The World Is Awash in Easy Money

The Federal Reserve isn’t the only central bank cutting interest rates. In fact, the world is awash in easy money.

The Fed met market expectations during the September FOMC meeting and lowered interest rates another 25 basis points. It was the second cut of the year and pushed the interest rate down to the range of 1.75 – 2%. Meanwhile, the European Central Bank took a decidedly dovish turn over the summer. It has even hinted at another round of “shock and awe” stimulus.

And it’s not just the big central banks slashing rates.

Eleven emerging market central banks cut rates in September. That follows on the heels of 14 rate cuts by emerging market central banks in August. September was the eighth straight month of net cuts by emerging market bankers. according to a Reuters report.

Emerging markets went through a tightening cycle that ended in early 2019, following the lead of the Fed’s “Powell Pause.” Emerging market tightening lasted a mere nine months.

In effect, we’re seeing a race to the bottom in interest rates around the world.

The following central banks have cut rates in recent months.

Mexico, Egypt, the Phillippines, Paraguay, China, Hong Kong, Indonesia, Jordan, Saudi Arabia/UAE/Qatar, Brazil, Vietnam, Azerbaijan, Turkey, Armenia, Russia, Ukraine, Chile, Dominican Republic, Botswana, Jamaica, Mozambique, Nambia, Mauritius, Peru, Serbia, India, Belarus, Thailand,  South Africa, South Korea, Costa Rica, Sri Lanka, Tajikistan, Kyrgyzstan, Angola, Malaysia, Rwanda, and Malawi.

A few countries have raised rates recently, including Kazakhstan, Moldova, Pakistan, Zambia, the Czech Republic, and Georgia,

We’re seeing the impact of all this easy money. Negative-yielding debt exceeded $15 trillion globally for the first time ever in August and quickly climbed to around $16 trillion. This pile of negatively yielding paper includes government and corporate bonds, along with some euro junk bonds. WolfStreet called it a “race to hell.”

Central bank interest rate manipulation has longer-term ramifications. It encourages debt and discourages savings. Lower savings rates ultimately mean less money available to invest in capital goods. This does not bode well for long-term real economic growth.

In the US, we’ve seen a massive pileup of debt as the Fed has held interest rates artificially low for decades. In August alone, the US government added $450 billion to the national debt. Forty of the 50 US states don’t have enough money to pay their bills.  C0rporate debt and consumer debt have also hit record levels.

Rate cuts may create the illusion of economic growth, but building an economy on borrowing and debt simply isn’t sustainable.