Zero is a hard number to understand. In multiplication, it turns other values to nought. In division, it turns them to infinity. In finance, it turns the world upside down. No wonder investors are dizzy.
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The US is repeating a Japanese experiment with a zero in one of the most important variables in financial markets: the official overnight interest rate.
This zirp—zero interest rate policy—is combined with a nearly infinite quantity of government borrowing. The US government is expected to stimulate the economy—well into what looks like a bad recession—with as much as $850 billion (Rs4 trillion) of new debt.
Meanwhile, the recession is inspiring a flight to safety. That means buying government bonds.
The 2.2% yield on the 10-year US treasury could approach zero if the Federal Reserve follows up on hints that it will start buying treasuries itself. So bond prices could move higher.
But in the currency market, mega-debts and mini-yields are harmful, which is why the dollar has fallen back from 98 yen to 88 yen in a month.
The combination of falling yields and falling currency is illogical for a country that depends heavily on foreign capital. But in the zirp world, many things don’t quite stack up.
The US isn’t the only country that offers this investment conundrum. Take the UK, which is similarly indebted, and similarly borrowing more.
The country is heading quickly towards zirp, with the overnight rate of 2% likely to be cut in half in January. The 10-year gilt yields a low 3.2%. And the pound has tumbled as fast as the dollar, from €1.18-1.08 in a month.
The move towards zirp is widespread. Japan never really left, and the eurozone is gradually getting there. The thinking is that free money will keep the credit system from freezing up, while higher government deficits should keep demand from collapsing.
But the policies aren’t obviously working. The best that can be said so far is that the world could be in even worse shape without them. As no plausible alternatives are on offer, investors should expect more zirp. And that points to many sub-zero returns.