This last week, the yield on a 2-year Irish Government bond turned negative, garnering a rate of -0.007%. That means that if you want to loan the Irish government some of your money, you have to pay for the privilege of doing so. Negative interest rates are not exactly new, but in the case of Ireland it’s particularly bizarre. Just three years ago, amid a potential default crisis, the same bonds were yielding 23%.
What changed? The short answer is no one knows. Shiela Kinsella, an Economics Professor at the University of Limerick, was exasperated. “The market is still in an irrational stage. It’s telling me that markets are lumping the same countries in again, and it’s just proof that nothing is ever learnt.”
Why did this happen? Investors in the Eurozone still can’t find anything to invest in as the European Central Bank (ECB) started a weak bond-buying program to goose investment. It’s a last ditch attempt to goose the economy and produce much needed jobs. But all it has created so far is a Bizarro World in finance.
The prevailing attitude in the ECB is the same as it is for central bankers all around the world. Jobs, jobs jobs – nothing is going to happen in any economy anywhere until there are more jobs. That means that companies have to invest in their businesses by hiring more workers, meaning that they need really cheap money to “prime the pump” and get things going. The problem is that they need cheap money and a lot of faith – expressed in a willingness to borrow and take a gamble on traditional job making industries.
The short answer is that no one is willing to do this. Since 2008, the developed world has been in a period of deleveraging that Mohammed El Erian calls “The New Normal”. So much money that was borrowed before that period was lost that appetites for debt have fallen off to zero. It takes very cheap money to offset that fear – perhaps even negative interest rates. The world has to be utterly awash in cheap money before the workers of the world get a good chunk of it.
So those with money need to park it – and in some cases are willing to pay for that privilege. The US has started to pass out of this regime to some extent, but the hangover from 2008 is still lingering. Most analysts agree that it won’t finish running its course until 2018, which is to say 2018. Where the US is a bit better off, and actually started deleveraging in 2007, it may happen a tiny bit sooner.
What is new, or same as it ever was, is the apparent belief that the ECB is in charge again and will support Euro backed bonds from any member nation. That faith fell apart in the Greek Crisis after 2008, but it’s back strongly now. Apparently, investors didn’t take enough of a hit when Ireland renegotiated its debt in 2011 and now see it as completely safe once again.
How will the developed nations create jobs? The government of Japan, for one, is willing to do anything – even invest in US high speed rail if it means that Japanese factories get to build the trains. They are all doing everything they can to create jobs and get things moving, but investors have no interest in borrowing to leverage their investments. The net result is that while the developed world is awash in cash, there’s a net shortage of cash to get anything done.
Many things fall naturally from this problem, including growing income inequality. High unemployment puts downward pressure on wages and guarantees that working people will never be able to catch up as long as “The New Normal” persists.
Meanwhile, the problem shows up in other symptoms that apparently make no sense at all when you first look at them. Negative interest rates on Irish bonds are just a part of the same problem running through the developed world all at once.
It’s Bizarro World in finance, and there is every reason to believe that it will continue for at least a few more years. Meanwhile, policy makers around the world, in nations that the US has to compete with, will do everything they can to turn everything right again. But the markets aren’t responding in ways that seem to make sense to anyone.
Welcome to Bizarro World, where everything is so backwards even interest rates can be negative. Fasten your seatbelts.