The Celeri Journal #80: Negative Infinity Rates

Written by Michael

On May 22, 2020

Global Markets Recap

You probably thought I was kidding when I began using the term #negativeinfinityrates. But here we are 12 years after Lehman, central banks have emptied the cupboard. This is causing consternation at the Big Banks on Wall Street these days.

As Bloomberg reports: “U.S. banks have long looked with pity at overseas lenders coping with negative interest rates. Now, they’re grappling with the fear they may join the crowd. Negative rates — especially if they persist for many years — reduce the spread banks make between lending and borrowing because they cannot pass the negative rate onto most depositors.

Coupled with surging defaults due to an economic downturn, they can sap profits out of the banking system even if they create an initial jump in lending. That toxic combination has crippled Europe’s banks in the last 6 years, a dreaded position their U.S. peers would like to avoid.

“Initially, there’s a sugar rush when negative rates are introduced,” says a London hedge fund strategist. “But ultimately you zombify banks by lowering the velocity of money. Negative rates are a bad idea.”

Surging provisions for bad loans have eaten into U.S. bank profits, with the top 6 firms seeing 1st-quarter income declined 60%.”

The U.K. & Canada are poised to go negative. Will the U.S. follow.

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