Don’t miss today’s Heard on the Street item in the Wall Street Journal headlined “Central Banks Tilt at Global Windmills.”
The item, by Richard Barley, notes that “the People’s Bank of China, the European Central Bank and the National Bank of Denmark all cut rates Thursday, and the Bank of England delivered another £50 billion ($77.95 billion) of so-called quantitative easing through bond buying.”
As the piece notes, the ECB move triggered a rate cut in Denmark, since its currency is tied to the Euro. A key short-term interest rate in Denmark has now gone negative to the tune of 0.2% annually. Give the Danish central bank 100 krone at the start of a year, and it promises to give you back 99.8 krone at the end. What a deal!
As the Journal item notes, the negative nominal rate may lead to trouble in the banking system. When nominal interest rates are negative, it makes more sense to hold physical cash than to put it in the bank.
So with all this rate-cutting, consumers and businesses are chomping at the bit to borrow so they can consume and invest, right? Well, no.
Here’s the Journal’s take:
In many developed economies, the monetary-transmission mechanism, whereby reductions in official rates filter through to juice demand, is broken. Very low rates may even be an impediment to growth, as they signal how poor the outlook is and squeeze those on fixed incomes.
The rate-cutting looks to me like a sign of desperation. The political systems in the U.S. and Europe seem broken. Financial repression continues to help finance deficit spending that is unsustainable in the long term. Central banking seems as broken as political systems.
We have not seen this movie before. We do not know how it ends.