Much has been written about negative interest rates of late, as many major economic players have followed and Japan’s lead into the wonderland of negative interest rates. Most analyses focus on the intended domestic effects of interest rate policy on the outdated premise that interest rates are a domestic matter. Reality is, negative rates are being used to prop up the European (and other) economies through foreign exchange manipulation.
Europe is a zombie economy.
Negative interest rates are supposed to encourage domestic lending by lowering borrowing costs, and they probably do. However at the same time they depress the foreign exchange value of currency and make government borrowing cheaper – in fact negative – in cost.
So far the major European union members have resisted the temptation to plunge into government deficit spending with both feet to stimulate their economies (i.e. fiscal policy), but that is the only remaining deflationary tool left to them should their economies tank.
And their economies are already dead. It’s only the artificially depressed Euro rates that are keeping their lifeblood exports alive.
Domestic lending in Europe remains stagnant, despite negative interest rates, and the financial system is awash with deposit money. Why? Because business investors and the public in general are not stupid – individuals are hoarding cash as they expect a near future financial catastrophe, and business investors are not borrowing because they know their exports depend on deflated currency and domestic growth is stagnant at best.
The negative interest rate / currency manipulation game is a zero-sum proposition. As long as only some players on the world stage engage in it they win. If everybody plays, no-one wins. This is what the IMF and EU leaders are counting on – USA, UK and China will not get on the bandwagon.
But what if they do? China’s Corona virus outbreak could throw the world’s second largest economy into a recession. What happens if China follows suit and adopts negative interest rates to prop up exports in the face of a stagnant (or worse) economy? The US, UK and every other economy would experience a dramatic rise in currency value, massively decreased exports and increased imports, widening their already unsustainable trade deficits with the EU and China.
The only thing to do would be to follow suit with negative interest rates in the US and UK, defeating the manipulation of the few by making the game manipulation by all. Then the only way to win is to be first in the race to the bottom… foreign exchange manipulation becomes the purpose of interest rate policy globally.
Governments take over the world economy
At the same time, this scenario makes government borrowing costs negative, tipping the scales towards government takeover of private sector functions, and hollowing out the private sector. Governments already have a competitive advantage in provision of labour intensive goods and services that the private sector does not enjoy by virtue of the fact that all their employees effectively work at a 35% discount (after-tax wages are the true cost of labor to a government).
When we consider that government labor costs have a structural competitive advantage versus the private sector and add infinite funding at negative cost to the equation it is inconceivable that the private sector can compete with governments to provide labor intensive goods and services through operational efficiency and excellence.
Negative interest rates accelerate the erosion of the private sector in favor of the public sector that has been happening consistently since the introduction of income taxation in the first world war. And it’s all happening without any input from citizens through toxic monetary policy embraced by Europe, Japan and others.
If you want governments own your economy, all is well. It, like me, you think the role of government is to govern – a political, not economic function – you may share my concern. We are heading toward global communism without even voting.