Submitted by Matthew Borin via CFA Institute blog,
Negative interest rates are unsustainable and once investors decide to stop paying for the privilege of holding government debt, a banking crisis could result, says James Grant.
The founder of Grant’s Interest Rate Observer was one of several speakers at the New York Society of Security Analysts (NYSSA)’ Annual Benjamin Graham Conference to remark on the ramifications of unprecedented loose monetary policy.
Historic Lows
Central banks are treading in uncharted waters. Sidney Homer and Richard Sylla, the authors of A History of Interest Rates, found no instance of negative rates in 5,000 years. Now there are $11.7 trillion invested in negative-yield sovereign debt, including $7.9 trillion in Japanese government bonds and over $1 trillion in both French and German sovereign debt.
Grant posed a tongue-in-cheek question: “If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC?”
This is not a bad economy by most measures. Household wealth in the United States has grown steadily since the Great Recession. If these gains were the result of greater productivity, interest rates would not need to stay at historic lows. Grant says they are “a sign of someone’s thumb on the currency.” Negative rates are propping up risk assets. He critiqued US Federal Reserve chair Janet Yellen’s touting of the bull market in equities as a sign of prosperity by alluding to Brexit voters.
“Asset prices have failed to pacify the world’s unprofitable voters,” Grant said.
Continue reading “James Grant: Negative Interest Rates Will End… Badly”
