The world of negative rates

soldiThere is often talk of the negative interest rates applied by some credit institutes.

Two paradoxical situations have emerged: some customers ask for money and pay back a sum lower than the initial one, while others deposit some money but take a loss (it happens frequently, but in this case they already know it).

Certainly a certain political and macroeconomic scenario has led us to this situation. In the article: il mondo rovesciato dei tassi negativi (fonte: www.italpress.com), Paolo Barnard also talks about this in a colourful language. This is not the purpose of this article, since everyone may get an insight into this issue at their own discretion.

This phenomenon leads to a contradictory reflection: on the one hand the real economy is in “crisis” with a stagnant consumer market, deflation and currency appreciation; on the other hand there is an overabundance of money which is allocated at negative rates.

It is unsound…

Approximately the equivalent of 3 billion dollars have been invested with negative return. The major investors fear losing money by investing it in the real economy, to the extent that they are more willing to accept a small loss.

Then, it is not necessary to have earned a Masters in Economics to understand the dangerous effects of the creation of new money as well as of the QE.

It is difficult to understand how to act within this scenario.

The enhancement of non-performing loans in this situation helps rebalance the market: an asset is allocated at a price which meets the current demand, the creditor depreciates his/her credit to please the buyers, and the economy recovers. On the one hand, we are glad to contribute to the recovery of the economy and provide the bondholders with the payment of 10% per year instead of a negative rate. On the other hand, it is worrying that this excess currency and credit market is likely to be adjusted.

Under these conditions, it will be no surprise if the prices of securities and real estate assets suddenly drop. Before this happens, we should make sure that the drop of our assets is lower than the rest of the market and that they continue to generate income.

Emanuele Grassi