Fed chair Janet Yellen testified in front of the House Financial Services committee yesterday, where one member said God does not want you to raise until the spring, to give you a taste of the “grilling” she took.
Yellen still “believes” that a Dec. rate hike is on the table, but should there be another downturn did not dismiss the idea of negative interest rates. I can say the American people do not want to see negative rates in the spring or any other time.
Negative rates are the ultimate perversion of the markets. You are paying the government to take their debt. Now what would be the economic environment for that to occur?
Well German bunds out to 5 year are trading in negative territory, France up to its 2-year bonds have negative yield, along with the Belgium and Dutch going out to the 5-year bonds curve are all underwater.
This is the ultimate fear trade, paying the government to hold your money. It undoes a millennium of banking theory, being paid interest on money lent or deposited so the institution can lend it.
So for Yellen to suggest a negative rate environment is a possibility, suggests to me — as I said many times — that not only is Dec off the block for rate rise, but 2016 may be shaky.
Let’s remember Japan, where this whole experiment started some 25 years ago. The Japanese central bank has been at zero for all that time save 7 months, where it raised rates 0.25% in Aug. 2000. By Feb. 2001 it cut the rate back to 0.15%.
The Japanese central bank also has huge positions in the markets — another perversion — with the bank holding more than 52% of the Nikkei’s ETF offerings as well as a majority position in the government bond market.
Is this where we are headed? Not right away, but then again we are only 7 years at the zero bound. Don’t get me wrong the Fed has sizable positions in Uncle Sam’s debt.
The word negative is negative for a reason and if we go there, it will have a negative outlook for the world.
As I wrote yesterday bitcoin prices while soaring in Nov. on Chinese capital controls, sold off more than $100 overnight. Remember the feds have large holdings in bitcoin due to criminal seizures.
Not saying that was the cause, but even new-age digital currencies can be perverted by government intervention.