With the IMF's annual meeting now concluded, few topics discussed during the past week which saw the IMF downgrade its outlook for the global economy to the lowest GDP since the global financial crisis...
... evinced as powerful a response as negative interest rates, and for good reason: long seen as the last "red line" of central banks before they are forced to admit defeat, some $15 trillion in debt now trades with a negative yield, making a farce of conventional finance which operates on the simple premise of "time value of money", which has been flipped on its head, as negative rates mean that the value of money is now negative.
Meanwhile, with the ECB recently cutting rates further into negative territory, and the BOJ likewise set for even more negative rates, a rare public debate among establishment economists has erupted as a growing number of policymakers question the value of its deep foray into unconventional monetary policy. Just one month ago, Dutch Central Bank chief, a frequent critic of the bank’s ultra-easy monetary policy, unloaded on ECB outgoing president Mario Draghi: "This broad package of measures, in particular restarting the asset purchase program, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness. There are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behaviur in the housing markets."
And yet, despite the growing chorus of opposition, the far bigger problem faced by central bankers is that they really have nothing else up their sleeve, and should negative rates be denied by the establishment, it may well mean game over for the financial system as we know it.
Which explains why everyone - certainly the world's most powerful and important executives and policymakers - has an opinion on NIRP
Below we summarize some of the key quotes from last week's IMF conference on the topic of negative rates, courtesy of Reuters:
MORGAN STANLEY’S CEO JAMES GORMAN:
“What Europe is experiencing with negative rates, obviously is really bad. Not just for the financial sector, but for the broader economy. Do I worry about them being too low? Listen, the Fed’s job is to manage the excesses and to prop up the weaknesses in any economic cycle. There’s no rulebook that Jay Powell’s got on his shelf behind saying at this point, with this information, you should do X. There’s a judgment call. I personally would be more cautious bringing rates down because you are using up one of the tools that you have... At this point, I would probably price one more cut for the rest of the year, and then I would really sit back, watch and wait.”
JPMORGAN CEO JAMIE DIMON ON LESSONS FROM THE CASE IN EUROPE:
“I think this is a lesson. I think they did it early on to save Europe basically from coming apart with the monetary union. We don’t know. I think they’ll be writing books about this in 50 to 75 years.
“[Negative rates] has huge negatives for savers and low-income people, for investors and for the capital markets. I, personally, would not buy debt below zero… There’s something irrational about it…I’m not sure the monetary rules are the same for a negative rate as they are for a positive one.”
TOBIAS ADRIAN, FINANCIAL COUNSELLOR AND DIRECTOR OF THE IMF’S MONETARY AND CAPITAL MARKETS DEPARTMENT:
“Remarkably, the amount of government and corporate bonds with negative yields has increased to about $15 trillion. Moreover, markets expect about one-fifth of government bonds will have negative yields for at least three years. With rates staying lower for longer, financial conditions have eased, helping contain downside risks and support global growth for now. But loose financial conditions have encouraged investors to take more risks in a quest to achieve their return targets.”
DANIEL PINTO CO-PRESIDENT AND CHIEF OPERATING OFFICER OF JP MORGAN, SPEAKING AT THE INSTITUTE OF INTERNATIONAL FINANCE:
“I think one of the problems with negative (interest) rates is that it tends to have less effect today than a few years ago. Before this current interest rate environment, if rates were going to be so low for so long, we would have started to get worried about the future. But today, as the population gets older and their priorities change, the distribution of rate changes don’t affect the economy as much. For our business, we prefer high interest rates more than low interest rates, but in general, it doesn’t make much of a difference.”
“In the insurance business and pension business, it makes more of a difference because they have certain liabilities that become more difficult to manage as rates go lower and lower.”
RAY DALIO, FOUNDER OF BRIDGEWATER ASSOCIATES:
Dalio said he was worried perpetually low or negative interest rates was creating a “crazy or odd” reality in which debtors barely had to service their debt.
“Interest rates become negative or near negative so the debt service payments for the interest rate are down a lot. And it’s almost a situation where there’s guaranteed debt rollover.”
AUSTRIAN CENTRAL BANK GOVERNOR ROBERT HOLZMANN:
Holzmann, one of the newest members of the ECB’s policy panel, said negative interest rates are not sustainable over the long term and some financial sector players simply can’t adjust.
“Insurance companies and pension funds have no way to neutralize the negative rates and it becomes impossible to provide the rates of return individuals expect,” Holzmann said. He argued that given low returns, insurers and pension funds must take on more risk, which could then endanger financial stability.
Holzmann also noted that ultra-low pension returns endanger European efforts to supplement a public pension system with a private pillar, another reason for the ECB to change its approach to negative rates.
ITALIAN CENTRAL BANK CHIEF IGNAZIO VISCO:
“Being very unconventional, I think we have to be very careful of the possible negative effects of negative rates,” Visco told a conference on the sidelines of the IMF and World Bank fall meetings. “I would be very, very careful in going further in this direction.”
RESERVE BANK OF AUSTRALIA GOVERNOR PHILIP LOWE:
Lowe said it was “extraordinarily unlikely” that negative interest rates would be implemented to meet the country’s inflation and growth targets, adding that low rates alone were unlikely to stimulate investment.
“I’m not going to speculate on ... negative interest rates and quantitative easing in Australia, other than to say that negative interest rates are extraordinarily unlikely in my country,” Lowe said during a presentation at the IMF and World Bank fall meetings in Washington.