Very Bad News: Zero Yields Arrive!!

Guys: this is not good news. The days of zero yields have arrived. Here’s the news from the New York Times: As Markets Waver, Treasury Yield Turns Negative

This presents a major problem.

First it renders the Federal Reserve Board much less effective. Traditional monetary policy, as executed by the FRB, includes cutting interest rates in order to induce people and companies to borrow and thus to energize a flagging economy. With interest rates at their current low levels and reaching zero as this news suggests, interest rates are no longer a weapon for the FRB. We have seen situations like this before elsewhere, most famously in Japan during the 1990’s. The Japanese economy suffered through a decade of extremely poor performances even though its Central Bank had reduced interest rates to zero. The comparison is an ugly one. Let’s hope we are not on the verge of copying that decade.

Second: the emergence of zero rates on Treasury securities suggests that people are hoarding cash. This is also terrible news. The more cash is withdrawn from productive use and simply stashed away for safe keeping the greater the chance of the economy weakening. There is clearly cash sitting around. The problem is that no one is spending or investing it. This leads inevitably to shrinking demand and thus sets in motion, potentially, the downward and self fulfilling spiral of economic contraction that leads to very deep recession.

So the news that yields are at zero can only be viewed as bad news for the economy. It is the kind of news that should grab everyone’s attention and focus them on getting a huge stimulus package passed as quickly as possible.

The second coming of Lord Keynes is upon us. It was his great work ‘The General Theory of Employment, Interest, and Money’ that described the policies necessary to break the downward spiral we now seem to be getting into. He wrote that book during the Great Depression. Keynesian economics works. Now is the time to dust off his book and put his theory to use.