Continuing Low Interest Rates In The US, Europe Joins The Party

Both the central bank in the US and Europe announced an update on their monetary policy over the last two days.

The US is now facing almost five consecutive years of zero interest rates. On Wednesday May 1st, the US central bank confirmed that “interest rates will remain at historically low levels while the U.S. central bank will not alter its $85 billion a month asset purchasing program,” as reported by CNBC (among many others). Although it has become somehow “normal” to most of us, we should note that up until now, not too much progress has been made on the macro economic level. Apart from preventing a new financial crash, the main effects of the gigantic monetary stimulus lies in the financing of the (too big to fail) banks, stimulating the (US) stock market as well as the (US) bond prices.

Meantime, the US government has continued to grow its debt, which now stands at 101% compared to the US GDP. In that respect, the report from the latest US Fed (FOMC) meeting states:

“Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

The Fed’s decision came the same day as a report on private payrolls fell well below expectations, indicating just 119,000 new jobs created, a seven-month low.

If there is a certain concern about a restraining effect of the fiscal policy with a growing debt level than what will happen once austerity becomes a necessity to control the debt?

Over to Europe, where ECB President Mario Draghi today cut its benchmark refinancing rate by 25 basis points to a record low 0.5%. That is the first cut since Mr. Draghi reassured the world “he would do whatever it takes to solve the crisis” in June of 2012.

Mr. Draghi left the deposit rate unchanged (i.e. the interest rate that commercial banks receive when depositing their money at the central bank). But he said the central bank is technically ready for negative deposit rates and noted downside risks to the economy. Reuters wrote the following earlier today:

While there are “several unintended consequences that may stem from a negative deposit rate, Draghi said policymakers will look at this with “an open mind” and “stand ready to act if needed.”

A negative deposit rate would mean having to pay for holding euro deposits. Such a move could drive money out of the euro zone into other higher-yielding assets and encourage the banks to lend out money rather than hold it at the ECB.

“The fact that Draghi is leaving the door open for the prospects of negative deposit rates is a medium- to long-term euro negative,” said Paresh Upadhyaya, director of currency at Pioneer Investments in Boston.

“It certainly opens the door for capital outflows, and that’s what makes it essentially a game changer in terms of the euro.”

Brought to our attention via Mike Shedlock’s blog, Deutsche Bank published an overview of different monetary measures with their impact. The ironic conclusion of their analysis is that the ECB is choosing for the low impact measures while ignoring the impactful measures.

ECB measures May2013 gold silver general

As a round up, we looked up the government bond rates of the largest economies. The table below is based on today’s figures (courtesy: Bloomberg).

government bond rates 2 may 2013 gold silver general

Based on official inflation rates, holding government bonds in most large economies yields a negative return on 2, 5 and 10 years. Based on the unofficial inflation rate, bond holders are literally throwing away their money. So who said that gold is a worthless investment because it does not pay an interest or dividend?


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