Earlier today the European Central Bank announced that it would keep its key interest rate where it is for now, but made it clear that there was a rate cut on the horizon and that other stimulus will be considered as well. The current rate for the ECB is -0.4%. That’s right, it’s in negative territory and now they are looking to cut again.
The ECB isn’t the only central bank with negative rates either. According to TradingEconomics.com, there are four other central banks with negative rates: Switzerland, Denmark, Sweden, and Japan. There are also 21 countries listed with rates at 0%.
According to a recent Bloomberg article, there is approximately $13 trillion worth of sovereign debt with negative yields circulating in the global bond market at this time. At the rate debt is being issued and with the overall global trend being to cut rates, you can bet the total amount of debt is going to grow in the months and years ahead.
It baffles my mind that investors will purchase debt with a negative yield, but it also baffles my mind that central banks continue to cut rates. The total amount of government debt issued around the world is also hard to believe. According to the Commodity.com real-time global debt clock, there is over $75 trillion worth of government debt issued at this time.
What concerns me is that we see the negative rates and the amount of debt being issued getting worse by the day and yet we aren’t in a recession. Yes global growth is very slow, but it is still growth and not contraction. What tools will central banks have in their arsenal when we do go into the next global recession?
As I write this, we are on the eve of getting the first look at second quarter U.S. GDP for 2019. Expectations are for the report to show growth of 1.8% for the quarter and that is down from 3.1% in the first quarter. The annualized rate is at 3.2%. The European Union’s most recent annualized GDP growth figure came in at 1.2%. China has seen a tremendous decline in its growth rate, but the Chinese economy is still growing at a rate of 6.2%.
Yes, the annualized GDP growth rates are pretty low from a historical perspective, but the economies aren’t contracting. But central bankers are panicking and the panic is contagious apparently. The Federal Reserve is expected to cut rates at next week’s meeting and it seems to be doing so in order to keep up with the global trend.
When I look at the actions of the various central banks, I can’t help but think back to my monetary economics class with Dr. Robert Premus. It was back in the late 90s, but I still remember various points about how the Fed could use interest rates to fight inflation, boost growth, etc. Dr. Premus worked at the Fed when Paul Volcker was the Chairman. I will say that he had trouble sharing his knowledge in the classroom setting, but I went to his office frequently to talk to him. I would love to get Dr. Premus’ take on the current interest rate environment, but he has long since retired.
From what I learned from Dr. Premus, the current global interest rate environment worries me greatly. Falling interest rates are indicative of a weak economy, but negative interest rates are dire signals about the economic outlook. Historically central banks have been able to cut rates to spur growth and help get economies out of recessions. At the very least interest rate cuts could shorten the length of a recession.
With so much debt being issued with negative rates, our next recession is likely to be a bad one and it may be a long one. At some point, investors will stop purchasing debt because you can’t continuously buy investments that you know are going to lose money. It doesn’t matter whether you are an individual, an institution, or a government—you are perpetuating a cycle by buying negative yielding debt.
The Fed is set to meet next week and right now the odds of a 0.25% rate cut are at 78.6% and there is a 21.4% chance for a 50-basis point cut. Many investors will likely cheer the move by the Fed, but I for one don’t think the U.S. should be cutting rates at this time. We are caving to political pressure and peer pressure at a time when our economy is growing.