If you’re planning to borrow money, you’ll be happy to hear there hasn’t been a better time in 5,000 years to do it. But what's good for your monthly home payments may not be so good for the world economy.
Interest rates today are the lowest they’ve been at least since Stonehenge was under construction and the pharaohs of the First Dynasty ruled Egypt, Bank of America Merrill Lynch (BAML) said in a report this week.
(Chart: BofA Merrill Lynch)
In fact, according to another new report, this one from the Bank of Montreal, interest rates have fallen so far that some governments can actually make money by borrowing it — essentially destroying any argument for spending cuts.
“In this bizarre circumstance, let’s just say that the argument for spending restraint — let alone austerity — pretty much collapses,” Bank of Montreal chief economist Doug Porter wrote in a report Friday. “Public sector borrowing becomes a revenue-generating activity.”
Yes, folks, it’s a strange new economic world we live in. Here's why we're living in it.
The headquarters of the European Central Bank in Frankfurt-am-Main, Germany, lit up for a "symphony of light" show, March 12, 2016. The ECB and other central banks are fighting what appears to be a losing war with deflationary pressure. (Photo: Thomas Lohnes/Getty Images)
Central banks vs. the nightmare scenario
According to BAML’s “Longest Pictures” report, this is happening because of central banks all over the world that have been pushing down interest rates for years in order to fight the threat of deflation — a persistent decline in prices.
For finance experts, deflation is an economy-destroying nightmare scenario. Why would you make any major purchases today if you know things will be cheaper tomorrow?
As BAML and many others have argued, there’s little that can be done about the deflationary pressure in the global economy. It’s mainly the result of the technological change that we’ve seen in the world recent decades — change that has seriously reduced the cost of producing just about anything.
Central banks are battling that trend by lowering rates, which is supposed to spur more borrowing and spending, and therefore higher prices. But after nearly a decade of low and lower interest rates, and the threat of deflation still stalking developed economies, some are wondering whether the policy works at all.
It may have just caused the world to take on way too much debt.
Negative interest rates: You get paid to borrow
In some countries (Sweden, Switzerland, Japan) the battle against deflation has become so extreme that central banks there have dropped their key lending rates below zero. You literally have to pay to stash money at those central banks.
It’s a policy designed to encourage people and investors to spend rather than save, propping up the economy.
A canal in central Amsterdam, Netherlands. Some Dutch homeowners have been getting paid to hold a mortgage. (Photo: Pixabay)
But it’s not just governments who can get paid for borrowing these days. Some homeowners in the Netherlands are actually being paid by their banks for having mortgages. Their variable rate mortgages are tied to the Swiss National Bank’s interest rate, which dropped to -0.75 per cent about a year and a half ago and has just stayed there.
This week, German government bond yields turned negative. If you buy German debt (as a safe, stable long-term investment) you will never make as much from the country's debt payments as you paid to to own that debt in the first place.
‘A $10-trillion supernova that will explode one day’
Some experts fear that all this bizarre negative-rate borrowing will eventually catch up with us, and result in a debt crisis.
The Bank for International Settlements (BIS), a sort of “central bank of central banks,” has been warning for some time that the borrowing numbers aren’t adding up — the world has gone and borrowed too much.
All these banks desperately dropping interest rates are “signs of a gathering storm that has been building for a long time,'' a BIS economist wrote.
Bill Gross of Janus Capital is predicting a "supernova" in the debt market, due to borrowing at negative interest rates. (Photo: Andrew Harrer/Bloomberg via Getty)
Bill Gross, a legendary billionaire money manager, is using a stronger analogy than “storm.” Noting that some $10 trillion in debt around the world today has a negative yield on it (i.e., it’s so expensive it doesn’t make any money for the debt owner), Gross described the debt market as a “supernova that will explode one day.”
Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day
— Janus Capital (@JanusCapital) June 9, 2016
Of course the big question — the $10-trillion-and-counting question — is when this supernova will explode.
In the meantime, make sure you can actually afford that huge mortgage you got on that overpriced house. No point in adding to the problem, right?