Since the Bank of Japan introduced negative interest rates a few days back, some financial pundits in the United States have been calling for the U.S. Federal Reserve to do the same. This would be a disaster for the American and global economy. In this political year, the calls for the Fed to continue to provide stimulus seem to have a biased agenda.
For instance Ron Insana at CNBC states in a post today, First, the Fed continues to raise rates, weakening an already decelerating a U.S. and global economy. That pushes the dollar higher, commodity prices lower, weakens U.S. exports, and cuts into the profits of U.S. multi-national corporations, exacerbating a profit recession in corporate America.
Such continued intransigence on the part of the Fed, ignoring the accelerating weakness of nearly all of our major trading partners, would materially raise the risk of recession here at home, and exacerbate the one abroad.
Speculation has abounded that Minneapolis Fed president Narayana Kocherlakota is the one member of the Fed that is in favor of negative rates in the U.S. She tweeted recently, “We’ve seen this with Swiss bonds paying negative nominal interest rates; cash hard to keep if you have a lot.”
“Negative nominal interest rates easier to manage than cash but can influence people to spend instead of save.”
For her part, Fed President Janet Yellen recently said that the Fed is not considering negative rates at all. That is a good thing.
Yes, negative interest rates could force cash into the real economy; however, it is a last-ditch effort and smacks of desperation. But the more important point is one of morality and responsibility. The U.S. has been kicking the can down the road now for almost a decade since the financial crisis started. All one has to do is look at Japan for the effectiveness, and more importantly, the consequences of never-ending quantitative easing. Japan is not recovering. There is just something abysmal about the government continuing to pump newly printed money into the economy for year after year. It obviously doesn’t work, and Japanese debt levels are beyond anything one could call responsible.
What will work is forcing the economy and the population to undergo the pain that is needed to force efficient reallocation of capital in the economy. Bad banks have to be shut down. Free money has to end. Money that governments don’t have has to quit being spent. Then the economy can readjust, shrug off bad investments, and move forward, eventually. There is no short cut. Zero rates, printing money, or even negative interest rates are a band-aid to delay the consequences of bad decisions and the normal business cycle. They don’t force an economy to be more competitive; quite the opposite.
In addition, zero or negative rates are immoral. They are extremely hard on people who exist on fixed incomes or investments from deposits. There should be a time value of money. When there is not, all kinds of bad decisions are made.
I applaud the Fed for finally starting to get the American monetary system slowly back to some sense of normalcy.
The calls for the Fed to join Japan and a few other nations in setting short-term interest rates at negative levels are irresponsible and politically motivated. Many just don’t want any needed economic readjustment to happen on this administration’s watch. That is blatantly obvious.
I hope the Fed continues to slowly raise rates as conditions allow to get the American economy back to some since of normalcy. We are simply removing accommodation, not tightening. There is a big difference.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com