by Michael Roberts
The recent announcement of the Bank of Japan (BoJ) that it would
introduce a negative interest rate (NIRP) for commercial banks holding
cash reserves is the final admission that monetary policy supported by
mainstream economics and implemented by central banks globally has
The main economic policy weapon used since the global financial crash
and the ensuing Great Recession to avoid another Great Depression of
the 1930s has been zero interest rates (ZIRP), then ‘unconventional’
monetary measures or ‘quantitative easing (QE)’ (increasing the quantity
of money supply to banks), all fixed to inflation targets of 2% a year
or so. ZIRP and a virtually unlimited supply of cash (QE) were supposed
to kick-start the global economy into action, so that eventually
capitalism and market forces would take over and achieve ‘normal’ and
sustained economic growth and fuller employment.
But QE and ZIRP have failed to achieve their inflation (and growth)
targets. On the contrary, the major economies are close to deflation,
as commodity and energy prices plunge and prices of goods in the shops
and on the internet slide. Deflation has its good and bad side. Sure,
it lowers the cost of many things but it also raises the real burden of
debt repayments for those who borrow. And if prices are falling
continually, it breeds an unwillingness to spend or invest in the
expectation that it will be cheaper to wait. Deflation is a symptom of a
weak economy, but also a cause of making it weaker. Deflation can become a debt deflationary spiral.
So now we have NIRP. It started with the Swiss, then the Swedes and
more recently the European Central Bank and now the Bank of Japan. Now
about one-quarter of all interest rates are below zero! And we have
only just begun with this latest monetary tool. BoJ governor Haruhiko
Kuroda announced there is “no limit” to monetary easing and that he would invent new tools rather than give up his goal of 2 per cent inflation. “Going
forward, if judged necessary, it is possible to cut the interest rate
further from the current level of minus 0.1 per cent,” said Kuroda. “The
constraint of the ‘zero lower bound’ on a nominal interest rate, which
was believed to be impossible to conquer, has been almost overcome by
the wisdom and practice of central banks, including those of the Bank of
Japan,……It is no exaggeration that [ours] is the most powerful monetary
policy framework in the history of modern central banking,” he said.
The ‘wisdom’ of central banks – really? ‘Most powerful’? NIRP will
fail in the same way that ZIRP and QE has. Take Sweden. There, the
Riksbank, the central bank, has applied NIRP with zeal for some time.
What has been the result? Inflation in the prices of goods and services
has not returned. Instead, cheap credit and penalties for holding cash
(negative rates) have pushed banks into lending for property and stock
market speculation, not productive investment. Swedish non-financial
credit now stands are 281% of GDP, a rise of 25% on the pre-crisis peak
and up from 212% a decade ago. House prices have risen by a quarter
nationally and 40% in Stockholm over the past three years, stretching
earnings ratios to extremes (house prices are 11.7x earnings in the
Far from curing deflation and restoring growth, NIRP will only
exacerbate the sizeable debt burden that the major economies have built
up in a desperate attempt to avoid a ‘Great Depression’ since 2009. To
bail out the banks and avoid a severe collapse in incomes and
employment, governments borrowed hugely. Sovereign debt, as it is
called, rose to record post-1945 levels. But the private sector,
particularly the corporate sector, also expanded its debt. Cheap
central bank money flowed into the so-called emerging market miracle
economies of Asia and Latin America. But now they are in recession,
leaving a debt burden to be serviced, mainly in appreciating dollars.
And as China and emerging economies slow or drop into a slump, the
demand for exports from Europe, Japan and North America has slid away.
Take the European powerhouse, Germany. While Chinese exports only
account for 6% of total German overseas sales, adding in Asia this rises
to 10%. That might still seem small, but is a potentially large drag
on GDP where net trade has been contributing an average of 0.6% pts to
the 1.5% pts of growth recorded over the last six years.
It’s a similar story in Japan. The BoJ’s policy of ZIRP, QE and now
NIRP has succeeded in weakening the yen against the dollar. But it has
failed to boost exports because most other Asian currencies have fallen
too and now the Chinese yuan is under pressure. Despite a 55% fall in
the yen against the dollar in just three years of BoJ policy, there has
been zero increase in export volumes.
Nevertheless, the dominant economic tool of the mainstream and major
governments is still monetary policy, with its last stand in NIRP. The
US economy is still plodding along at about a 2% real growth rate,
better than most and official unemployment has come down. US Fed chief Janet Yellen claims to be confident that sustainable improvement in real GDP is here.
Yet all the recent economic data lend serious doubt to that forecast
and the aim of the Fed to hike interest rates in 2016. So there is even
talk that the US Federal Reserve may adopt NIRP if everything goes
pear-shaped in the US.
In its annual stress test of the US banks for 2016, the Fed said it
will assess the resilience of big banks to a number of possible
situations, including one where the rate on the three-month U.S.
Treasury bill stays below zero for a prolonged period. “The severely
adverse scenario is characterized by a severe global recession,
accompanied by a period of heightened corporate financial stress and
negative yields for short-term U.S. Treasury securities”, the
central bank said in announcing the stress tests last week. New York
Fed President William Dudley said last month that policy makers were “not
thinking at all seriously of moving to negative interest rates. But I
suppose if the economy were to unexpectedly weaken dramatically, and we
decided that we needed to use a full array of monetary policy tools to
provide stimulus, it’s something that we would contemplate as a
Fed Vice Chairman Stanley Fischer said that foreign central banks that had resorted to negative interest rates to stimulate their economies had been more successful than he anticipated. “It’s
working more than I can say I expected in 2012,” he told the Council on
Foreign Relations in New York. “Everybody is looking at how this
works,” he added. Working well? Really? Sweden?
Radical Keynesian, Richard Koo summed up the NIRP option as “an
act of desperation born out of despair over the inability of
quantitative easing and inflation targeting to produce the desired
results… the failure of monetary easing symbolizes crisis in
As I have shown before in a previous post, during the Great Depression of the 1930s, John Maynard Keynes also gave up on monetary policy. Having
advocated lowering interest rates and ‘unconventional’ monetary easing,
he eventually concluded that it was not working and moved onto to
fiscal policy – in essence more government spending. This is also the
answer for Koo.
Keynes in the 1930s was disappointed that governments, particularly
the US and the UK, did not adopt his policy of deficit financing and
government spending, let alone his more radical suggestion of the
‘socialisation’ of investment to replace the failure of capitalists to
invest. And modern Keynesians like Paul Krugman, Larry Summers, Simon
Wren-Lewis or Brad Delong, while promoting monetary easing big time
since 2008, have increasingly become disillusioned and joined Richard
Koo in advocating fiscal spending to avoid ‘secular stagnation’ and
deflation. What puzzles the Keynesians is why governments, as in the
1930s, will not go down this road.
For the Keynesians, running up debt (public sector debt) is not a
problem: one man’s debt and is one woman’s credit is the argument. But debt does matter, as I have argued in previous posts.
Debt must be serviced and repaid by real production: money does not
come out of nothing forever. The corporate sectors of China, Asia,
Brazil, Russia and Europe are finding that out now. Deficit financing
and rising public debt will not kick-start an economy that has low
profitability and high corporate debt. And in near deflationary
economies, there is a real burden in servicing that debt.
Monetary policy has failed; NIRP will not work. But neither will a
more radical Keynesian deficit financing plan. Both fail to recognise
that it is profits versus the cost of capital and debt that sets the
pace of economic expansion or contraction in a capitalist economy.
Globally, corporate profits have been falling and in the major
economies even the largest companies are seeing falling earnings and
sales. In the US, 43% of the top 500 companies have reported their
financial results for the last quarter of 2015. On average, sales were
down 2.5% over the end of 2014 and profits were down 3.7%. In Europe,
17% of the top 600 companies have reported and sales were down 6.5% and
earnings 11.7%. In Japan, 45% of the top 225 companies reported a fall
in sales of 2.5% and profits down 9.3%.
A new round of ‘creative destruction’ is coming globally and ZIRP, QE and NIRP will not stop it.
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