Buried in the Weekend section of the Financial Times is a report that the aggregate value of assets that earn negative nominal yields has substantially expanded since the beginning of 2019 and has reached a new high. So on January 1, 2019, the value of these assets was at $8.3 trillion. As of six months later it had reached $13 trillion, a more than 50 percent increase. There are fewer assets around that have negative yields than a few years ago, but the amount of money in them has grown, and the depth of some of the negative interest rates has deepened. It used to be said that -0.5 percent was a lower bound, but some Swiss franc bonds are down to -0.8 percent. The main ten year German government bond’s yield has fallen to -0.4 percent.
This reflects a general decline of interest rates around the world. This would seem to be tied to a general slowdown in the growth of the world economy. One of the most sharply shifting economies is that of Germany, in recent years the fastest growing in the EU, but apparently in negative GDP growth territory for the second quarter of 2019. This is not a good sign for the entire European economy. Of course, China has also been slowing down.
This general slowdown has spilled over into US long term interest rates, which the Fed really does not control. Indeed, for only the seventh time since 1980, the ten-year Treasury bond’s yield dipped below the federal funds rare, a more dramatic inversion of the yield curve than we have seen so far, with the US economy going into recession soon after this inversion five out of the six previous times this happened. So this is not a definite sign of recession, but it is quite understandable that the Fed is now talking lowering short term rates, and not just because Trump is shouting at them to do so.
Is there a good explanation for such a large amount held at negative nominal rates? I get that there are costs to holding large volumes of cash but surely that does not explain everything. Is it all a reach for safety or are there no investments that can be made at reasonable risk levels or …?
Yes, if capital doesn’t have anything to spend on, they won’t spend on it. Space is a great example where there is a bunch of bluster, but little action. As the recession evolves, the little action there will be exposed big time by the early 20’s, pushing back progress there.
Low interest rates is a sign of excessive capital as Steve Keen has said for 15 years. This is usually a period of disinflation/deflation. On the other hand, the late 60’s to the early 90’s was a time of capital drought. Americans just have not capitulated yet. I think that was a big part of the bailouts failure. It would have sped that up. By 1980, the American system had to change. It needs to change again.
The universe of “change” is immense. The universe of bad change is huge. The universe of worthwhile change is small.
Did you have anything specific in mind?
Economists have had amazingly little to say about this matter. The long-entrenched traditional view was that negative nominal interest rates were impossible except maybe as a very short-term fluke, and indeed the first appearances of them were like that, such as during the day on Dec. 31, 1986, the last day of the old fed tax code when there was wild trading and interest rates were zooming up and down all day.
Indeed the usual argument was that people would hold cash instead, but it does seem that it is not so easy to hold large amounts of cash, and so cash has not made those negative rates go away. Instead, here they are if anything spreading.
Negative rates are the monopoly fee government charges to maintain liquidity when no one else will bother.
Here in Germany there are web sites advertising for CONSUMERS to convert their loans to negative interest loans. I haven’t checked out the fine print to understand how that can be (My guess is that the loans are limited duration and there is establishment fee so they aren’t really negative interest.) But that sure is an odd thought people will pay you to hold their money, money that they have newly created?
Thank you for your response. I have tried to grasp this idea but do not see a great explanation. As noted, there is some discussion about the costs of holding money but with electronics it seems that the physical costs are not a great explanation. I tend to think that it is because real investment opportunities for the somewhat risk averse are rare nowadays but confess I have not seen any good data.
Well, there is another reason that holds for certain nations, especially Switzerland, which has the most negative rates of all, and it at least helps explain that. For the Swiss central bank, they do not want the Swiss france appreciating too much as that would destroy the international competitiveness of many Swiss industries. But because of its reputation for being “safe,” many like to hold the Swiss franc. So the central bank puts on negative interest rates to discourage foreigners from sending their money their and overappreciating the Swiss franc.