What Negative Interest Rates Mean for the World

Joe Weisenthal (0:01)

Hello, Odd Lots listeners, it's Joe Weisenthal. Before we get to today's show, I wanted to let you know that Odd Lots is hosting its first ever live event on September 19th here in New York City.

Join me and Tracy Alloway as we host an all-star lineup of guests to talk about cryptocurrency, white collar fraud, modern monetary theory, and more. We'll even have some finance-themed live music, including some songs by yours truly. So keep listening to Odd Lots all this month to find out more details about the live show. But for now, mark your calendars for Thursday, September 19th for the first ever Odd Lot Variety Show.

Tracy Alloway (0:53)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway. My co-host, Joe Weisenthal, is away. But I was thinking the other day, and I realized that Joe and I have never really done an episode on negative interest rates. And while we've had instances of negative yielding bonds before, over the course of the summer, this has actually become a really big topic. By some estimates, the world has, I think, $17 trillion worth of negative yielding debt now, and that includes things that you wouldn't really expect, like corporates, some emerging market governments.

And I think the reason this gets so much attention is that there's something fundamentally kind of unsettling about negative rates. It just doesn't really sit well with our idea of how capitalism is supposed to function. I mean, if you have money and you put it to work by investing in a company or a government, then you are supposed to be rewarded for that.

And that's one reason, I think, that we're really starting to see people question the foundations of the global economy, and we're also starting to see people look at new ideas for fixing it, such as modern monetary theory or MMT, which is something that we have discussed on Odd Lots before. Now, in any case, it doesn't seem like negative rates are going to go away anytime soon, given that central bankers around the world are pushing benchmark rates even lower by embarking on another easing cycle. So on today's Odd Lots, we'll be asking, why exactly is this happening? Why is it that more than 10 years after the financial crisis yields are trending even lower? And what does this say about the economy and how we think about it, and how can we actually fix it?

And I'm really happy to say that our guest for this episode is one of my favorite analysts. I've been reading his research notes for many years now. And I think he's really one of the few on the sell side that thinks about these kinds of issues on a big picture basis. He's certainly the only analyst I've read who seems to be taking MMT very seriously. And you'll see what I mean in just a minute. So without further ado, I'd like to bring on Viktor Shvets.

He is a Global Markets Head of Asia Strategy over at Macquarie. Viktor, so nice to have you on the show.

Viktor Shvets (3:18)

Thank you. Thank you for having me, Tracy.

Tracy Alloway (3:20)

Let's start with that number that I threw out earlier, $17 trillion of corporate and sovereign debt with negative yields. How exactly did we get here?

Viktor Shvets (3:32)

Well, that's a great question. You're absolutely correct. The question is why we cannot tolerate things like what the utility said more.

When I was a younger man, quite often spreads will move 50, 60 bits very easily. Today, when we have 20, 30 bits spreads suddenly moving, you almost need ambulances at the exits. Why can't we have price discovery?

Why can't we have time value of money? The answer to me is leveraging. In other words, our solution to low productivity rates over the last 20 or 30 years was to bring future consumption to the present. Our solution was asset prices and leveraging will deliver to you what wages no longer capable of giving you. And therefore, yes, your real incomes might not grow, but we will allow you to grow wealth in different ways. And initially, it's incredibly stimulating. It improves wealth. It does all sorts of wonderful things.

It also works together with globalization. You can't really have that sort of leveraging unless you also globalize the product and labor market. So it's really the next of triple package of globalization, product market, labor market and financial market where our well-being, our pensions and everything else depends on asset prices. But the challenge with that is that the more you financialize, the less effective it becomes. You go 20, 30 years ago, you needed maybe a dollar, $1.50 of debt to generate $1 of GDP. In most countries today, you need $3 to $5 of debt for every dollar of GDP. So the more you do it, the more incremental impact diminishes. And that implies that you have to spur or you have to motivate debt to multiply even higher. To do that, you need to issue more and more of that debt.