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…