We have written about this issue for so long now it is hard for us to imagine it is still necessary to do so; however, we feel compelled to reiterate how important we think it is for the US Federal Reserve to continue the nascent increase in interest rates it began late in 2015. Obviously, the era of "Zero Interest Rates" (ZIRP) has ended, but the ramifications still endure as long as the Fed continues to hesitate in getting on with pushing their target for the Federal Funds Rate up.
We now live in a world where Central Banks in Europe and Japan actually think a "Negative Interest Rate Policy" (NIRP) is a good thing, so in "relative" terms, the US Fed is thought of as "tight"! This is all crazy!! These extended years of ZIRP and now NIRP are causes of slower economic growth, not "stimulative" policies that are helping the world economy.
Last week we had the pleasure of meeting with our distinguished Board of Advisors member, VC partner and best-selling author George Gilder in the Silicon Valley and this topic was at the forefront. George's view (which is well spelled out in his latest book, The Scandal of Money) is that these policies fail because they are actually valuing time far too low, thereby creating a lack of urgency or incentive to innovate. The old adage "time is money" really gets turned on its head in a world which values time as worth zero -- or less than zero, in the case of NIRP!
This is not going unnoticed any longer as both German and Japanese bankers are realizing that the NIRP world is creating uncertainty for their their customers and, as a result, hurting them. The following excerpt from a Wall St. Journal article regarding Japanese banks underscores the problem:
MUFG President Nobuyuki Hirano in April became the first top Japanese banking executive to publicly criticize the BOJ's negative-rate policy, saying it had actually caused households and businesses to rein in spending by creating a sense of uncertainty about the future. "For the banking industry, the consequences, at least in the short term, are clearly negative," Mr. Hirano said in a speech in Tokyo.
The Germans are protesting these policies as well, as this Reuters article on the topic points out:
. . . some banks complain that a dim global economic outlook means there is weak demand for loans on the terms they require, and they have little option but to hoard cash.
The "hoarding" of cash is not a good thing! This is all part of the argument that Gilder is making when he says:
Since time is the scarcest of all scarce resources, the fact that the market values it at zero creates an environment where there is no sense of urgency to create or innovate.
Our last two posts have emphasized the fact that we are suffering from a lack of IPOs coming to market. This all fits together in the sense that the ZIRP and NIRP world has at least served to exacerbate that phenomenon if not been a primary culprit in this predicament.
