Prior to the ongoing Coronavirus pandemic, researchers from ANBOUND noticed that the global zero-interest as well as the negative-interest monetary environment was expanding in the face of global excess liquidity.
The spread of the Coronavirus has further accelerated the decline in global interest rates. The impact of the pandemic on both economic and financial markets has led the Federal Reserve to adopt ultra-loose interest rates policy with near zero interest rates. Furthermore, central banks have cut their benchmark interest rates in reaction to the Federal Reserve, whilst buying large amounts of government bonds and formulating a large-scale fiscal stimulus package.
A total of 146 countries have introduced interest rate cuts in 2020. Ultra-loose monetary policy, zero interest rate and negative interest rates has become the solution for many countries across the globe. Clearly, the ultra-loose monetary policy implemented by the Federal Reserve, did indeed help ease the crisis in the short term. In fact, many supporters of ultra-loose monetary policy agrees that the policy is essentially a stop-gap, to reverse the downturn of the economic cycle through policy stimulus before inflation rises.
Distortion of financial market prices
However, if we look at the European Union and Japan’s negative interest rate policy process, we see that years of negative interest rates and QE did not increase inflation. Instead, it caused deflation, reduced growth, and making monetary easing difficult to exit.
In the wake of the 2008 financial crisis, the U.S. responded by raising interest rates in the short term in an attempt to normalize monetary policy. However, in the present day that same policy couldn’t be implemented due to several factors, one being that the capital market is more volatile than before and is prone to panicking. Furthermore, the pressure from President Trump has forced them to continue to abandon that effort. This means that financial markets are becoming more and more influential to central banks, making it difficult to escape the effects of excess capital.
As Anbang Consulting recently suggested, the Federal Reserve’s current ultra-loose money policy has shown negative consequences. This is highlighted in the weakening of the dollar and making it difficult for interest rates to accurately reflect real financial demand and supply, furthermore, it distorts the prices of financial markets.
In this sense, it is true that if global monetary easing continues, interest rates will face certain doom. Former Bank of Japan governor Toshihiko Fukui has said that”1% is the lowest effective interest rate. 1% is seen as the general criterion for the functioning of interest rates, with interest rates below 1% in half of the major countries, and the trend of “death of interest rates” spreads even further.
The side effects of “killing” interest rates are great. It directly promotes the “debt monetization” of countries, making national policies more and more powerful for the market, the function of the free market itself is gradually being lost.
In addition, the European Central Bank (ECB) and the Bank of England (BOE) hold about 30% of their national and regional government bonds, while the Bank of Japan’s holdings have reached 50% of the balance of government bond issuance after a long period of QE policy. The Federal Reserve is also following the Bank of Japan’s lead and are starting to buy corporate bonds, which will become the biggest player in financial markets in the future.
As this continues, the tendency of market participants adopting policy arbitrage will grow stronger and the role of financial markets will gradually be lost. At the same time, excessive liquidity has pushed up the price of risky assets, which is also the root cause of the ongoing bubble in the stock market. This means that the stock market and the high-risk bond market are more volatile.
For emerging economies with loose monetary policy, central banks are less credit worthy and risk capital outflows are greater, making them more prone to currency and financial market crises.
The global economy is in a state of fear.
Most worryingly, the “death of interest rates” which would mean low growth sustainability. The global increase in the number of zombie companies that survive under low yields environment has led to a sustained decline in investment efficiency, dragging the real economy into a low-growth, “Japanese” trend.