The maddening descent into global negative rates seems like it will never end as central banks continue to double down on their mistakes. Factors that will lead to its end are the growing problems that banks and insurance companies are experiencing as a result of negative or zero rates. These industries have a “must have” need for normal rates so that they can operate. If an extreme form of negative rates is implemented they will be unable to function.
Then ironically the Federal Reserve will have to bail them out as they did for Bear, Stearns and AIG in 2008. This would result in voter anger at favoritism for rich banks, like what happened in 2008 with the TARP bailout of banks.
The growth of Trump’s following, (I don’t endorse him) which is partly based on things like resentment of the 2008 bailouts of rich banks and loss of jobs to items imported from EM countries, is a huge change factor that could morph at any time, even if Trump loses, into a political movement to stop the bailouts.
If the central bank destroys the giant banks and insurance companies and then the Trump wing of the Republican party succeeds in blocking relief then this might result in the discrediting of modern central banking. That might be what ends negative rates.
Negative rates are a form of government taxation by the imposition of a mandated fee, which is this case, is the imposition of a negative interest rate charge assessed against savers. Free-enterprise traditional Republicans will oppose it if they have a chance to get in power. Democrats will also prefer to raise taxes by a traditional method of progressive income taxes, paid by those who can afford them, instead of negative interest rates that favor rich speculators and hurt lower-middle class savers.
Even if Trump retires after the election, I think there will be a new movement of anti-free enterprise people who will seek all kinds of restrictions like protectionism against imports or bailouts for big banks. This would probably be inflationary and would act to end negative interest rates.
Retired working class people tend to like bonds and bank CD’s more than upper-middle class people. The lower-middle class, especially those close to retirement, have been hurt the most by ultra-low rates, including discounting the future of low rates creating an unaffordable retirement. At some point Congress may decide that central banks have gone too far and have to be reined in. Unlike the constitutionally protected independence of the courts, the central bank is a product of legislation and can be eliminated in a rider to a generic bill passed by Congress and signed by the president.
Ultimately insurance companies will have to get Congress to authorize the Federal Reserve to print up and donate money to them to subsidize losses caused by negative rates. Society can’t survive without insurance companies and banks. But this will trigger a political crisis that will discredit and disempower the Federal Reserve.
The Fed urgently needs to avoid going anywhere near this problem of deeply negative rates or they will not be able to break away from its gravitational tug and will not survive politically. The Fed is in the midst of a Vietnam style war against Secular Stagnation and needs to withdraw before things become worse. Monetary policy, during a very low rate environment, doesn’t work and only fiscal policy, especially targeted tax cuts can help.
Financial writer Jim Grant said the Swiss central bank buys U.S. stocks by printing up Francs and exchanging Francs, ultimately for dollars, and then buying stocks, in order to devalue their currency. This explains why stocks have appreciated in such a smooth, steady pace despite absurdly high PE ratios and a weak economy. Japan’s central bank is doing the same to their stock market. Since most everything is globally and electronically integrated then money printing in Switzerland and Japan leaks out to global stock markets and ultimately gets deployed into the most entrepreneurial of major Developed economies: the U.S. stock market. So the worse things get the more central banks print money which flows, in some cases, directly into stocks, thus boosting stock prices, even though the macroeconomic weakness is the reason why central banks decided to stimulate. The result is that stocks fool people into thinking the economy is getting better when the opposite condition is what is happening.
The lower rates go the more people desperately seek a fake “yield” by doing things like writing naked options, etc. This lowers the cost of options, thus creating a false signal of lower volatility, which feeds on itself, as it encourages more investors, including yield hungry insurance companies, to take the plunge into options.
Such a wrong-headed action, and a conundrum, of central bank stock market bubble making is unsustainable and will ultimately be discredited. Investors must increase their degree of independent thinking in the face of increasingly deeper negative interest rates. Investors need independent financial advice about the risks of being fooled by central bank stock market bubbles.
The global growth of competitive devaluation by the use of ever-deeper negative rates is like the situation before the 1962 nuclear test ban treaty. Before then the global environment was hurting from airborne radiation and the test ban ended this. Today the globe is hurt by the airborne radiation of zero rate and negative rate policies that can’t work in an environment of instantly interconnected global financial markets. If everyone devalues then no one benefits.