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House of Cards

Interest rates at minus as 'perfect storm' looms

When you borrow money you pay interest to the lender. The rate you pay is the cost of borrowing and lenders derive their profits from it. At least, that’s the way it is supposed to work.
Not any longer. On July 5, the European Central Bank cut its deposit rate to zero. That means it stopped paying interest on money deposited with it.

As a consequence, six countries with economies for the moment at the edge of the economic storm now offer negative returns for government bonds maturing in two years or less: Germany, Finland, Denmark, Switzerland, the Netherlands and Austria.

Investors in effect have to pay them to look after their money. It’s a kind of parking fee. Rather than receiving interest on the loan the investors are so desperate to find a home for their money as the crisis escalates, they are willing to pay for it to be stored. 

And as a further consequence, more than half of Europe’s money market funds investing in government bonds – so-called “securities” – have closed. Not only is there no money to be made, but, because the interest rates are negative, it means that the value of investments will fall.

Switzerland’s two-year bond yield is the lowest of the six, at minus 0.55%, while Austria’s comparable government bond yield edged down to a negative 0.01% on Tuesday.
This morning, Japan joined the stampede. The Bank of Japan scrapped the 0.1% lower limit on the rate it would pay for government bond purchases, opening its door to the possibility of buying debt with negative returns.

And in the US, policy makers “are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labour market,” said chairman of the Federal Reserve Ben Bernanke yesterday, using typically guarded language to disguise the seriousness of the situation.

Over the past 60 years the world’s economy was transformed. Production expanded, the population ballooned, the flow of commodities pouring out of factories turned into a flood.

Big and small companies operating from within national boundaries and subject to the home countries regulations expanded beyond their borders, becoming the transnational and global corporations so powerful that their requirements – for more growth from which more profits could be siphoned – determined national policies.

Regulation on the movement of capital was removed to allow the expansion of credit needed to fund continuously expanding investment. The ballooning of the credit (and debt) industry spawned a generation of brilliant, creative, inventive young people discovering ever new ways to make money out of money.

The amount of interest-bearing credit extant in the world soared, to become ten then, 20, 60 times larger than the value of the real, substantial things in the world, like food, clothing, cars, roads, factories, computers.

And the velocity of its movement around the world accelerated as the power of those computers and the carrying capacity of the networks that linked them spread worldwide.
All that came to an end when the ability of people to repay their debts reached its limit, triggering the 2007/8 financial meltdown.

With the bursting of the bubble, global expansion has turned into its opposite – global contraction. In reality, interest rates have been effectively negative for years since central banks reduced their policy rates to below inflation in the wake of the crash to try and encourage more borrowing.  

The technical term for this is “financial repression” and millions of people around the world have felt its effects in unemployment, lost home, pensions, soaring food prices, and increasingly brutal austerity programmes.

Negative interest rates are a sign of increasing desperation in global economic and financial circles. Leading economist Nouriel Roubini is convinced that 2013 will produce a “perfect storm” as a number of factors come together to derail the global economy. You can’t say we haven’t been warned. 

Gerry Gold
Economics editor
18 July 2012

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Your Say

Frank says:

Doctor Doom and the Mother Goose Mystery

Ever wonder what would happen if the goose what lays the golden egg developed an eating disorder? Like gluttony, for instance? And she just kept on stuffing her face, developing middle age spread, obesity they call it these days; just like old Jellyroll Morton’s song predicts: “The more I get, the more I want, it seems!”

So she keeps on eating. Fatter and fatter and fatter. No time for egg production anymore. It only distracts from gorging more glorious grub. Tell you what, better send for the doctor, before she …

Well, just for future reference, maybe we should check out what the good doctor thinks. So we ring long distance for New York University …

Me: Hello Central, get me Dr Doom, I mean, is Professor Nouriel Roubini about?

Her: You mean the guy they call Dr Doom, ever since he correctly foretold the coming of the global financial crash? Yeah he’s around luv.

Me: That’s great, Y’see, I need his advice, I’ve got this pet, well, I had this pet – used to lay these great golden eggs all the time. It was absolute magic! Does the Doc do any veterinarian or farming stuff?

Her: Well, I think he might have said something about the magic of the markets, once upon a time. Can you please hang on?

Author’s Note: We could be on to something here. Professor Niall Ferguson of nearby Stanford University has just finished the BBC Reith Lectures 2012, the first ones ever written as a pantomime script, too! Now he believes in magic … but, as he warned a sceptical audience member, “– the magic doesn’t work every time”. Oh Yes, It Does? Oh No, It Doesn’t! Well, not any more, it seems.

Me: Hi Dr Doom, I had this Golden Goose, name of Humpty, but that’s another tale. Used to feed her all sorts of fantasy food, Yen, Dollars, Euro, Sterling, Junk Bonds, Derivatives, any old bits of waste paper I could find lying around. She just gobbled it all up. After I fed her, she used to lay a golden egg for me. It was really cool. Then I noticed although the eggs looked bigger, they seemed to weigh less and less. It was as if they were becoming … sort of … hollow, or something? And yet Humpty the Goose kept on growing and growing till one day …

Doom: Mmm, Yes, I’ve heard of this happening before, alright. There was a previous case, I don’t think it was a goose though, perhaps, a show called “Fictitious something or other”? Capital show, y’know. I think the big hit was “Black Monday Blues”, or was it “The Permabear Necessities of Life”? Anyway, the whole production went off with a BANG!

Me: Doctor, could you please help me put Humpty the Goose back together again? I think I’ve got all her bits and pieces, and I really want my eggs back!

Doom: No, it wasn’t a Bear, not a Goose either, I think. Could it have been that case of Jack and the Genetically Modified Beanstalk? It grew and it grew till it pulled down the Proscenium Arch in the Theatre of the Absurd. Eventually brought the house down if I remember rightly!

Me: Lookat, there’s no interest these days in that sort of fantasy and fakery, you can’t shave a buck off the old reliables anymore. And the prime actors are looking for telephone numbers! That’s why sticking my goose back together again is soooo very important!

Doom: The best advice I can give you is to invest wisely in one of next season’s panto productions. I heard from a neighbour that they’re all the rage over there at the moment. Even the BBC is getting in on the act! But be careful! Remember the great philosophical question posed by Zero Mostel : “Where did it all go right?” Right?

Me: I think I know the answer to that one. Would it be: Chateau Despair, Downing Street?

Doom: No, I’m serious, be careful where you put what’s left of your little nest egg. Now I think I heard there’s a new script on an old theme being written for next season. Mother Goose with a twist, the Pantomime Dame speaks fluent German, and in the final act, everyone finds out their goose is cooked.


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