Tags: Hendrickson | interest | rates | dysfunction

Economist Hendrickson: 'Negative Interest Rates Symptom of Economic Dysfunction'

By    |   Tuesday, 10 March 2015 06:00 AM

 
Short- to medium-term interest rates have turned negative in a number of major economies including Switzerland and Germany.
 
Obviously this isn't a normal situation, and it's not a healthy situation either, says Mark Hendrickson, adjunct Professor of Economics at Grove City College in Grove City, Penn.
 
"We have the spectacle of widespread acceptance [by investors] of a nominally negative return on paper denominated in a currency that the relevant central bank is actively trying to depreciate," he writes on Forbes.com.
 
That certainly qualifies as a bit bizarre. The five-year German government bond yields negative 0.05 percent, and the euro plummeted to an 11 ½-year low of $1.0828 Friday.
 
"Negative interest rates are a weird and alarming symptom of profound economic dysfunction," Hendrickson states. "In a healthy economy, interest rates coordinate production between the present and the future according to people’s composite time preferences."
 
But what's happening now?
 
"Those vitally important market signals are mangled, broken, shattered," Hendrickson says. "Maybe negative-yield instruments will pay off in ways I don’t yet perceive, but I’m content to keep my distance from them and let others play that bizarre game. I’d rather preserve my sanity."
 
Washington Post columnist Robert Samuelson doesn't quite get what's happening either.

"To the long list of economic mysteries can now be added interest rates," he writes.

"They've been at rock bottom, as everyone knows. But now we've encountered something novel: negative interest rates."
 
Actually, it's not that mysterious. Economic sluggishness overseas is pushing central banks there to cut interest rates. This pours money into the financial markets, ironically pushing down yields.
 
"I don't understand why anyone would put up with negative interest rates," Richard Sylla, a financial historian at New York University, tells Samuelson. "You could do better by holding cash."
 
The danger: "What happens if governments or corporations begin selling bonds that start with negative rates?" Samuelson asks. "Then we're in completely unchartered waters."
 
Actually, it already has. Look out below.

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Short- to medium-term interest rates have turned negative in a number of major economies including Switzerland and Germany.
Hendrickson, interest, rates, dysfunction
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2015-00-10
Tuesday, 10 March 2015 06:00 AM
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