Submitted by Alasdair Macleod – FinanceAndEconomics.org
In last week’s article I pointed out that negative interest rates should lead to a general shift in consumer preferences from money towards essential goods.
Central bankers may wish for this outcome on a controlled basis to allow them to hit their price inflation targets, and this could happen quite quickly. If people face a tax on their cash and bank deposits, which is what a negative interest rate amounts to, they will simply reduce these balances, artificially boosting demand.
There can be little doubt that negative interest rate policies (NIRP) are now a distinct possibility after the Fed backed down from raising the Fed Funds Rate at their September meeting, having prepared markets well in advance for the event. In fact, many mainstream analysts still expect the Fed will raise rates in the coming months. However, external factors are rapidly changing everything, with China’s economy succumbing to a credit crunch, and all the countries supplying China with raw materials suddenly facing a fall in demand. The bad debts in commodity financing (including energy) are a growing concern, as the collapsing share price of Glencore attests. International trade is now contracting for the first time since the wake of the Lehman crisis.
The welfare states have spent the last seven years in the economic equivalent of suspended animation, with the reallocation of capital from unproductive, unwanted and over-indebted businesses impaired by zero interest rate policies. Even though ZIRP didn’t work, central banks undeterred will probably opt for NIRP. We now know the Bank of England is examining the possibility of NIRP at the most senior levels, in which case it is almost certainly being considered by all the major central banks. Continue reading