We have already witnessed currency war and now we are going to witness a new paradigm of interest rates where Negative Interest Rates will play replacing Zero Interest rates. After Japan now many countries across the globe would move towards this policy which will spook a bubble burst for the debt market and Sovereign Wealth Funds in the long term. Well also one thing I would discuss later in this article is that Iran is not in discussion with Saudi Arabia its European companies. Now, coming back to the earlier point which I was discussing, that no more QE and no more printing of money would be working now. We have witnessed negative interest rates on government bonds from Switzerland, Denmark, and Germany and now Japan. The best game for any economic policy is to weaken its currency, which leads to cheapening of its exports and let other countries buy more of its goods and services particularly those have higher-yielding currencies. Further the problem will be more with pension and retirement based funds across the globe since restriction of withdrawal as well as no gains on their savings would spook more problems in the long term. Deflation problems cannot be solved through Negative Interest rates policies. If we look at the history over the last 1 year we find that ECB came up with rate at minus 0.10% in the summer of 2014. It did not work to control deflation and it further lowered its rate at minus 0.30%. In Swiss Central Bank came up with a minus 0.25% interest rates and later on dropped it further to minus 0.75%. The problem did not end here, infact many commercial banks are introducing fees to open and maintain an account
Negative interest rates mean that in order to park funds in bank one has to pay interest. Ideally it never happens like that but bank doesn’t pay any interest rather they deduct the expenses form the savings of cash. This is what Switzerland’s interest rates have been doing over the last 10 years. On the other hand many will say that negative interest rates might induce more borrowing and consumption, but there is heavy risk of people exiting bonds and debts product into cash. So US will not go for negative interest rates. Coming to other economies we might have to wait and watch what other economies do to keep their export market to alive. The problem is with the Pension fund manager who need generate positive cash flow to the elderly person. Now the worst thing which will happen is they will scout desperately for high-yield bonds, emerging market debt, and high-dividend equities which will create bubble in debt and hybrid product categories.
This is one of the prime reasons why companies like Moragn Stanley, Credit Suisse and other banker have been cutting down their debt wealth management part especially in Asia. They have huge herculean pressure of providing returns on their investments as they getting into lending game whether is real estate debt, structured credit products or high yield loans to fetch returns over. Now with this ongoing problem of debt sovereign wealth funds are now seeking permission to invest in infrastructure, renewable energy etc. This has two parts 1) Safe assets are at risky point and 2) Investments in other sectors will be like bubbles being created. The largest sovereign wealth funds in the world include Norway at $900 billion; UAE Abu Dhabi at $775 billion; Saudi Arabia at $740 billion; and Kuwait at $410 billion. China has three such funds including Hong Kong that total $1.5 trillion.
Iran is not in recent discussion with Saudi Arabia for crude price negotiation. It’s actually the European companies who are approaching the Middle East for crude negotiation since Euro will come up with bond purchase and in order to get buyers Middle East Sovereign Funds inflow in the bonds are crucial. Hence the trade off is going to begin. Everyone is trying to pull funds from the other asset classes particularly from Debt and invest in equities. Coming to the last part US fed might find its difficult to go for interest rate hike but in order to pool and stop leakages of fund outflow from Sovereign they may go ahead. Further a pull of US economy in term of interest rates coming down might act as political weapon to win but might not be reasonable things since that would create sentiment of weak US economic growth prospects. The current situation is very crucial. There is no proper road map for the recovery as long as Crude and Commodity prices don’t grow.
Global Macro Economic Researcher and Business Strategist
Master of Economics, MBA in International Management, ICWAI (Final)