NEGATIVE INTEREST RATES’ long-term impact

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Economies are being slowly ‘suffocated’ by negative interest rates. Shan Saeed discusses its long-term repercussions.

screen-shot-2016-10-29-at-5-19-22-pmWe are witnessing the greatest turmoil in the global economy. Global financial markets are not behaving normally. After the financial crisis of 2008/2009, the term ZIRP became commonly used — zero interest rate policy. The major central banks throughout the world adopted policies of loose money and low interest rates, which typically go hand in hand. Global central banks have lowered the discount rate 649 times since Dec 2008.

The financial markets are not based on reality but on printing presses unleashed by the central banks from advanced economies. The growth patterns are abysmally low. So for the next 4-5 years, either some economies will have slow growth or no growth. The monetary expansion model is coming to an end. The path is rocky and many players are now scared about the markets. Brexit is done. Markets almost collapsed globally on June 24. Clients / investors lost USD1.2 trillion in one day. We are heading for an economic bloodbath/ financial armageddon in the next 9-17 months.

Global markets and players are losing confidence in governments and western policy makers as policy levers being applied by the governments are yielding zilch confidence. Remember the crisis months were September/ October since 1973, 1980, 1987, 1994, 2001, 2008 and 2015?

It pays off if you can fathom history/ economics/investment and geography. All the great analysts, bankers, mainstream media and top gurus were saying last year that global economy would grow at a phenomenal rate and economies (US, Europe, Japan) were coming out stronger than many expectations. All were wrong and misreading the financial markets.

Now we have gone from ZIRP to NIRP. If it weren’t already insane enough, we now have to deal with a negative interest rate policy. This means, the financial system is heading for more troubles as financial markets are getting unstructured returns. The risk-reward ratio in the markets is becoming skewed. This policy makes little sense. It is an attempt to repudiate the time value of money. Most people would rather have a dollar today than a dollar one year from now. And if you loan a dollar today to be repaid one year from now, you typically get paid some kind of interest.

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