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 stockcharts.com)

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 stockcharts.com)

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.

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