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Why Interest Rates Canít Go Much Lower, In Five Charts


By: John Rubino



 -- Published: Sunday, 14 August 2016 | Print  | Disqus 

Japan and Europe have been operating with negative interest rates for going on a year now, and this is what they have to show for it:

Japan GDP Aug 16

Japan inflation Aug 16

EU GDP Aug 16

EU inflation Aug 16

For readers who arenít completely clear about the GDP charts, theyíre measuring the annual rate of change, so 0.4% means an economy is growing at a rate of less than Ĺ of 1%. This is about as close to zero as itís possible to get without enduring actual shrinkage. Clearly the new-age policy mix of negative interest rates and massive central bank bond buying isnít working.

Mainstream economists want to up the ante by lowering rates even further. But there are reasons to believe that not only wonít such a policy work but that it wonít be tried. For one thing, negative rates are already killing the banks. In Japan, for instance:

Negative rates seen reducing Japan big banksí profits by $2.96 billion: Nikkei

(Reuters) Ė Japanís financial watchdog estimates that negative interest rates under the Bank of Japanís monetary easing policy will reduce profits for the countryís three big banks by at least 300 billion yen ($2.96 billion) for the year through March 2017, the Nikkei business daily reported on Saturday.

The Financial Services Agency (FSA) expressed concern to the BOJ regarding the situation as it sees reduced profits weakening the banksí ability to extend loans, the Nikkei said.

According to FSA estimates, Mitsubishi UFJ Financial Group Incís profit will fall by 155 billion yen. Sumitomo Mitsui Financial Group Incís profit will be reduced by as much as 76 billion yen and that of Mizuho Financial Group Inc will be cut by 61 billion yen.

If the BOJ was to take interest rates deeper into negative terrain, the agency reckoned that the banks would suffer substantial further drops in profit as their interest rate income would suffer.

In Germany, Deutsche Bank is so badly run that teasing out the effects of any one problem isnít easy. But negative interest rates do seem to be in the mix. From a recent Zacks Research report:

Deutsche Bankís Profitability at Risk from Macro Concerns

Profitability growth of Deutsche Bank, one of the largest financial institutions in Europe and the world, as measured by total assets (Ä1.80 trillion as of Jun 30, 2016), remains threatened by a stressed operating environment with negative interest rates, slow growth of the European economy and global headwinds. Management continues to see a challenging revenue environment in 2016, specially post Brexit vote.

Last month the German banking giant reported net income of Ä20 million ($22.6 million) for the second quarter of 2016, significantly down on a year-over-year basis. Income before income taxes came in at Ä408 million ($460.7 million), down 66.8% year over year. Results were adversely impacted by reduced revenues and higher provisions, partially offset by lower expenses which resulted from reduced litigation as well as compensation costs.
DEUTSCHE BK AG Price

Deutsche Bank Aug 16

As the article on Japanese banks noted, more negative interest rates will suck even more life from the banks. Since 1) theyíre already on life support in a lot of cases and 2) even in their currently diminished state they remain immensely powerful politically, itís highly unlikely that weíll see -3% yields on government bonds in this cycle.

But if not that, what? Banks are shrinking around the world Ė as are pension funds and insurance companies and everyone else who depends on positive fixed income returns. National economies arenít growing, while national debt burdens continue to soar. Staying the course in this case means drifting over the falls.

So the next round of experiments will probably feature bigger deficits and more aggressive public hand-outs. Which Ė since these have already been tried and failed Ė doesnít give much hope for the future.


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 -- Published: Sunday, 14 August 2016 | E-Mail  | Print  | Source: GoldSeek.com

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