Written by Nate White, Chief Investment Officer of Paragon Wealth Management
Yes folks, the condition where you actually have to pay someone to hold your money or you get back less than you deposited is now a reality in Europe. In anticipation of the start of the ECB’s asset purchase program yields in many European countries are now negative. Why would someone accept a negative yield? One reason is that you might expect deflation to continue to fall pushing the price up even further or giving you a positive real yield. Another reason could be regulations that force people or institutions to hold negative yielding instruments. Unless you’re using your mattress you pretty much have to put your cash in a bank/depository. Fear of an economic downturn or disaster could make getting most of your money back rather than losing it a relatively better prospect.
Due to the Fed’s zero interest rate policy and QE we in the U.S. have almost been there for years. I bet you are just loving that zero percent you basically get on your savings! In fact, after adjusting for inflation we’ve had negative real yield for some time on cash or near cash instruments. However, now the Fed is in a tough spot trying to raise rates to match the economy because most of the rest of the developed world is doing the opposite. Our relatively higher rates are causing the dollar to soar as foreigners buy our bonds. As the dollar increases it creates stress on emerging markets and U.S. multinationals. This in turn gives the dovish Fed the excuse to put off the date for rate increases to begin.
Central banks however can only do so much and their actions to prop up assets prices don’t necessarily translate into economic growth. Overtime the marginal benefit from asset purchases decrease and then we are left with paying the price of trying to unwind them. The pain of trying to unwind then causes the Central Bankers to refrain altogether or even add more QE. The cycle never ends and we are trapped.
Let’s hope the world doesn’t end up being stuck in an infinite loop of QE and negative yields as they seem to be associated with subpar economic growth in the long run – just ask the Japanese.