What Happens When Everyone in the World has Zero Interest Rates?

If you can’t remember the definition of stupidity, events this week will refresh your memory. One popular definition of stupidity is repeating the same behaviour but expecting a different result, like pushing on a door that opens by pulling. A more current and topical one would be cutting interest rates 511 times in six years in order to raise growth and/or lower the unemployment rate.

Bloomberg ran the headline last week ‘Central banks keep easing after 511 cuts fail to spur growth’. This was a real article, not one on a satire site. After six years of responding to a credit bubble by lowering the cost of credit, central banks are almost out of rates to cut. This presents an interesting problem which we’ll try to solve over the next five days: what happens when everyone in the world has zero real interest rates?

Central Bank
Source: Bloomberg

Hold your thoughts on global ZIRP (zero interest rate policy). It’s a big week in Australia, at least if you think macro-economic data has an effect on the stock market. March housing finance figures will be released by the Australian Bureau of Statistics today. With no advance knowledge of them, we predict they will show that the Reserve Bank has failed to ignite a new housing boom in Australia.

So what? Well, poor housing figures will provide more justification for another interest rate cut between now and the Federal election in September. You’d go with sooner rather than later on the rate cut. Any rate cut too close to the election looks political. Cutting now looks apolitical.

Besides, the size of the government’s deficit in 2012–2013 should provide even more justification that the Australian economy needs cheaper credit.  Treasurer Wayne Swan is set to announce that the government will return the budget to surplus in 2016–2017, about $40 billion in deficits later.

It’s an impressive achievement. In the last five years, the deficits have been $27 billion, $54.5 billion, $47.5 billion, $43.4, billion, and an estimated $15 billion for 2012–2013. That number will probably be lower tomorrow, in order to show some fake improvement. But the trend is pretty clear.

There is something vulgar in the amount of press coverage the Australian Federal Budget gets. The mainstream media furiously calculates the net dollar benefits to the average family, the same way you might calculate the net caloric benefits a pig gets when it sidles up to the trough. The handing out of taxpayer money (while running deficits) should be an occasion for public shame.

Dan Denning
for Markets and Money

Join me on Google Plus

From the Archives…

The Higher the Market, the Harder the Fall
10-05-13 – Vern Gowdie

India’s Balance of Trade — a World out of Balance
9-05-13 – Greg Canavan

How the Dow is Just Wall Street’s Marketing Tool
8-05-13 ­– Dan Denning

Watch Out For When Australia’s Terms of Trade Goes Back to ‘Normal’
7-05-13 – Greg Canavan

The Greatest Wealth Transfer in History
6-05-13 – Bill Bonner

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money