It is all connected: flat growth in Europe and continuing deflation in Japan, the rise of right-wing political movements, and central bank policies leading to negative interest rates across the globe.
Negative interest rates. The concept inherently makes no sense. Interest rates are often described as the price of money. If a price of something is negative, it suggests that someone will pay you to take it off their hands. And that is actually the case with money today. Investors now give money to most governments in Europe with the promise of getting back less money later. Not less money adjusted for inflation, but less money.
Negative interest rates and the rise in populist political movements in Europe are both linked to bad economic conditions. While mainstream politicians and economists might deny we are in a global recession, the fact remains that economic growth is flat to negative across a large swath of southern Europe, growth in Germany is barely positive and Japan remains in a deflationary spiral. Trump voters may not believe it, but the United States is actually the good news story today in global economics.
In subtle ways, negative interest rate policies and populist political movements are reinforcing each other. Negative interest rates are a radical effort by central bankers to kick-start their moribund economies, while that same economic weakness is emboldening right wing political parties that have historically won popular support in bad economic times. Right wing politicians are pointing to the failure of central bank policies as evidence of the corruption and incompetence of the old order they propose to replace, while central bankers fear that continued economic weakness will further public unrest, weakening faith in democratic institutions and ultimately threatening the integrity of the European Union.
Just a couple of years ago, few economists imagined that negative interest rates could be a sustainable national policy, and yet, today, negative interest rate policies have been embraced by 23 advanced industrial nations as they struggle to rekindle economic growth. Monetary policy--the basket of tools that central banks use to modulate economic activity and control inflation--used to be constrained by "the zero lower bound," meaning that rates could not go below zero.
As a general matter, we tend to think of falling interest rates as a boon to the economy, for governments in particular. As the long-term cost of capital declines, investments of all types became more affordable. Homeowner refinance mortgages, freeing up household cash for other purposes. Lower interest rates mean that your credit is good. If lower rates are better than higher rates, why aren't negative rates better than positive rates?
They aren't better because they speak to a global economic that is broken, and where politicians and central bankers are taking extraordinary and desperate measures to put Humpty Dumpty back together again after all of the traditional strategies have failed. Over the past two years, as negative interest rate fever has spread across advanced economies, I have taken every chance I can to ask people I run into--economists, bankers, traders, hedge fund managers (yeah, I know, I need to get out more)--what they think of negative interest rates. To a person, they are befuddled. No one knows what the implications are going to be, because we have never traveled this path before, and, importantly, the longer interest rates remain negative, the more troubling becomes the question of how we get back to the world that we once knew.
Now that we have crossed the great barrier of what was once the zero lower bound, we are literally in uncharted waters. Negative interest rate policies and quantitative easing are flooding the world with cash. Asset values held by the wealthiest are rising, while for the average family and for retirees savings are being gutted. And few, if any, public officials can tell their constituents what it all means and where we are headed, leading to a spiraling downward in public confidence in political and central bank leadership. In Japan, where negative interest rates are now being felt at the household level, the Bank of Japan is facing growing demand for large denomination bills. Imagine what it means to a modern economy that depends on a functioning banking system if people conclude--as a matter of rational analysis, not conspiracy theory--that cash literally stuffed into a mattress is worth more over time than savings deposited in a bank.
It has now been nine years since the summer of 2007 when global markets first started to seize up, and eight years since the global collapse in 2008. Eight years is not a long time in the lifespan of major economic collapses and recoveries, based on comparisons with comparable banking system collapses in the past--as Harvard economists Carmen Reinhart and Ken Rogoff document their book, This Time is Different--but it is a lifetime in a democracy.
As the post-2008 economic stagnation has dragged on and popular discontent has grown, Europe has seen the rise in right wing political movements across the continent. The 2008 collapse is not the cause of all that that is ailing the advanced industrial economies--arguably the immigration crisis in Europe is now a greater source of societal stress there than economic stagnation--but it has exposed deep tensions between our economic system and democratic institutions.
Historical data suggests that recovery from a major economic collapse can take a decade or more. Policymakers know--as recent elections across Europe have demonstrated--that the public lacks anything close to that kind of patience. Negative interest rates--an economic strategy that has never been tried before, and a concept that many struggle to comprehend--reflect the pressure that global central bankers are under to jumpstart the world economy as public discontent continues to deepen.
It is impossible to say whether negative interest rate policies are working or not, as it is impossible to know what conditions would be in Europe today were those policies not being followed. But we do know that things could be worse, a fact that cannot be far from the minds of European policymakers as they see the rise in right wing parties across Europe today. In the wake of the last global economic collapse--eighty years ago--the rise of right wing parties was swift and furious. By early 1933--a little over three years into the Great Depression that came after the 1929 collapse--Adolf Hitler was elected Chancellor of Germany.
Artwork by Jay Duret. Find him at jayduret.com.