After seeing the fed funds futures in December pricing in the very slight chance of negative rates and hearing Ken Rogoff on CNBC yesterday calling for a -3% negative interest rate, I feel the need to lay out the idiocy of implementing it. A while ago I referred to it as poison for a financial system and the dumbest idea in the history of economics.
1)It’s a tax. A tax on bank capital housed at a central bank that someone has to eat, either the bank itself or they pass it on to their clients. Taxes aren’t stimulative.
2)It would blow up the $4 Trillion money market industry as money would flee and this money finances government repo’s, commercial paper, CD’s, etc…
3)It would damage bank profitability, which is the blood of small and medium sized business lending and a big help to large ones that also have access to capital markets. To remind you, the Japanese Topix bank stock index is down 92% in nominal terms since its peak in 1989. The Euro STOXX bank stock index is down by 89% from its 2007 high.
4)We’re seeing in Europe that banks have passed on some of the tax on to retail deposits. There is a story today on BN that UBS is offering some of its high net worth clients a payment holiday for a few months from paying the negative rate penalty for keeping money at the bank. They are doing this because money is leaving the bank.
5)It hurts insurance companies and pension funds that have little low risk options in meeting their investment return goals.
6)It crushes the saver and retiree.
7)It has created a massive bubble in sovereign bonds that will be a complete mess when reversed considering the large debt taken on that NIRP encourages.
8)It therefore becomes a trap for central banks because of the potential damage to bond prices when unwinding it.
9)The Swedish Riksbank saw the error of its negative rate ways and got its benchmark rate back to zero, but only zero. Even the BoJ realized the damage done as they stopped at a negative rate of .10% years ago.
Moving on. Yes, today’s US payroll number will get all the news as it will be painful to see, knowing the lives impacted by it. But again this was completely self inflicted and we must instead think about what it will look like in coming months and quarters as businesses reopen.
Looking overseas, Taiwan’s April exports fell 1.3% y/o/y, a bit worse than the estimate of up .6%. Exports to China/Hong Kong jumped by 14% as China continues to reopen but shipments elsewhere to the region fell sharply. Exports to the US had a slight gain of 1.5%. Imports up .5% y/o/y were about as expected. The TAIEX closed up .5% as the entire region was in the green led by Japan.
The only thing of note in terms of April data in Europe was in the UK consumer confidence index which remained depressed at -33 vs -34 in March. The estimate was -37.
UK CONSUMER CONFIDENCE INDEX