Central banks should know by now that you cannot have negative interest rates with low bond yields and strong growth. One or the other.
Central banks have chosen low bond yields at any cost, despite all the evidence of stagnation ahead. This creates enormous problems and perverse incentives.
Central banks have already stated that they will continue with ultraloose policies no matter what happens to inflation in at least a year and a half. For consumers that is a lot of time for weakening purchasing power of salaries and savings. Markets may continue to reward excess and high risk, but that is not something that should be ignored, let alone celebrated. Extreme risk will be blamed for the next crisis, as always, but the cause of that extreme risk -perennial loose monetary policy- will not stop. In fact, it will be used as the solution if there is a market collapse.
Central banks should be tapering already, and if they believe that low sovereign yields are justified by fundamentals, let markets prove it. If negative nominal and real yields are justified by the issuers’ solvency, why is there any need for monetary authorities to purchase 100 percent of net issuances? Reality is much scarier. If central banks started tapering, sovereign yields would soar to levels that would make many deficit-spending governments quake. Therefore, by keeping yields artificially low, central banks are also sowing the seeds of higher debt, lower productivity, and weaker growth—the recipe for crowding out, overcapacity, and stagnation.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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