Category Archives: The Economy

Negative interest rates: Playing with economic antimatter

In particle physics, antimatter encounters between particles and antiparticles leads to mutual annihilation. In economics encounters between investors asset and negative interest rates leads the annihilation of wealth.

Today we see some $2 trillion in German government bonds with maturities less than 10 years now yields below zero. As strange as this may appear is not a unique phenomenon as Bank of Japan’s $5 trillion of debt securities also have negative yields and soon the European Central Bank will begin offering a trillion-euro bonds that could yields a -0.2% or more.

us treasury note  interest rate 2013 to 2015

Yield on the US 10 year treasury note (from

Such actions are negatively influencing US Treasury yields as seen with the 10-year note and its decrease in yield of 2.24% just five weeks ago to a yield of 1.9% today. These money destruction yields reflects the decisions by the Japanese and European central banks to mimic the US Federal Reserve quantitative easing program and both push investors into riskier asset classes such as high-yield corporate bonds or stocks and a hope of artificially inflate their moribund economies. The danger from  negative interest rate policies is  the serious risk of deflation. In modern economies and with their fiat currencies deflation increases the real value of foreign debt and often precipitates recession or increases recession severity.

us dollar index

US dollar index (from

Added to this “economic matter: antimatter” mix is the massive borrowing in US dollars from companies in China or other emerging economies in Asia and South America while the Federal Reserve was employing their quantitative easing programs and the dollar was “cheap”. In fact non-U.S. borrowers increased their dollar indebtedness to nearly $9 trillion from $6 trillion (data from the Bank of International Settlements). As the Bank of Japan and the European Central Bank lowered interest rates to below zero, this has pushed the US dollar higher and “dollar debtors” are struggling to pay back their high-priced US dollar loans with falling currency-priced revenues. A similar scenario occurred just prior to the 1997 in the Asian financial crisis as countries acquired too much foreign debt. Many economists believe that the Asian crisis was created by policies that distorted incentives within the lender–borrower relationship. The highly leveraged economic climate was unsustainable level as asset (currency) prices eventually began to collapse and cause individuals and companies to default on their debt obligations.
Take home message:
Today, with the US dollar already strong, any change in US interest rates by the Federal Reserve would place China and other emerging economies burdened with too much US dollar denominated debt into a “lose-lose situation” of both hiking interest rates and precipitate a domestic credit crunch or keep rates in the negative and let inflation accelerate along with investor capital outflows.

Why is Current U.S. Economic Growth Slow? — Follow the Money

Following the 2008 financial crisis, U.S. economic growth has been anemic compared to prior recessions. The average growth rate  has been less than 3 percent. (1)

U.S. GDP after financial crisis of 2008

GDP growth before and after 2008 financial crisis (from ref. 2)

Follow the money

In the 1976 movie, All the President’s Men, the character Deep Throat whispered “Follow the money” to a Washington Post reporter and allow the reporter to see through the White House’s lies and deceptions and find out who was behind the Watergate burglary. To answer the economic question of why US GDP growth has been so low compared to prior recessions, we have to follow Federal Reserve money flow.

Since the financial crisis, American banks have increased their excess reserves or cash funds they hold over and above the Federal Reserve’s requirements. Excess reserves, as of January 2015 now stand at $2.6 trillion (3). Why are U.S. banks holding these excess cash reserves instead of making more loans and fulfilling the intentions of the Federal Reserve? The answer stems largely from the new Federal Reserve policies introduced after the 2008 financial crisis. Under normal economic conditions banks hold excess reserves for several reasons. First and foremost is to meet any unforeseen liquidity needs such as to make payments, service deposit withdrawals, or responding quickly to market opportunities or to make loans needing immediate action. Banks normally measure the cost of carrying reserves to the interest they would make in interest bearing accounts at another financial institution versus their cost incurred in last-minute borrowing from another banks to cover a reserve shortfall. It generally cost banks more to get cash from other banks than keep an “emergency stash of fund” that the bank could access when extra cash is needed.

What has changed since the 2008 financial crisis?

Since the financial crisis banks are required by the Federal Reserve’s Board of Governors to hold excess reserves (3). The Federal Reserve now mandates that net transactions greater than $14.5 million need to hold a 3% reserve ratio while ones over $103.6 million need to hold a 10% reserve ratio. A second reason (or incentive) in holding excess reserves is that now the Federal Reserve pays interests on all bank reserves (3). Before the 2008 crisis banks receive no interest payments on excess reserves but since December 2008, the Federal Reserve pays 25 basis points or 0.25% interest on all bank held reserves. This rate is substantially higher than what a bank could obtain in the market which is from 0.07% to 0.20%. For these reasons banks are calculating a zero risk and greater benefit to holding large reserves.

Carrot or the Stick: Banks move in the same direction

In 1936, as in today, US banks’ reserves accumulated to record levels. Federal Reserve at that time decided to reduce the flexibility of the banks’ options for using the cash by mandating an increased reserve requirement. Banks responded by dramatically reducing their loan portfolios. Today the Federal Reserve has mandate increased reserves but also used that powerful incentive of interest payments. With prime lending rates close to zero, banks easily sitting on large cash reserves  and make money at zero risk.

Although for opposite reasons, the banks of 1936 and the banks of today have move in the same direction and reduced their loan portfolios.  In 1937 the economy went in recession. We will have to wait, perhaps not long, to see the negative impact that current bank actions have played on the present economy.


1. Kirshner, J. 2014. The Global Financial Crisis: A Turning point.

2. Congressional Budget Office 2012. What Accounts for the Slow Growth of the Economy After the Recession

3. Craig, B. and Koepke, M. 2015 Excess Reserves: Oceans of Cash.