling at a record pace. The looming prospect of a “Brexit”  (that the UK will vote to leave the EU in an upcoming June 23 referendum) has investors piling into risk-free government debt like mad. The downward pressure on  yields has pushed the price of US Treasuries and German bund through the roof while signs of stress have lifted the “fear gauge” (VIX)  back into the red zone. Here’s brief recap from Bloomberg:

Today’s bond market is defying just about every comparison known to man.

Never before have traders paid so much to own trillions of dollars in debt and gotten so little in return. Jack Malvey, one of the most-respected figures in the bond market, went back as far as 1871 and couldn’t find a time when global yields were even close to today’s lows. Bill Gross went even further, tweeting that they’re now the lowest in “500 years of recorded history.”

Lackluster global growth, negative interest rates and extraordinary buying from central banks have all kept government debt in demand, even as yields on more than $8 trillion of the bonds dip below zero.”….

The odds of the U.S. entering a recession over the next year is now the highest since the current expansion began seven years ago, according to JPMorgan Chase & Co. The Organisation for Economic Cooperation and Development also warned this month the global economy is slipping into a self-fulfilling “low-growth trap.” What’s more, Britain’s vote on whether to leave the European Union this month has been a major source of market jitters.”

“Most Expensive Bond Market in History Has Come Unhinged. Or Not,” Bloomberg

There are a number of factors effecting bond yields:

Fear, that a Brexit could lead to more market turbulence and perhaps another financial crisis.

Pessimism, that the outlook for growth will stay dim for the foreseeable future keeping the demand for credit weak..

And lack of confidence, that policymakers will be able to reach their target inflation rate of 2 percent as long as wages and personal consumption remain flat.

All of these have fueled the flight to safety that has put pressure on yields. But the primary cause of the droopy yields is central bank meddling,  particularly QE, which has dramatically distorted prices by reducing the supply of UST’s by more than $2.5 trillion in the US alone. David Stockman gives a good rundown of what’s really going on in an incendiary post titled Bubble News From The Nosebleed Section.  Here’s a clip:

…One of the enduring myths of Bubble Finance is that bond yields have plunged to the zero bound and below because of “lowflation” and  slumping global growth. Supposedly, the market is “pricing-in” the specter of deflation. No it isn’t. Their insuperable arrogance to the contrary notwithstanding, the central banks have not abolished the law of supply and demand.

What they have done instead is jam their big fat thumbs on the market’s pricing equation, thereby adding massive girth to the demand side of the ledger by sheer dint of running their printing pressers white hot. Indeed, what got “priced-in” to the great global bond bubble is $19 trillion worth of central bank bond purchases since the mid-1990s that were funded with cash conjured from thin air.”

Bubble News from the Nosebleed Section,” David Stockman’s Contra Corner

Central banks have never intervened in the operation of the markets to the extent they have in the last seven years. The amount of liquidity they’ve poured into the system has so thoroughly distorted prices that its no longer possible to make reasonable judgments based on past performance or outdated models. It’s a brave new world, and even the Fed is uncertain of how to proceed.

Take for example the Fed’s stated goal of “normalizing” rates. Think about what that means. It is a tacit admission that the that the Fed’s seven-year intervention has screwed things up so badly that it will take a monumental effort to restore the markets to their original condition. Needless to say, whenever Yellen mentions “normalization,” stocks fall off a cliff as traders wisely figure the Fed is thinking about raising rates. Here’s Bloomberg again:

Last year, inflation in developed economies slowed to 0.4 percent and is forecast to reach just 1 percent in 2016 — half the 2 percent rate most major central banks target, data compiled by Bloomberg show.

So what Bloomberg and the other elitist media would like us to believe is that these highly-educated economists and financial gurus at the central banks still can’t figure out how to generate simple inflation. Is that what we’re supposed to believe?

Nonsense.

If Obama rehired the 500,000 public sector employees who got their pink slips during the recession, then we’d have positive inflation in no-time-flat. But the bigwigs don’t want that. They don’t want full employment or higher wages or workers to a bigger share in the gains in production. What they want, is a permanently-hobbled economy that barely grows at 2 percent, so they can continue to borrow cheaply in the bond market and use the proceeds to buy back their own shares or issue dividends with the money they just stole from Mom and Pop investors. That’s what they really want.

And that’s why Krugman and Summers and the other Ivy League toadies concocted their wacko “Secular Stagnation” theory. It’s an attempt to create an economic justification for continuing the same policies into perpetuity.

So what can be done? Is there a way to turn this train around and put the economy back on the road to recovery?

Sure. While the political issues are pretty thorny, the economic ones are fairly straightforward. What’s needed is more bigger deficits, more fiscal stimulus and more government spending. That’s the ticket. Here’s a clip from an article in VOX that sums it up perfectly:

But if the exact cause of the bond boom is a little unclear, the right course of action is really pretty obvious: If the international financial community wants to lend money this cheaply, governments should borrow money and put it to good use. Ideally that would mean spending it on infrastructure projects that are large, expensive, and useful — the kind of thing that will pay dividends for decades to come but that under ordinary times you might shy away from taking on…

The opportunity to borrow this cheaply (probably) won’t last forever, and countries that boost their deficits will (probably) have to reverse course, but while it lasts everyone could be enjoying a better life instead of pointless austerity.

Financial markets are begging the US, Europe, and Japan to run bigger deficits,” VOX.

That’s great advice, and there’s no reason not to follow up on it. The author is right, these rates aren’t going to last forever. We might as well put them to good use by putting people back to work, raising wages,  shoring up the defunct welfare system, rebuilding dilapidated bridges and roads, expanding green energy programs, increasing funding for education,  health care, retirement etc. These are all programs that get money circulating through the system fast. They boost growth, raise living standards, and build a better society.

Fixing the economy is the easy part. It’s the politics that are tough.

6 Comments

Filed under Asia, Britain, Capitalism, Democrats, Economics, Europe, Germany, Government, Japan, Labor, Obama, Politics, Regional, US Politics, USA

6 responses to “Negative Rates, Plunging Yields and a “Fix” for the Economy, by Mike Whitney

  1. Another William Playfair Web

    http://www.investopedia.com/terms/n/negative-interest-rate-policy-nirp.asp

    This is perhaps a solution to the fundamental, existential problem with laisize fare capitalism- that the big whigs, when earning increased amounts of money- merely sit on their money, not causing it to “trickle down”.

    This is really quite an interesting idea, and although of course there are the obvious detriments of the central Bank losing investment- the increased revenue, and some of interest rate payments themselves should compensate (which I suppose is similar to the concept of bonds, and could cause perhaps their collapse).

    “If Obama rehired the 500,000 public sector employees who got their pink slips during the recession, then we’d have positive inflation in no-time-flat. But the bigwigs don’t want that. They don’t want full employment or higher wages or workers to a bigger share in the gains in production. What they want, is a permanently-hobbled economy that barely grows at 2 percent, so they can continue to borrow cheaply in the bond market and use the proceeds to buy back their own shares or issue dividends with the money they just stole from Mom and Pop investors. That’s what they really want.”

    That was absolutely correct, Robert.

  2. Jason Y

    Some economists and one was featured in a video advertised by Ron Paul are predicting another financial collapse soon. Note one of these economists predicted the fall in 2008.

  3. TJF

    To Rob:

    If Obama rehired the 500,000 public sector employees who got their pink slips during the recession, then we’d have positive inflation in no-time-flat.

    There are actually slightly more Federal employees now than in 2007:
    https://www.opm.gov/policy-data-oversight/data-analysis-documentation/federal-employment-reports/historical-tables/total-government-employment-since-1962/

    So I don’t see where the 500,000 figure comes from unless the author is referring to hiring state and local employees which President Obama has no control over.

    There is something to be said for funding local infrastructure projects, especially with a green bent (Build and repair commuter and long distance passenger rail for instance) but these projects generally take years to plan and get local waivers for construction.

    If we took a step back from globalization (place tariffs on goods made externally and other incentives for manufacturing to come back to the US) and ease back on legal and illegal immigrant labor we would see a marked increase in wages for the working class and hey maybe even dream of unions with teeth. But yes the bigwigs most assuredly don’t want that.

    • Another William Playfair Web

      It would probably have to be a super high protectionist tariff to get companies to come back.
      I think at that point prices would sky rocket, without really growing the sectors/companies (they already largely existed in the U.S, kept their assets in the U.S., etc.) but I’m not sure.
      The future of the U.S. is highly skilled things, which are not effectively outsourced to India, SE Asia, etc. As much as it pains to me to say this about my Asians (and of course, it would take easing up, it wouldn’t work at first) we need to really take care of H1B visas more than low-skilled illegals.

      • Jason Y

        True, actually the poor benefit from cheap prices at Wal Mart and dollar stores.

        • Another William Playfair Web

          I think, although it was bad that we had to globalize in the manner we did, the ship has largely sailed. We’re going to need Highly, highly skilled workers for jobs even in industry, that can’t be done in the Far East and Latin America.

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