It wasn’t expected by everyone, but MMs have been predicting this for quite some time (although they are even lower than I expected):
World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.
Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a “secular stagnation” thesis floated by former U.S. Treasury Secretary Larry Summers.
Of course Summers was a latecomer to this idea; I’ve been talking about slower trend growth and low interest rates as the new normal for many years. Tyler Cowen’s book entitled “The Great Stagnation” also preceded Summers.
If you believe the press (and many economists), this period of low interest rates represents “easy money”, That’s right, the implied claim is that the “liquidity effect” (normally very transitory) has now lasted for a decade. And there’s more to come:
Take overnight interest rate swaps. They imply European Central Bank policy rates won’t get back above 0.5 percent for around 13 years and aren’t even expected to be much above 1 percent for at least 60 years.
Japan‘s main interest rate won’t reach 0.5 percent for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1 percent, and a decade until UK rates reach that level.
“Although interest rates are low, they’re not accommodative,” said Harvinder Sian, global rates strategist at Citi in London. “The era of zero rates will be with us for years and years, it wouldn’t surprise me if we’re looking at another five to 10 years.”
Sixty more years!?!?! At least there is one guy dissenting from the view that low rates mean easy money. It will be interesting to see how long it takes the others to figure this out. Let’s hope it’s not 60 years.
Update: Commenter BC pointed out that the US interest rate data looks fishy, given that 5 year T-notes currently yield well over 1%. So the article I cited may not be accurate.
And as predicted by MMs, the Swiss decision to revalue the franc has backfired. Now that markets understand that the Swiss are willing to let the SF appreciate over time, Swiss interest rates are forced below the already very low eurozone rates (due to the interest parity condition.) In contrast, the Danes fought the speculators off, and are now reaping the (admittedly small) benefits, of having slightly higher bond yields than Germany:
The five countries or economic blocs currently with negative deposit rates have yields below zero on all their bonds from a minimum of five years’ maturity (Denmark) to a maximum of 20 years (Switzerland).
The pro-revaluation crowd thought that the SF would no longer be expected to appreciate, if speculators could be placated with a revaluation upwards. But that was like feeding meat to sharks, it just increased their appetites.
PS. Here’s what Tyler Cowen said 13 months ago, about the ability of the Danes to fight off speculators:
I would bet against them [the Danes], in any case this will be a neat test case for our judgments of Switzerland.
As The Economist noted, between 1999 and 2014, the International Monetary Fund, in its April forecasts, failed to predict every one of the 220 instances in which one of its members suffered negative annual growth in the next year.
Ouch! I wonder if they ever predicted anyone will have negative growth? Kudos to Lars for going out on a limb.
PPPS. Tyler Watts sent me a music video on “Tall Paul” (Volcker), which might be fun to use in undergrad money/macro classes.
Update: Timothy Lee has a great post on Draghi’s screw-up today.