Time For End To Radical Monetary Experiments And Go With What Works
Monetary Policy: From Asia to Europe, major developed nations are moving rapidly to a once-inconceivable policy: negative interest rates. Switzerland has just became the latest. Is this a good thing or bad?
The move toward negative rates is driven mostly by fears of another financial crunch like the one that decimated the world economy seven years ago. Consider these events just this week:
• Switzerland announced a 10-year bond that carries a negative interest rate - that is, you will have to pay them to keep your money.
• Mexico, looking at what's going on in Europe, is issuing a 100-year eurobond, cashing in on Europe's ultralow rates.
• The U.S., in contrast, is preparing to raise interest rates later this year, which many analysts warn could tank our struggling economy.
What to make of all this?
Conventional wisdom says that with interest rates close to zero in the U.S. and negative in Japan and parts of Europe, we should be seeing booming investment and growth. But we're not.
Instead, investment and economic growth are slowing across much of the globe. The IMF recently cut its estimate of potential growth in developed countries to 1.5% from 2% due to shifting demographics, slowing productivity and strict post-crisis bank rules.
It seems paradoxical. Shouldn't low interest rates - cheap money - translate into higher investment?
Not so far.
One reason is that negative rates provide no incentive to save money. None. Would you sock funds away for 10 years in Switzerland, knowing that you'd actually lose money? Yet around the world central banks are punishing savers with ultralow rates.
This is a little-discussed reason why central banks from Japan to the U.S. to Europe are engaged in quantitative easing: They're printing money to replace missing private savings and keep interest rates low, which, in turn, is expected to create an economic boom by pushing up investment. Over the last 10 years in the U.S., however, real gross domestic investment, the broadest gauge of private-sector investment, has risen just 1.3% a year - that is, hardly at all.
This is in sharp contrast with average growth of 4.2% a year since 1960 - including a stretch of stagflation in the 1970s, vicious economic downturns in the early 1980s and 2000, and the so-called Great Recession.
The same scenario is playing out around the world. And thanks to stiff new regulations under the so-called Basel Accords and the Dodd-Frank bank reforms, banks are no longer any help in escaping it. They have little incentive to lend money.
That's visible in commercial and industrial loans, a key gauge of business borrowing from commercial banks, which are still at roughly the same level - $100 billion - as they were before the financial crisis hit.
In other words, banks no longer feed economic growth. Instead, profitable small- and medium-size companies finance themselves out of cash flow, while large companies stockpile cash or raise funds in the bond market.
But there is no investment boom - and won't be. Businesses are convinced that we're in a slow-growth rut and are not likely to spend more for smaller returns.
In short, negative interest rates, as in Europe and Japan, and zero interest rates, as in the U.S., have done little to boost growth or create opportunity. They've likely made things worse by distorting markets.
Higher U.S. rates may be of some benefit as capital flows here from slowing European and Asian economies. But they won't radically alter the picture. We won't escape the no-growth box simply by manipulating rates and experimenting with other radical monetary policies. Instead, we need supply-side measures.
Forget the Fed. It's time to cut tax rates, reduce regulations, reward hard work, stop punishing savers and put an end to the class-warfare rhetoric that has damaged entrepreneurs' confidence in the future.
