Business Insider's Myles Udland just posted a
chart, drawn from research by the Bank of England, showing interest rates
for the past 3,000 years. And for all those who've been feeling like today's "new
normal" is actually profoundly abnormal, here's your proof. It turns out
that interest rates, both long and short-term, are lower than they've ever
been. Not lower than in this cycle, or post-war or in the past century, but
ever, going back to the earliest days of markets.
And they're still falling in most of the world. Central banks are cutting
rates on a daily basis (Turkey was
today's announcement), in some cases to less than zero. Something like $2 trillion
of sovereign and corporate debt now trades with negative yields.
Virtually the only major entity considering raising rates is the US, and the
incongruity of this threat has traders balking. See Bloomberg's Traders
still don't believe the Fed is ready to raise rates.
If this is indeed uncharted territory and we're going further in before we're
done, what are the implications for markets and, well, everything? A couple
of thoughts:
The insurance industry, pension funds and money market funds all depend on
positive yields to operate. A life insurance company, for instance, can keep
premiums low because it can invest that cash for years before having to pay
out on the policy. What happens if the bonds it buys start yielding nothing
(or less than nothing)? What about a money market fund that can no longer find
investment grade corporate paper yielding much more than zero? Pension funds,
meanwhile, have generally promised 7%-8% returns to their members, but now
have to get all of those profits from the equity and real estate sides of their
portfolios.
For any of these entities to stay in business they now have to act like hedge
funds, taking on extra risk, rolling the dice and hoping that the good years
outweigh the bad ones. In other words, these formerly safest-of-the-safe investment
vehicles become just as risky as the typical eTrade account.
Then there's the impact of negative rates on the market's price signaling
mechanism for the rest of us. Interest rates are the price of money, and as
such they tell investors, entrepreneurs and consumers what to do. Low interest
rates generally say "buy, build, consume, take risks" while high rates say "save,
sell, conserve, wait." But zero or negative rates? Are they just an extreme
version of low rates or is there a qualitative difference? Everyone has a theory
about this but in the absence of historical precedent, we'll have to wait and
see.
Anyhow, the coming negative interest rate world will provide plenty of thrills,
chills and blog post material. For now it's enough to note that we've never,
through depressions, world wars, bubbles and famines, seen anything like today's
economy.
