A Negative Interest Rate World

Written by Staff Writer

NegativeIntereat ratesThe Economic Future of a Negative Interest Rate World -AIER.org
"Danske Bank of Denmark introduces the first negative 10-year fixed-rate mortgage. The German Finance Ministry voices disappointment at the lack of demand for 30-year zero-coupon bonds. The U.S. and Sweden contemplate issuing 50-year and 100-year bonds. These are all cause for concern. Excessively low interest rates support assets, favor the rich over the poor, favor the rentier (a person living on income from property or investments) over the business investor, encourage leverage and stock buybacks over capital expenditure and equity-capital formation. Income inequality grows, and social instability follows.

Corporations that, under a more normal interest rate regime, would have been placed into receivership are able to continue to operate....If an inverted yield curve is the harbinger of recession, there may be trouble ahead....The effect that an artificially low interest rate has on an economy is pernicious. Asset markets are supported, and it raises the point at which they clear, but it also reduces the need for companies to improve internal efficiency. For corporates, borrowing becomes preferable to issuing equity. Firms become more leveraged....For households, lower interest rates encourage borrowing to buy assets...With falling interest rates comes more affordable mortgage financing, boosting property prices....And what of the poor, the unemployed, those unable to clamber onto even the first rung of the property ladder? Populist politicians will seize the opportunity to pander to the dispossessed voter....In the thrall of negative interest rates there is a clear incentive to borrow and a disincentive to save. This is Ponzi finance; it has turned time preference on its head, driving us to borrow from tomorrow to consume today."