Banks will not give out more loans because the cost of funds is lower. Both businesses and consumers will not borrow money and will look at the potential growth in the future so they can pay the loans back.
"Instead, they look at the likelihood of future growth so they can get their money back," Ma said. "Consumers will not take out loans to buy new cars or homes just because the financing term is attractive. The notion that negative interest rates will produce loans and generate economic growth is just wishful thinking."
The total value of negative yielding debt globally is $10.6 trillion, up roughly 20% year-to-date.
Potential buyers of negative yielding bonds include central banks, regulated financial institutions, speculators and passive investors.
Side effects of negative interest rates include potential for future financial bubbles, excessive borrowing and leverage and lower bank profitability.
We think the increase in global debt stock of negative yielding bonds signals a slow down in global growth, continued low inflation and global central banks re-engaging to jumpstart their economies.
The Jackson Hole monetary conference had no sooner ended than one more European country was added to the scroll of countries with negative 2 year sovereign yields...
With its entire yield curve below zero and the yield on the 30Y auction assured to be below zero, a reflection of dwindling expectations for inflation and growth over the coming years and ahead of the ECB's relaunch of QE next month - Germany was hoping to sell some €2 billion in bonds maturing 2050. However, with bond yields rising sharply into the auction, with the yield on the German 30Y rising from -0.18% to as high as -0.10%, demand suddenly slumped.
And so, when the dust settled, it turned out that Germany had managed to sell just €824 million of the total €2 billion target at a record low yield of -0.11%, with the Bundesbank forced to retain almost two-thirds of the entire issue as demand plunged. In other words, this was basically a failed auction.
Thanks to the central bank's intervention, the bid-to-cover ratio was just barely above one, or 1.05 times, versus 1.07 times for the previous sale of similar maturity bonds on July 17, while the real subscription rate - which accounts for retentions by the Bundesbank - fell to 0.43 times against 0.86 times at the previous auction. Anything below 1 indicates that there is no real market demand for the entire issue.
If the interest rate is negative, it indicates that the entity providing credit is losing capital by taking the counterparty’s risk. However, the central banks in many countries have been in a position to implement negative real rates because of the continued demand from investors for low-risk securities as result of the prevailing uncertainities and poor returns provided by other asset classes.
Actually, the economic growth will not be stimulated if investors just rush to low-risk assets. The reason as to why the interest rate is taken to the negative territory by the central banks is to spur economic growth. Consumers, businesses and banks that hoard cash get punished when the interest rate becomes negative if they do not respond in the right way.
The turn to NIRP (negative interest-rate policy, reflects the breakdown of the macroeconomic model that guided monetary policy in the decade before the Great Recession. For central bank and mainstream economists the challenge has been to explain that breakdown, and it has given rise to zero lower bound (ZLB) economics. The argument is the Great Recession caused the natural rate of interest to become negative, but the ZLB on nominal interest rates prevented the market from delivering that required interest rate. Consequently, policy was compelled to step in with NIRP to overcome the ZLB obstruction.