The over-issuance of currency and negative interest rate policies, which were adopted by the developed economies after the 2008 global financial crisis and gradually spilled over to other countries, have failed to stoke the economic growth. On the contrary, they led to a decline in the underlying growth rate of the global economy, and sowed seeds for the eruption of a new systemic crisis in the financial sector.
The negative interest rate is the prominent feature of the current global financial system. To rein in inflation and compete for the depreciation of local currencies, the European Central Bank and the central banks of Denmark, Switzerland, Sweden and Japan adjusted their monetary policies and cut the interest rates into negative territory, in June 2014, September 2014, December 2014, February 2015 and January 2016.
In 2016, the number of countries and regions applying the policy of negative interest rates continued to rise, and the negative interest rate margins were also expanded. At the same time, the scope of negative interest rates was expanded from commercial lenders’deposits at the central banks to the interbank market and the bond market. Furthermore, more countries are considering the possibility of interest rate cuts or the negative interest rate policy.
At present, the global value of bonds with a negative yield amounts to $13 trillion, more than doubling the $5.5 trillion in 2015. In 2014, there were virtually no bonds with a negative yield. The growth of such bonds in developing economies and emerging economies was very fast.
For the central banks that adopted negative interest rates, they were in sort of a dilemma and had to cut key interest rates into negative territory. After the global financial crisis, the conventional monetary policy tools were no longer effective, and they applied various quantitative easing measures to the maximum. However, the recovery of the global economy remained slow and sluggish, and the developed countries are now under dual pressure from high debt levels and deflation. The policy of low interest rates and even negative interest rates cast immeasurable negative impact on the long-term economic stability. Despite stimuli from the purchases of long-term bonds and low interest rates, the growth in global productivity was still very slow. The financial sector had a “crowding-out effect” on the real economy, and credit easing was prevalent on the market. Under such a scenario, resources were allocated to sectors with low efficiency, and the post-crisis low productivity would continue. According to estimates, the developed economy, which witnessed the cycle from economic boom to doom, lost an average of 0.5 of a percentage point in productivity annually from 2008 to 2013, and it is unlikely to recover the losses in a short period.
In the international financial market, for non-American banks, the cost of borrowing in US dollars is higher than borrowing in local currencies and then exchanging them into the dollar, and this is an abnormal phenomenon. In particular, catalysts for the financial market turmoil since the beginning of this year included a decline in banks’ net interest margins under the negative interest rate policy, the continuing decline in profitability and plunges in the share prices of European banks. For several financial institutions in major European countries, including Deutsche Bank Group, Societe Generale, Credit Suisse AG and some Italian banks, the amount of credit default swaps rose sharply, and the credit risk also rose accordingly.
In the era of negative interest rates, the supply of safe assets could not meet the demands, and this is what is known as the “asset shortage”. At a time when the prices of crude oil rebound and the interest rates are low, safe haven assets including gold have become popular among investors. This year, investors have poured more than $50 billion into commodities, reaching the highest level for the February-July period in the past seven years. In the first half of this year, the commodity market outperformed the global bond and stock markets.
On the surface, the global waves of negative interest-rate experiments were part of the unconventional easing policy, but in essence, it meant that the risk of credit tightening has not been eased fundamentally, and its long-term structural impact on the global financial markets can not be ignored.
First, the negative interest rates could, in theory, encourage banks to extend more loans, lower the financing costs and promote consumption and investment, but in actual practice, whether or not the banks would expand their credit scale depends largely on factors such as their desire to issue loans, the market demands, market confidence and the health of their balance sheets, and the negative interest rate policy alone could not fundamentally solve the problem of “liquidity trap”.
Second, long-term supplies of lost-cost capital under the negative interest rate policy would greatly heighten the risks of asset bubbles and speculations, which in turn would mean greater debt pressure. For example, the long-term refinancing operations by the European Central Bank unleashed huge amounts of low-cost capital, and banks could buy government bonds and make profit through arbitrage transactions. On the one hand, when the liquidity holding in the financial system grows, banks could invest their surplus liquidity into sectors with higher yields but bigger risks, or harvest short-term capital gains through riskier capital operations. On the other hand, because government bonds became a hot investment choice among financial institutions, this would result in a further increase of the supplies of government bonds, consequently pushing up the overall debt levels.
Third, the negative interest rate policy was an outcome of dual pressure from the sluggish growth of the global economy and deflation. The underlying structural problem was the declining return rates for long-term capital and investment. Therefore, if the negative interest rate policy continues, the long-term real interest rates will be further lowered due to the declining return rates of investment in the real economy, and this would lead to a further decline in the nominal interest rates. Under the interaction and mutual influence of the factors, a “negative cycle” was formed.
And fourth, the negative interest rate policy would also be spilled over through such channels as exchange rates and international capital flows. Against the trend of globalization and the expectations of negative interest rate policy, the competitive depreciation of currencies would resurge, which would cause more turbulent fluctuations in the prices of global assets.
Therefore, if the current global crisis bailout methods are not fundamentally reformed and the old policy options continue to be applied, the possibility of another global systemic financial crisis in the future can not be ruled out.
