Former Republican congressman and two-time GOP presidential candidate Ron Paul warns that negative interest rates will crush the global economy.
“We will join the rest of them and go to total negative rates in hopes that that will be the solution,” the former Republican congressman from Texas recently told CNBC.
“We’ve never had as many currencies in negative interest rates. $17 trillion worth of bonds [are] in negative interest rates. It’s never existed before. And, that’s a bubble. So, we’re in the biggest bond bubble in history, and it’s going to burst,” said Paul, a vocal libertarian known for his economic and stock market bubble warnings.
President Donald Trump's pining for negative rates last week was widely panned on Wall Street where strategists and traders said such a move would be unjustified and extreme, and not advisable based on the experience in other countries.
Trump called on the Federal Reserve to push down interest rates into negative territory, a move reluctantly used by other world central banks to battle weak economic growth that risks punishing savers and banks' earnings in the process.
Paul contends the Fed’s policies are powerless in this environment. He doesn’t believe this week’s Fed meeting will provide any kind of relief and cutting rates will not be the answer, CNBC.com explained.
“You can’t predict exactly where the creation of credit goes,” said Paul. “We have a ton of inflation with all that QE [quantitative easing]. And, every time you lower interest rates below market levels and create new credit, that’s a bubble,” he said. “You don’t know this precise time. But you know it can happen,” he said. “How do you sell a bond that pays a negative rate? Who’s going to jump up and down?”
Paul isn't alone in warning about negative rates.
Former Fed Chairman Alan Greenspan warned that it won’t be much time before the spread of negative interest rates hits the U.S.
“You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States,” Greenspan told CNBC.
There are currently more than $16 trillion in negative-yielding debt instruments around the world as central banks try to ease monetary conditions to sustain the global economy. The 10-year sovereign bonds in Belgium, Germany, France and Japan — among others — are trading with a negative rate, CNBC.com explained.
An aging population is driving demand for bonds, pushing their yields lower, Greenspan said.
“We’re so used to the idea that we don’t have negative interest rates, but if you get a significant change in the attitude of the population, they look for coupon,” Greenspan said. “As a result of that, there’s a tendency to disregard the fact that that has an effect in the net interest rate that they receive,” said Greenspan, who led the central bank from 1987 to 2006.
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