Make Kitco Your Homepage
Market Analysis - Kira Brecht
  1. Kitco Metals Inc.
  2. Commentary Archive
  3. Bio

Will Yellen Provide Answers At Jackson Hole Summit?

(Kitco News) - The advanced world economies are stuck between a rock and a hard place.

Nearly 500 million people in the world now live in countries with negative interest rate policies, which represents nearly 25% of global GDP, according to a sweeping research report published this week by S&P Global. Also significantly, over half of the world's sovereign bonds, as measured by the S&P Global Developed Sovereign Bond Index, now carry negative interest rates, the report said.

Plop, plop, fizz, fizz – money evaporating before your very eyes. That's the downside of negative interest rates.

Advanced economy global central banks have resorted to unprecedented and experimental attempts to stimulate economic growth. The shift to negative interest rates as an official policy at the European Central Bank, the Danish central bank, the Swedish central bank, the Swiss National bank and the Bank of Japan is a desperate move of last resort.

The U.S. Federal Reserve, for now, has escaped this trap—as the United States scrapes along with a paltry but still positive 1.2% annualized growth rate in the second quarter. Fed Chair Janet Yellen, however, has stated that she won't rule out negative interest rate policies here in the U.S.

Negative interest rates are in part intended to stimulate sluggish economic growth and to battle against potential deflation. The idea is to encourage banks to lend more, for individuals and companies to borrow more and to get money moving and flowing through economies.

Key report findings: The team of economists at S&P Global note that while European economic data reveals that negative rates may be having the desired stimulative impact there, it's not working for Japan. The report warns that if negative interest rates remain in place too long, they could damage bank profitability and also that the policy could create excessive investor risk taking, which has the potential to ultimately create more defaults.

3 risks from a negative interest rates environment

  1. It's bad for banks. Negative interest rates weighs on profitability for banks. It not only forces commercial banks to pay for their deposits at the central bank, but it also encourages riskier lending practices. Ultimately, weakening our banking system pries at the health of the global financial system.

  2. It could mean on tax on savings.
  3. How long will it be before banks begin to pass along negative rates to retail depositors? Will you gladly embrace a negative interest rate on your balance on the bank –just for the privilege of holding your money in the bank's vault?

  4. It could encourage a move to an all-cash society.

Here's a quote from David Blitzer, managing director at S&P Dow Jones Indices: "If negative interest rates spread beyond major financial institutions to the overall economy, the economy will shift increasingly towards a cash-only economy. This means increased transaction costs and rising risks of theft. Some industries might benefit: home protection services and safe manufacturers. You would be moving back toward a pure cash society. If nothing else, it’s a cost in productivity. It gets more difficult and expensive to complete transactions. You really turn the clock back."

What it means for gold: Meanwhile, gold continues to shine in this environment, as concerns about the growing risks of negative rate policies support physical bullion ownership. Gold benefits in a world where nearly half the globe's sovereign debt have yields below zero. A larger move back to a cash society would also likely be gold-bullish.

Big questions: Monetary policy, Fiscal policy. The more worrisome questions revolve around what will or can global central bankers and global governments do to stimulate economic growth? Fiscal policy has been limited in recent years in advanced economies amid concerns about rising debt levels.

Who has answers? Will Janet Yellen and team have any answers at their famed summer mountain gathering in Jackson Hole, Wyoming on Aug. 26? Stay tuned.

By Kira Brecht, Kitco.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news