Negative interest rates brought negative moves. Global markets are in turmoil. Gold rallied from the dead after three years in the wilderness with its best start in more than 30 years. Gold is up 19 percent this year as risk adverse investors sought safe havens over the angst of a slowing global economy despite the printing of trillions to bring near zero interest rates, then zero and now negative rates. Markets are concerned that the round of negative interest rates means central banks have exhausted their options and there is growing skepticism that it won’t be enough to revive the global economy. The Federal Reserve put on hold any move to increase rates after its miniscule 0.25 percent increase was met with collapsing markets and a weakened greenback. The dollar too has peaked because of concerns about America’s faltering economy and doubts they can raise rates again, particularly in an election year.
Negative interest rates last seen in the Great Depression, has turned the world topsy-turvy with everyone paying for the privilege to save and borrowers, paid for borrowing. But why should one pay a penalty to leave their savings in the bank, when they could always keep it under the mattress? Cars alone are now financed with low or zero-interest loans and like the subprime days, a trillion dollars were packaged into five year paper but 60 day delinquency rates are at the highest level in two decades. It is not the level of rates that is worrisome, it is lack of confidence in money and what the central banks are doing. Paper money is simply dying.
Since 2008 our politicians have left the tough stick handling to our central banks. Fiscal policies were absent. The G20 meeting in Shanghai ended in failure. America, seems stuck at two percent growth while the oil sector has put a dent in the world’s economy. Moreover, US policymakers are stuck in election mode and no one can make the courageous decisions. China, now the world’s second largest economy still grows but not enough it seems to pull the rest of the world along. And, China’s foreign exchange reserves have been falling as it dips into its massive reserves to cushion a declining renminbi, an extension of the “stealth currency war” where countries depreciate their currencies to help exports. Running out of ammunition, we believe the adoption of negative interest rates is an extension of this “beggar thy neighbour“ currency war which moves the problem from one country to another.
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