What Negative Interest Rates in Japan Portend for the Global Economy

The Bank of Japan’s unprecedented (for a major economy) move to charge savers for the right to deposit their money in the safest financial institution in the world’s third largest economy has tremendous implications for the financial condition of the world economy, and more importantly, the future of global markets.

What’s a ‘Negative’ Interest Rate?

An interest rate is normally paid to depositors who seek to maintain a portion of their wealth in the form of cash. A negative interest rate means that depositors are charged a fee for leaving their money in their bank accounts.

In other words, what was once the ‘safest’ place to deposit money, in terms of a capital preservation strategy, has now become the government institution where you are guaranteed to lose 0.1 percent of your money each year.

Psychologically, it is a new form of stimulus (though Switzerland rates went negative in an effort to prevent the Swiss Franc from soaring out of the currency stratosphere) that signals G7 governments are likely in collusion on a policy that will force all the cash that corporations and hedge funds have stashed in banks into the broader economy by making it less risky to deploy capital through investments than it is just to hold cash.

It’s a serious and historic development in economic policy, and its implications for the state of world currencies is nothing if not terrifying. At its simplest, since it is a general principle of price/value dynamics that a thing is worth what someone is willing to pay for it, the implication is that the value of currency has deteriorated so badly, as a result of capital and credit fabrication by central banks, that nobody actually wants it. The government of Japan’s own bank does not want its own yen.

Cascading from that simplistic yet relevant perception is the reality there really are no other ‘tools’ at the disposal of central bankers, despite the grandiose representations of bankers like Mario Draghi, who as recently as last week insisted that ‘additional monetary stimulus is still on the table and the European Central Bank stands ready to act should a strong recovery continue to elude them Eurozone’s fragile economy.

Are Stimulus and Negative Interest Rates a Realistic Approach?

Mainstream financial media continues to parrot the position of economists and central bankers that there has been a recovery over since the onset of the financial crisis in 2008, yet the actions of central bankers and government (tacitly) negate such representations.

First and foremost, if there is a genuine global economic recovery underway, then why is GDP and earnings expansion only visible in countries who are easing quantitatively along with providing non-existent interest rates? If a genuine economic recovery was underway, there would be statistical improvements in aggregate demand and unemployment – neither of which is seen in real terms in any of the major economies.

The S&P 500 index's performance in the period since the 2008 financial crisis is directly attributable to the expansion of the Fed's balance sheet through capital fabrication. So like...what recovery?
The S&P 500 index’s performance in the period since the 2008 financial crisis is directly attributable to the expansion of the Fed’s balance sheet through capital fabrication. So like…what recovery?

The U.S. Federal Reserve’s creative accounting techniques for proclaiming 5.4 percent employment rests entirely on its election to not include anyone who has not been able to find work for a period of time. The much more highly representative labour participation rate in the timeframe from 2011 – 2014 has averaged 62 percent in the United States. So the 5.4 percent number is utterly delusional.

The U.S. asserted unemployment rate of 5.4% is rather thoroughly ridiculed by the actual participation rate.
The U.S. asserted unemployment rate of 5.4% is rather thoroughly ridiculed by the actual participation rate.

Secondly, if one considers that rate of annual GDP increase in that timeframe, the growth in GDP perfectly reflects the growth in monetary supply, which means there’s been no recovery in aggregate demand – the GDP growth must be a direct result of quantitative easing and zero interest rate policy exclusively.

Which rather thoroughly explains why it makes perfect sense for interest rates to suddenly be turning negative. How else can the central bankers of the G7 economies continue to pretend that their imaginary economic recovery even exists?

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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