From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic
The whole atmosphere on global market, reactions of many subjects and the behavior of large majority show us that the world has mostly forgotten the 2008 and its crisis. The thing is that the new crisis threatens the world market again and that the indicators to confirm this are everywhere, but many subjects (pretend that they) do not see it.
The oil price fell below 30 dollars at the beginning of the year. This decline has resulted in series of very pessimistic economic and financial forecasts in global media, while the mainstream ones welcomed the gain for the consumer, putting the impact on the global economy in the other plan. Therefore, many producers will be destabilized countries, such as Russia, Venezuela, Nigeria and Iran, though the connotation is that the destabilization of many vital countries can only upset the world economy.
At the same time on the other side of the financial world, the Bank of Japan announced that it has joined other central banks that introduced negative rates. The measure was proposed to restore lending by cheering banks not to leave their reserves inactive, as well as to reduce the savings rate in the population served, and consequently encourage them to consume. This distracted move by the Bank of Japan made many banks in that country to withdraw their mass of liquidity and retain their cash, causing a shortage of security.
If throughout the first two months of this year the correlation between the stock market and oil could put forward that the latter was leading the first, the recent turn down has been intensified by banking stocks in Europe and the United States. This is not encouraging because the reasons for such assurance are not well recognized. The boost in defaults from the energy sector, recession, flat yield curve for long are just a part of it.
The problem with the whole chaos is that many ignore the mixed impact of zero rates and the decline of the oil price on the global economy. When the IPO of Saudi oil giant Aramco has been announced, traders supposed that the company could increase oil stocks to continue the war on oil prices. It was also at that moment that we saw a lot of offers to withdraw. If the price of oil comes down to break the entry of 30 dollars, this could guide to some sales drop and it would become a real trouble.
On the other hand, wherever we look we see the indicators and the statements that th Quantitative Easings program of the ECB led to another situation that has been seen in 2008 already, but has been forgotten rooted in the thick haze of high stock prices, effects of switches increasingly strong and derivatives ever more bright. In all this confusion of financial innovation, the difficulty for banks, governments, investors and media is that the roots of the malevolence, which consists of indebtedness, inconsistency and unsuitable economic doctrines had still not been eliminated, and, especially since their income depended straight on their ability to delight, do not understand.
When the whole economy is flooded by inflationary cuts of the central banks, which offset deflationary barely pushed more and more violent and when, at the same time, figures related to bank ratios, unemployment, growth are more than just problematic, the reality is complex and hard. This decline has its exact equivalent in upbeat economies of the world, since the summation is lacking in one benefits the other. This should relieve us and possibly offer some aid to the populations concerned, although in this area it suspiciously fault in guaranteeing that the money is not abstracted.
The other complex reason to regret the oil price drop is that it will make easy the consumption and delay its replacement with carbon-free energy sources, but there is firstly a possibility of a carbon tax directly or indirectly through a better controlled than that market failing in Europe. Furthermore, away from this technical key, there is the need for some independence towards the producer countries, at least to keep away from some begging and there is hope that this require will play for real green ecological solutions.
However, the policy of negative rates of central banks aims to persuade banks to lend and thus encourage movement of negatively paying their reserves. The risk is that, at the low enthusiasm of borrowers and risks of default increase, banks choose to make them stand the cost of negative rates by increasing lending rates. For the moment, this risk does not appear in Europe since borrowing rates statrted to have a tendency of falling.
From a certain position we may have already reached, banks will no longer be capable to boost credit volume to pay off for losses from their central bank. This might explain the collapse of the banking sector traded. The law of unintentional consequences has hit again, though it was quite easy to predict what would be the behavioral reaction of Japanese introduction of negative rates.
Besides that, the banks have to lend long-standing at lower rates than their historical average, but the risk of an increase in these rates around these averages is far from zero. Their long receivables therefore lose much worth if rates rise towards these historical averages for some reason, and we could go through the months or years ahead to generate a banking crisis similar to the 2008 crisis.
To conclude, too low rate setting degrades the quality of the overall asset and promotes negative rates on investments without performance, including the deflationary effect is unfortunately counterbalance by money creation desperately coordinated by central banks.