Tuesday, February 13, 2018

Negative Real Rates

"You know, the funny thing is, tomorrow if all this goes tits up, they're gonna crucify us for being too reckless. But if we're wrong and everything gets back on track? Well, then, the same people are gonna laugh till they piss in their pants because we're gonna look like the biggest pussies God ever let through the door."
--Will Emerson (Margin Call)

The difference between the nominal interest rate and the inflation rate is known as the real interest rate. If a fixed income instrument yields 5% annually but the purchasing power of the yielding currency is declining at 6% rate, then the 'real' yield is -1%.

A few years back, central banks embarked on policies known affectionately known as NIRP (negative interest rate policy). The idea was to make central bank yields so low that, when coupled with inflation, they discouraged saving in favor of spending. Presumably, this policy would be reversed as economies subsequently firmed.
The 'official' numbers tell us that, here in 2018, we stand in the ninth years of a global economic expansion. Yet, as indicated above, every developed country central bank in the world is maintaining negative real central bank lending rates.

Maintaining such easy money policy in the face of strong economic data signals one of two things. Either the 'official' numbers are wrong, or this is the greatest example of incompetence in the history of central banking.

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