On the Vicious Circle of Global Slowdown and Banking Crisis

Reflecting the global nature of the financial malaise and its associated uncertainty, growth rates in most advanced countries have slowed in the second quarter. The slowdown may have triggered a global banking crisis.

More specifically, the U.S. GDP grew at a sluggish 1.2 percent rate in the second quarter as businesses continued to hold back on investments. Given a downward revision of the growth by the US Commerce Department to just 0.8 percent in the first quarter as compared to 1.1 percent that was previously estimated, the average growth rate for the first half of this year is just 1 percent. The US GDP growth for three consecutive quarters has been hovering close to 1 per cent.

The US GDP Quarterly Growth Rate

In the eurozone, the year-over-year growth in the second quarter slowed to 1.6%, relative to 1.7% in the first quarter, and the outlook has deteriorated rapidly with the uncertainties associated with Brexit and other geopolitical developments, such as the German-Turkish dispute after the recent coup and Russia's more assertive pasture. In Japan the GDP growth rate has swung between negatives and positives, averaging close to zero in recent quarters, and her second quarter annualized growth is expected to have dropped to near zero. The slowdown in China is also expected to be accelerated, due to its unsustainable debts and other imbalances.


This slow growth pattern should not be a surprise to the readers of this blog as we have persistently warned about the implications of businesses adoption of the intensive margin mode of production and delays in investing for capital formation arising from the prevailing uncertainty. The fact that in the US widespread slow growth in the second quarter was stemming from a fall in inventories, at a time when personal consumption was growing at 4.2 percent, has validated our hypothesis. Moreover, for the third consecutive quarter, nonresidential business investment in the US declined in the second quarter by 2.2 percent, indicating that businesses are refraining from the irreversible capital expenditures. The situation is not much different in the rest of the advanced countries.

In Japan, a ¥28 trillion ($273 billion) in new spending, announced in the early August, as part of the Second Arrow of Abenomics, meaning fiscal stimulus, to jump-start the Japan's sluggish economy is not expected to alter the global distortion of fundamentals. Precisely because of the uncertainty, Japan's $130 billion dollars worth of new fiscal stimulus, including cash payouts to low-income earners and increased infrastructure spending, earmarked for upgrading port facilities for cruise ships, as well as accelerated construction of a high-speed train line, is not expected to create much of incentives for capital formation in the country's export-oriented industrial sector. The only solution, as we have repeatedly called for in this forum, is a global accord to restructure the toxic debts and to realign various currencies based on the real purchasing power parity.

Unfortunately, the illusory appearance of a strong US labour market, with her unemployment rate at 4.9 percent, may have disguised the severity of the problem. The quasi-strength, however, is mainly due to the use of contingent labour in the intensive-margin capacity planning of businesses where firms substitute labour for capital due to uncertainty. This is exactly why wage growth has remained anemic. The slowing of global growth is setting into motion a vicious circle that could, with an increasing probability, trigger a global banking crisis.


As the following charts show European banks' shares have already plummeted to some distress levels as they are saddled with $1.3 trillion in non-performing loans, nearly $400 billion of them in Italy, and many don’t have sufficient capital buffer. The situation will dramatically worsen if the current slowdown develops into a highly probable global recession.

Barclays PLC

Royal Bank of Scotland Group

Deutsche Bank AG

Banco Santander SA

Monte dei Paschi di Siena

In spite of its convoluted narrative, the IMF's latest Global Financial Stability Report acknowledges that for many European banks, elevated non-performing loans comprise a major structural weakness. According to the report roughly one-third of listed European banks (by assets) are facing significant challenges to attaining sustainable profitability arising from legacy issues (900 billion of non-performing loans and an unspecified amount of toxic assets).

Deteriorating profitability and unresolved legacy challenges raise the risk that external capital and funding could become more expensive, particularly for weaker banks with very low equity valuations (price-to-tangible-book valuations of less than 60 percent), pointing to weak future prospects. Italian banks face a particular challenge in this regard, as market pricing has reflected investor concerns that some banks may face difficulties in growing out of their substantial NPL overhang, despite constructive steps taken by Italian authorities to facilitate balance sheet repair. 

Italy, like other eurozone's weaker economies, including Greece, Portugal, and Spain that have been severely afflicted by the Big Recession, most probably will experience acute distress and becomes the first major country fully exposed to the brunt of this vicious circle. During the six consecutive years of recession since 2007, Italy's GDP has declined by 10 per cent and the country's banks, that rely heavily on retail deposits and bonds to finance their lending, have accumulated about €400bn of non-performing loans, compromising more than 18 percent of their total loans.


The EBA tests did not include any banks from Greece or Portugal, . The two Irish banks, AIB and Bank of Ireland were among the worst financial institutions.The results will have adverse impact on plans to starting selling down the Irish government's stake in AIB next year. In the words of Philip Lane, Ireland's Central Bank governor: the two banks

are adequately capitalised but remain vulnerable to a downturn, especially in relation to the continued workout of problem loans and the sustainability under stress of current profitability levels.”

The Italian banks are already exhibiting the first signs of stress and with their eminent insolvency a global contagion of banks' failure would be inevitable. For instance, according to the recent EBA stress test, the oldest operating bank in the world: Monte dei Paschi di SienaBanca was the worst performing bank among the 51 participating banks in the test, requiring to raise massive amount of capital. The bank would be insolvent inthe European Banking Authority(EBA)'s stress test that was released on July 29th, with a common equity tier one (CET1) ratio of -2.44 per cent. Banks are central to the European financial system, supplying about three quarters of all credit, and their demise therefore will be a devastating blow to the economy in Europe.

The bail-in solution for banks on the verge of insolvency, suggested by the newly established EU’s banking union, that has become operative earlier this year, requires that the bank's shareholders , creditors and large depositors (i.e., in excess of €100,000) to assume a haircut before taxpayers' funds can be used to bail them out. Bondholders, of course dislike "bail-in" remedies, and many are concerned about the inconsistent and at times chaotic bail-in procedures that are adopted in trying to prevent bank failures. These policies have increased the risk of funding for smaller lenders. Moreover, the looming prospect of bail-in has diminished the supply of credit for the smaller lenders that are mainly concentrated in the weaker economies, exacerbating the banking challenges.


For instance, when the Italian government in 2015 decided to bail-in junior, or subordinated, bondholders at four small insolvent regional banks it generated a significant hardship for retail investors and pensioners because many of the banks’ junior bonds had been sold to them as riskless savings products. The move also frightened the investors.

To guard against a bail-in the board ofMonte dei Paschi di Sienahas approved a conditional recapitalization of the bank, guaranteed by a consortium of investment banks led by J.P. Morgan Chase. Nevertheless, the bank's prospects remain gloomy, particularly in the event of a global recession.

Impact on Common Equity Tier 1 (CET1) capital ratio from 2015 to 2018 in the adverse scenario by bank in alphabetical order.
Source: EBA

Evolution of absolute credit losses (€ bn) and contribution of cumulative credit risk losses in the adverse scenario for selected countries of the counterparty (%). Source EBA

According to a study byAcharya, Pierret and Steffen, to meet the robustness standards specified by the U.S. Federal Reserve, Europe’s largest banks, including HSBC Holdings PLC, Deutsche Bank AG and UniCredit SpA, would need to raise more than €253 billion in capital rising to more than €572 billion in a crisis situation. The study focusing on 34 of the largest European banks, with more than €23 trillion in assets, also found they would need to raise more than €1.19 trillion, potentially from governments, to have enough equity to withstand another financial crisis. According to the study:

A. French banks lead almost each book and market capital shortfall measure, both in absolute euro amounts and relative to its GDP. The capital shortfall ranges from €2 billion to €189 billion. The Capital Shortfall in a Systemic Crisis stress scenario (SRISK) suggests a shortfall of €248 billion, which corresponds to almost 12% of the country’s GDP

B. The banks with the largest SRISK next to France are from the U.K., Spain and Germany. While German banks benefit from a stronger domestic economy with a higher GDP and capacity for public backstops, shortfalls relative to the GDP of these countries is large corresponding to almost 11% in Spain and 7% in the U.K.

C. Italian banks have capital shortfalls of €97 billion, which correspond to about 6% of Italy’s GDP.

Notwithstanding these discouraging numbers, the results of EBA's stress test suggest that only a handful of banks will be facing the challenge of maintaining sufficient capital in the event of a hypothetical severe economic downturn. As a matter of fact, however, should a contagion scenario come to pass even the Acharya et al results would be too optimistic. The severity of European debts, anemic global growth, negative interest rates, currency wars, and a rapidly deteriorating international trade's outlook render the EBA results even-more questionable.

The world urgently needs a global financial accord to cleanse the system of its toxic assets, realign currencies, and reestablish trade links.

How the Federal Reserve will normalize the benchmark interest rate after its FOMC meeting of July 26-27

Despite the low probability that markets attached to a July rise of the target range for the benchmark federal funds rate, there was a good chance that Fed would have used the July window to raise the range to 50-75 basis points from its current 25-50 level. Given the ongoing presidential electoral campaign, Brexit-negotiation uncertainties, and the economic outlook in China and Japan; July meetings offered the only window for policy action in contrast to September or December schedules, that notwithstanding the high probabilities that markets attaches to them, appear quite problematic. In fact, with apparent improvements in the inflation rates and some economic data since late-June including the non-manufacturing ISM, employment, retail sales, industrial & manufacturing output, and existing home sales Fed appears to have been in a good position to send a serious message about its resolve to move toward policy normalization.

After seven years at the zero lower bound, the target range for Fed funds rate was raised by 25 basis points in December 2015. At the time the data were exhibiting similar improvements and yet the increase triggered some global market volatility earlier this year that could have been predicted.

In fact, last September we wrote;

The Fed indeed has created a catch 22 situation; as higher rates are needed badly, but any action towards raising rates would be extremely destabilizing.

The reason for the needed higher rates as we have stated in the past was that:

[T]he low rates have been distorting the economy and have created dangerous imbalances, particularly unsustainable level of debts.

We have argued that:

Unfortunately under today’s “currency wars” conditions, with the slowdown in China, and Europe’s debt crisis, as well as huge debt build up by consumers and states the normalization of monetary supply in any single country, as an isolated and uncoordinated action, would be a recipe for disaster,

and in particular have emphasized that:

Policy makers should realize how important the role of capital formation in the supply side is. They should realize that for a successful working of international trade currency values, like any other price signals, must be informative about their relative purchasing power, and these can only be discovered in transparent markets, where the fundamental relationships between financial assets and the real sectors are respected -- where the banks are healthy and tax payers are not on the hook for the rescue of Too-Big-to-Fail zombie banks.

Last September we argued that;

[T]o raise the policy rate by 25 basis point at this time would not send any useful signal and (...) could be a wrong move. A policy normalization would only make sense when the markets know what the normal level is and how fast is the speed of adjustment toward that level.

On May 19 the Federal Reserve Bank of New York has introduced a data product entitled  U.S. Economy in a Snapshot ,  that in the words of its president William Dudley is supposed "to provide information that helps households and businesses follow the data along with the Fed." Unfortunately. the package is silent about how to organize these data so that one can follow the Fed. One may argue that Fed itself is still struggling with the challenge of calculating the unobservable neutral rate. Mr. Dudley has explained that:

Conventional U.S. monetary policy is conducted by targeting the level of the federal funds rate—an overnight interest rate on bank reserves. Few participants in our economy have any direct interaction with this interest rate. How, then, is controlling this interest rate such an important part of setting monetary policy and steering an 18 trillion dollar economy toward the Federal Reserve’s dual mandate objectives of maximum sustainable employment and price stability? (...)

When asked about the trajectory for the monetary policy stance, I always point out that it is data dependent. The FOMC calibrates the stance of monetary policy to best achieve our twin objectives of price stability and maximum sustainable employment, taking into account our forecast for how the economy is evolving. This forecast reflects the ongoing flow of the data. Data releases that are close to our expectations have little additional impact on the forecast, while data releases that deviate significantly from our expectations can lead to more significant revisions of the forecast. It is, therefore, important for market participants and households to be able to follow the data along with the FOMC and to understand how we are likely to interpret and react to incoming data.

What does it mean to say that the monetary policy stance is data dependent? Simply put, it means that the Fed funds overnight interest rate, as the main policy instrument of the monetary authority, is determined in relation to the interactions among a whole set of data. It is the movement of the key macroeconomics variables and their impacts on each other that determines the equilibrium neutral rate.

In fact, a quick glance at the New York Fed's aforementioned and very useful publication reveals that it contains about 60 time series data depicting movements of various macroeconomics variables. How then one should look at these data, and how can one interpret their seemingly inconsistent movements at certain times in order to project the likely direction of the Fed funds rate?

How to project the likely direction of the Fed funds rate?

There are a number of ways that one could organize the key macroeconomics data. The most familiar way is to specify and estimate a small structural model. However, as we have argued before, in the aftermath of the financial crisis:

the macro models are not very well specified, simply because there have not been enough observations that would allow for control of the impacts of various QEs, zero- and-negative interest rates, global shocks and behavioral and policy changes – just to name a few (and assuming that we have a right theoretical model- which is a big assumption). Furthermore, we do not know what are the distribution shape of various arguments in our risk functions and so on.

Thus, an alternative way would be to use Bayesian priors and specify a calibrated structural model, that can be updated in a Bayesian learning process. Finally, one may choose a small subset of perhaps about 10 variables in a Bayesian Vector Autoregressive (BVar) model, or one of its variants that would determine with some probability how much the policy instrument is needed to be changed in order for the model to stabilize at a certain inflation target range and output growth level.

With this in mind, it is surprising that most often the discussions of the likely trajectory of interest rates setting by Fed is presented in various types of partial equilibrium analysis. Typically, many analysts employ a Wicksellian paradigm of natural rate of interest, which as we will argue later is totally irrelevant for analyzing a severely imbalanced economy, such as those of many advanced countries in North America, Europe and Asia. Moreover, at times the monitoring of various variables are presented outside any structural or time series model in an ad hoc fashion. For example Esther George, the president of the Federal Reserve Bank of Kansas City, in a May 12th speech in Albuquerque, N.M., reporting a decline to 5 % in the unemployment rate, from 10% in the aftermath of the financial crisis in 2009 has stated:

Of course, the unemployment rate is an imperfect measure of the labor market, so I also pay close attention to other data. For example, one development I find promising is that many individuals who had dropped out of the workforce are finding jobs. After the crisis, the percentage of people participating in the labor market fell sharply. Some of this is because our population is aging, so people naturally work less as they get older. However, some of the decline in labor force participation was due to workers being discouraged about their job prospects. More recently, however, we have seen an upswing in people finding jobs who had previously stopped looking for one. For example, close to 2 million workers returned to the labor force over the past six months. This pace of re-entry is close to the fastest pace in more than 15 years. Despite these positive developments, wage growth has remained sluggish and many people still feel like they have limited options in the labor market.

She then goes on to describe two business perspectives in the labour market,

One perspective is of a booming labor market, rising wages and an abundance of opportunity. The other perspective is of stagnant wage growth, limited upward mobility and job insecurity.

Relating the second perspective to a sharp decline in the share of workers in middle-skill jobs she argues that

As the Federal Reserve considers these and other economic trends, it must weigh a number of crosscurrents to determine the appropriate interest rate policy. In the shortrun, I continue to monitor how the energy, agricultural and manufacturing sectors are adjusting relative to the national economy. And over the longer-run, I evaluate what trends like job polarization mean for monetary policy.

Nevertheless, without specifying what would be the prevailing equilibrium long-run Fed funds rate, she concludes by stating that:

The current setting for the federal funds rate is well below what the FOMC expects will prevail in the longer term. The plan is to move gradually and in a way that is responsive to economic developments. I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today’s economic conditions.

The problem with this type of analysis is that if businesses are shifting towards intensive margin mode of the production due to uncertainty, using more labour intensive techniques in their short-term capacity planning, for example by introducing additional labour shifts or hiring contingent workers instead of investing in irreversible fixed capital, then the fact that many of the dropped out workers from the labour force are finding jobs would not be that promising.

Ideally of course the impacts labour participation rate, discouraged workers, or wage growth could be incorporated in a structural model, or alternatively the Fed can run small satellite models to estimate and inform the market of their likely impacts. These variables would affect the other key macroeconomic variables such as capital formation, capacity utilization, productivity, terms of trade; to name just a few. A partial equilibrium analysis ignores many of these impacts when the trajectory of these omitted variables under various scenarios can drastically alter the nature of analysis and the outlook.

As a result of ignoring the situation of uncertainty as well as not taking into account the impact of the businesses' shift to intensive margin mode of production as well as delays in investment plans President George in her speech in Oklahoma city of July 9th, 2015 had been too optimistic about the capital expenditure outlook, stating that:

Moreover, as the economy continues to heal and domestic demand continues to strengthen, businesses should have more incentives to increase capital expenditures.

As we know, this prediction of course has not come to pass as according to the most recent New York Fed's snapshot of the US Economy in July:

Over the four quarters ending in 2016 Q1, real business investment in new equipment was down 0.3%, continuing a slowing trend in place since 2010. (...) A key reason for the overall slow pace of growth of investment in new equipment is relatively low level of the manufacturing capacity utilization rate. This rate which had been slightly above 75% for over a year, dipped below 75% in May. Historically, robust growth of investment in new equipment is associated with a capacity utilization rate of 80% or higher.

As we have argued in September last year that :

The Fed's estimate of longer-run normal rate of unemployment is not consistent with the US investment in capital formation, The appearance of a gradual decline in the US economy's slack is attributable to a greater use of contingent labour and contingent capital, due to the prevailing global uncertainty.

The economy is being distorted by the zero-interest rate policy and is not getting closer to its long-term equilibrium. The use of contingent production factors has generated a quasi-closing of the gap in reference to a quasi-potential output growth, which corresponds to Klein (1960) and Berndt and Morrison (1981) definitions of capacity. This is why this quasi-closing of the gap has not exerted an upward pressure on the US inflation rate.

This structural approach would reveal that the question of capacity utilization rate needs to be carefully reevaluated. The nature of full capacity under contingent capital and intensive margin would result in a shift of the full capacity potential to the left along the economy's long-term average cost curve. The resulting short-run equilibrium would be different from the long-term equilibrium capacity. Furthermore we specifically stated that:

How can the labour markets move to equilibrium with such a weak capital formation? It is quite clear that this fragile capital formation is due to the prolonged period in which businesses have postponed investment as a result of the prevailing global uncertainties which have been exacerbated by the authorities suppression of equilibrating market dynamics . Investment spending has grown more slowly than usual for a business-cycle expansion and this is the main reason for the observed decline of the US productivity.

The global uncertainty and ultra-loose monetary policies have encouraged businesses to follow strategies of incremental reductions in costs that are not accompanied by investment in new technology. This has undermined the longer-term growth of potential output, which appears to have caused a distorted and artificial decline in real interest rate, by which authorities hope to encourage entrepreneurs to assume more risk. The economic theory suggests that lack of capital formation would cause a shrinkage in production possibilities frontier, resulting in a decline in labour productivity growth as we have observed in the US

Unfortunately in spite of recognizing that the long-run level of the neutral rate is highly uncertain many analysts, including some of the FOMC members, still focus on it. It appears that some even focus the highly volatile short-term rate. For example, the FOMC's minutes of the June 14-15 meeting reports that:

Many participants commented that the level of the federal funds rate consistent with maintaining trend economic growth—the so-called neutral rate—appeared to be lower currently or was likely to be lower in the longer run than they had estimated earlier. While recognizing that the longer-run neutral rate was highly uncertain, many judged that it would likely remain low relative to historical standards, held down by factors such as slow productivity growth and demographic trends.

It should be clear that it is not slow productivity growth that is holding back (the long-run) neutral rate. The direction of causality is the other way around. The prevailing low interest rate gives the impression that the neutral rate has declined, and at the same time they cause a delay in capital information, via a rise in uncertainty that low rates are causing. Low capital formation reduces the trend productivity, although due to intensive margin operation we may observe some transitory short-term productivity increase. As we have argued in the past, the neutral or natural rate of interest derived from the Wicksellian theory is only valid in the long run general equilibrium conditions. We stated that:

[T]he Wicksellian theory is a general equilibrium theory in which the financial rate of interest that borrowers actually pay must be equalized to the natural rate of interest that is determined by the marginal return on the fully employed real capital. If the financial rate is below the natural rate the demand for investment will rise as businesses can borrow at the lower financial rates and invest the funds into high-returning projects. However, the information signals that a Wicksellian paradigm could emit are not meant for a disequilibrium environment in which the real capital is underutilized and businesses are postponing investment in irreversible fixed capital and opt for waiting.
When due to the prevailing uncertainty businesses refrain from investment and when in their capacity planning they resort to utilizing contingent labour and capital instead of moving towards their long term minimum average cost capacity the Wicksellian equilibrium theory would be an inappropriate analytical framework. In fact, the concept of the natural rate of interest in a disequilibrium environment would be an oxymoron.

-- The introduction to this piece is slightly modified to take into account the Fed's inaction on July 27th.

The UK's Low Corporate Tax Rate; Will it Attract Investment?

What are the merits of George Osborne’s slashing of the UK’s corporation tax rate? In the previous coalition government he reduced both the main corporation tax rate (from 28% in 2010) and the small profits rate (from 21% in 2010) to 20% in 2015–16. After the Brexit vote the chancellor has argued for a drastic reduction of the rate to below 15 per cent in order to demonstrate that Britain is “open for business” to international investment? In an Opinion piece published on the Wall Street Journal , on July 10, Mr. Osborne wrote:

Now we intend to offer even more competitive taxes, and to become a home to more, not less, international business. To signal our intent, we will cut our corporate tax rate still further. It was already set to reach 17% from the 28% rate I inherited six years ago; now I want it to fall to 15% and preferably lower. What stronger message could we send that Britain is open to business?

 Will the lowering corporate tax policy improves British industry's competitiveness and enhance its productivity? Or would it likely exacerbate a zero-sum international race to the bottom between governments on tax rates as some have argued it would?


There has been a tendency throughout the advanced countries to reduce corporation tax rates since the stagflation of 1970s as the policy makers have tried to improve competitiveness and expand export markets. This tendency has been the most striking in the UK, where since 2010, it has cut tax rates deeper and at a greater speed than her competitors,  to the extent that as the following chart shows the rate is now among the lowest in the G20, and as we saw earlier may become the lowest if other countries do not respond.

Corporate Tax Rates Across G20

Source: IFS

As we have argued last August, the British economy is plaggued with underinvestment which is hampering its productivity growth and its competitiveness. Corporate tax rate reductions that are not being tied to the companies' investment in innovation and agility will just deteriorate the fiscal stance of the country and will add to uncertainty which would discourage capital expenditures.

Sources of Growth in the UK economy 

(year-over-year growth rate)

Source: Hover

The above chart indicates that UK investment has been decelerating at an alarming pace since the first quarter of 2015. As we have argued before, because of businesses’ utilization of contingent capacity the UK productivity has been misleadingly signaling some artificial improvements.  We argued:

This is because in planning for capacity during uncertain times businesses usually postpone their irreversible component of investment and utilize intensive margin production processes. As a result of this focus on short-term capacity corresponding to existing cost structure the longer-term capacity signals will be hidden. (...)

We argued that consistent with Ben Bernanke’s option price of waiting it would be quite rational for businesses to postpone their strategic investment plans at uncertain times and focus instead on their contingent capacity limits, which would result in transmission of inconsistent and misleading signals on capacity utilization rate and productivity improvement. A misinterpretation of these signals by policymakers would deepen and prolong uncertainty.

A corporate tax reductions cannot eliminate or mitigate such uncertainties and in contrast it may just add to them if other countries would retaliate by lowering their tax rates. In the meantime productivity growth — defined as the rate of change of output minus rate of change of hour worked — may continue to send false rising signals misinterpreted by policymakers as the indication that markets have agreed that the economy is open for the business and that the businesses are investing in innovation and competitiveness to expand the production possibility frontier. Whereas in reality because of postponement of real investment and utilizing contingent capacity the economy is falling behind.

Corporation Tax Rate In Selected Countries. Source: KPMG

UK's Corporation Tax Rate, 1981-2016

Germany's  Corporation Tax Rate, 1996-2016

US' Corporation Tax Rate, 2001-16

Why Interest Rates Are So Inconceivably Low?

In a recent article in the Washington Post professor Larry Summers has argued that the fact that the U.S. 10- and 30-year interest rates reached all-time lows of 1.32 percent and 2.10 percent on July 6th this year, as well as the record-low 10-year interest rates in Germany, France, Switzerland and Australia reflect a heightened recognition of the importance of the “Secular Stagnation” risks. He wrote:

There is a growing sense that the world is demand-short — that the real interest rates necessary to equate investment and saving at full employment are very low and often may be unattainable given the bounds on nominal interest rate reductions. The result is very low long-term real rates, sluggish growth expectations, concerns about the ability even over the fairly long term to get inflation to average 2 percent, and a sense that the Fed and the world’s major central banks will not be able to normalize financial conditions in the foreseeable future.

Thus, theoretically speaking, according to professor Summers the configurations of the supply and demand functions for investment funds now suggest a very low real interest rate  (most probably implying a negative rate at the full-employment level) which is unattainable due to the close-to-zero lower bound nominal rate. This argument as previously laid out by him and his co-authors Eggertsson and Mehrotra in Secular Stagnation in the Open Economy (NBER Working Paper No. 22172, April 2016) is based on Alvin Hansen’s idea of secular stagnation suggesting that:

the industrial world is plagued by an increasing propensity to save and a declining propensity to invest. The result is a declining equilibrium real interest rate, a tendency for lower bounds on interest rates to constrain their ability to find equilibrium levels, and a consequent persistence of inadequate demand leading to slow growth, sub-target inflation, and excessive non-employment.

Believing that the sluggish growth and low inflationary expectations are consequences of these low long-term real interest rates, Summers expresses concern that:

policymakers still have not made sufficiently radical adjustments in their worldview to reflect this new reality of a world where generating adequate nominal GDP growth is likely to be the primary macroeconomic policy challenge for the next decade.

But why there is an increase in global propensity to save? Are the interest rates providing relevant signals about the global saving propensity at the current sluggish economic environment? Moreover, what is the rationality for this bizarre economic agents' inter-temporal choice in such uncertain times? We note that Professor Summers' argument is grounded on the Swedish economist Knut Wicksell's thory of "Natural Interest Rate". Substituting the term "neutral rate" for the Wicksellian "natural rate" concept, he writes:

Secular stagnation occurs when neutral real interest rates are sufficiently low that they cannot be achieved through conventional central-bank policies. At that point, desired levels of saving exceed desired levels of investment, leading to shortfalls in demand and stunted growth.

We note that the Wicksellian theory is a general equilibrium theory in which the financial rate of interest that borrowers actually pay must be equalized to the natural rate of interest that is determined by the marginal return on the fully employed real capital. If the financial rate is below the natural rate the demand for investment will rise as businesses can borrow at the lower financial rates and invest the funds into high-returning projects. However, the information signals that a Wicksellian paradigm could emit are not meant for a disequilibrium environment in which the real capital is underutilized and businesses are postponing investment in irreversible fixed capital and opt for waiting.

When due to the prevailing uncertainty businesses refrain from investment and when in their capacity planning they resort to utilizing contingent labour and capital instead of moving towards their long term minimum average cost capacity the Wicksellian equilibrium theory would be an inappropriate analytical framework.  In fact, the concept of the natural rate of interest in a disequilibrium environment would be an oxymoron. The low and negative interest rates, are the prices savers are willing to pay to have access to a relatively less risky liquidity in these uncertain times. The factors influencing such inter-temporal preference is derived from a risk aversion motive.

As we have argued in the past, the economic agents are concerned about the precarious state of the global finance, the banking frailties, the high levels of various global debts, and a fast spread of political uncertainty. The sluggish growth and lack of demand are the consequences of a very disorderly structural adjustment in a perilous financial environment in which the old rules of the game have been abandoned and no new rules have yet been established.

The low interest rate thus is an indication of market assessment of the growth rate of potential output. As the following chart from Quartz show we have been in this situation also in the depression of 1930's.

This blog has referred in the past:

 “ to the suggestions of the prominent Swedish economist Gustav Cassel who in Brussels conference had recommended a re-balancing of the world flow of funds based on Purchasing Power Parity. A Cassel type of PPP adjustment does not necessarily require a gold-standard regime. A return to a Purchasing Price Parity can be grounded on a composite index of industrial materials. This process would create a realistic correspondence between the nominal world of finance and the real world of goods and services. A global annual GDP of 75 trillion dollars does not need to be lubricated by 600 trillion dollars of toxic assets."

We have also emphasized a need for restructuring of global debt and a need for a new global Marshall-type plan.  We also reminded the readers that:

in the eve of the London conference of 1933, the British Prime Minister Ramsay Macdonald, who understood the significance of the need for a global restructuring to establish a global financial balance, opined that the conference might possibly save democracy from the world’s economic challenges.”

Will the Global Economy Survive the Brexit

  Pavel Constantin,  Romania, June 22, 2016 Caglecartoons.com,

UK's vote to become the first country to leave the EU, has the potential to start a motion that could unravel the post-war global financial structure and with it a deep plunging of the global growth. To be clear, the Brexit itself is not the culprit as we have argued before the global financial system has been in an extremely perilous situation over the past decade.

It is unfortunate that Brexit has happened in such  uncertain times when the US political situation is in such a precarious state  with the two highly  divisive presidential candidates; of whom one   is so out of touch with the global economic fundamentals that he constantly adds to the prevailing uncertainty by his uniformed and misguided policy statements and the other’s “extremely careless” use of a private email address and server has been mischievously exploited to render her as a completely ineffective leader, should she win the election. Meanwhile, the US economy is slowing down and a significantly higher dollar, partially reflecting the increased global risk, is exacerbating the global economic disorder.

In Asia, both China and Japan's economic and political situations leave a lot to be desired. A tepid global demand is intensifying the adverse impact of Brexit on Chinese exports at the time when the rise of dollar, vis-à-vis Europe’s currencies, may force China to react yet again by allowing a more rapid depreciation of its renminbi, which is scheduled to be included in the IMF’s basket of currencies making up the Special Drawing Right (SDR) effective October 1, 2016.  The country’s growth, after averaging almost 10 percent between 2006 and 2014, slowed to 6.8 percent in 2015 and it may slow to about 5.8 percent this year.   The  promised economic restructuring and the consolidation of inefficient state enterprises with chronic oversupply now appear of remote possibility, while the probabilities of political and social unrest should not be underestimated.

Japan’s economic malaise is also worsening and Abenomics appears dead after the Brexit.  A frightening fiscal debt level, a stagnant economy and an ineffective monetary policy with a damaging negative interest rate must now deal with the consequences of an appreciating yen against several currencies which will reduce its exports,   weigh heavily on its industrial sector’s earnings and undermine the country’s domestic investment prospects.

Of course, the brunt of the Brexit mishap will be felt mainly in Europe, and particularly in the UK where British pound has plunged to hit a record low of $1.28 since June 1985. The pound also fell to a near three-year low against the euro at €1.17. On the stock market, shares in domestic companies, such as supermarkets, housebuilders and banks, took the biggest hit on July 6^th after the Bank of England unveiled a four-point plan to cope with the Brexit crisis. With the economy dependent on his ability to act quickly, decisively and with full access to information, governor Carney provided a timely reassurance that “The bank can be expected to take whatever action is needed to promote monetary and financial stability, and as a consequence, support the real economy.” This was a reminiscent of the 2012 Mario Draghi’s pledge to do “whatever it takes” to save the euro, which has only been successful as far as it has postponed the day of reckoning for euro.   The bank of England has eased special capital requirements for banks, providing an estimated extra £150bn for lending, which would not be nearly enough to prevent the risk of a global contagion.

Of course, the answer to Brexit cannot be monetary policy.  The limits of central banking in Japan, Eurozone, and the US have already been observed. The answer to Brexit is not even in the hands of Europeans ( the UK included). The world global financial disorder requires an urgent restructuring to get rid of the global toxic debts, establishment of a purchasing-power-parity-based exchange rate system, and a Marshall-type plan to invest on global digital infrastructure, renewable energy, and eradication of poverty and diseases. Unfortunately, the world is faced with lack of credible and visionary leaders to push for such an agenda.   

On Currency Wars, Helicopter Money, and Negative interest Rates; "It's a Mad, Mad, Mad, Mad World!"

In its 1963 review of Stanley Keramer’s "It's a Mad, Mad, Mad, Mad World!", a film about a group of amusing characters fighting each other and ravaging the landscape over buried treasure, New York Times wrote:

It's a wonderfully crazy and colorful collection of "chase" comedy, so crowded with plot and people that it almost splits the seams of its huge Cinerama packing and its 3-hour-and-12-minute length. It's mad, as it says, with its profusion of so many stars, so many "names," playing leading to 5-second bit roles, that it seems to be a celebrities' parade. And it is also, for all its crackpot clowning and its racing and colliding of automobiles, a pretty severe satirizing of the money madness and motorized momentum of our age.

The piece is a fitting description of central banks’ engagement in the currency war over fragile global demand for exports where there have been no victors as economies remain ravaged and prospects get gloomier. The war that has been raging since 2010 has intensified this year, mainly because of the ineffectiveness of monetary policies’ in generating growth. Even though that global financial imbalances are responsible for various countries’ output and labour market gaps and large twine deficits policy makers are wishfully keeping their monetary stance extremely loose to perhaps gain the so-called “escape velocity” to break free of these predicaments.

Not surprisingly, “Currency war” is a desperate measure, which includes the bizarre negative interest rate that inflicts cruel horrors on pensioners, savers and fixed income earners. It is damaging Banks and insurance companies’ business models, and at a macro level it destroys and distorts market signals as well as market infrastructures.

In Japan, a covert currency war was declared by the newly elected government of Prime Minister Shinzo Abe at the end of 2012, when his government demanded that Bank of Japan should adopt a higher inflation rate target, to which the Bank obliged by its large-scale asset purchases. Subsequently, when the Greenback fell below 108 yen for the first time in 17 months on April 7th this year, Japan’s finance minister Taro Aso cautioned against a rapid rise in the yen, saying he would take necessary steps to offset “one-sided” moves in the currency market.

“A rapid move toward either yen rise or yen fall is not desirable. It is desirable that currencies are stable at levels that match the economy’s fundamentals. (…)

As the G20 confirms, excess volatility and disorderly moves in the exchange market hurts (economy), so we are watching currency moves with a sense of urgency. We will take necessary steps under certain circumstances,”

Aso warned. However, in the first quarter of this year, Aso's negative policy interest rates and the prospects of more intensified currency wars backfired and caused a sharp appreciation of the yen against the dollar and adversely affected the equity market.

On the other side of the Pacific, in her currency-war's battle cry on March 16th, the Federal Reserve chair, Janet Yellen, warned her counterparts at various central banks that in a world with highly integrated capital markets, monetary policy actions in any country will have spillover effects to other countries through exchange rates;

That’s true of our monetary policy, and it’s true of other countries’ monetary policies. In part, that shows up through movements in exchange rates, and those movements are a factor that any country needs to take into account in deciding what is the appropriate stance of monetary policy. So the fact that there are these linkages is an important factor in designing a monetary policy.

Hence, she implicitly served notice that she cannot ignore the adverse effects of the other central banks' policy moves on the U.S. economy and reiterated the Fed policy objective to maintain a weak dollar as a policy tool to insure against a growth slowdown, despite the fact that the US inflation is now virtually on the target. She noted that:

“Manufacturing and net exports have continued to be hard hit by slow global growth and the significant appreciation of the dollar since 2014. These same global developments have also weighed on business investment by limiting firms' expected sales, thereby reducing their demand for capital goods; partly as a result, recent indicators of capital spending and business sentiment have been lackluster.”

Consequently, Ms. Yellen left interest rates unchanged and signaled her resolve to fight currency wars by hinting at only two further contingent rate hikes this year relative to the effect that, heading into 2016, the market was pricing in four rate hikes. “Importantly”, she emphasized:

“this forecast is not a plan set in stone that will be carried out regardless of economic developments. Instead, monetary policy will, as always, respond to the economy’s twists and turns so as to promote, as best as we can in an uncertain economic environment, the employment and inflation goals assigned to us by the Congress.”

In the ECB, Governor Mario Draghi has also manifested his determination to intensify his initial opening salvo of introducing QEs in March 2015, which at the time he said the effort would run at least until September 2016, with an initial value of 1.1 trillion euros. Then in December, he cut ECB’s deposit rate deeper into negative territory, arguing:

"We have the power to act. We have the determination to act. We have the commitment to act,"

He intensified the ECB barrage in this ruthless race to the bottom for currencies this March with a fresh round of monetary stimulus including pushing the Bank’s key deposit rate deeper into a historic negative territory of -0.4 per cent and stepping up the pace of quantitative easing (QE) from 60 billion euros to 80 billion euros a month. Moreover, he cut the Bank’s benchmark interest rate from 0.05 percent to an all-time low of 0 percent, while announcing plans to extend its bond-buying program to include corporate bonds as well as government bonds, in a futile effort to raise the Eurozone inflation rate in a recessionary environment.

Surprisingly, some market participants have interpreted Draghi’s move as “de-emphasizing the role that the exchange rate plays in easing financial conditions," not taking into consideration that most probably the higher euro level may have been caused by the collateral damage in the currency wars and not by Mr. Draghi’s statement that: “We don’t anticipate it will be necessary to reduce rates further,” which was interpreted by some as to mean a shift away from the "currency war" – i.e, the -0.4 percent will be the ECB's last rate cut in the negative territory.

Looking forward, it is reasonable to maintain the hypothesis that the euro will depreciate against the dollar when Mr. Draghi would realize that his offer of ceasefire has not been accepted and will be forced to do ‘whatever is needed’ again to prevent a depression.

What about Britain, where the central bank has left its key interest rate at a record low for seven years? The readers of this blog may recall that in August last year we raised concerns about the British economy’s pace of growth and productivity, cautioning:

The fact that growth in the UK productivity has been subdued in the past eight years is a clear indication that British investors are still quite hesitant to invest strategically to enhance competitiveness.

Furthermore, we argued that Britain’s moderate investment growth would not be sufficient for the needed restructuring and the crucially necessary enhancement of her competitiveness. Sure enough the recent data showed that Britain's industrial output -- which makes up 15 percent of Britain's economy -- shrank at 1.5 per cent, the fastest rate in more than three years over the three months to February and the trade deficit ballooned to its widest in eight years.

In fact Britain's National Institute of Economic and Social Research (NIESR) now estimates that the overall economic growth in the first three months of 2016 had almost halved to just 0.3 percent, which would be the weakest rate of growth since the end of 2012.

Since August, the British pound depreciated by 7 per cent, however this decline has not been engineered by the Bank of England. Recall that last August we wrote:

A participation in the current currency war, even when British pound has appreciated 20% on a trade-weighted basis since March 2013, would not be an option. As it would either worsen the public sector net borrowing, or further reduce the effectiveness of monetary policy, and exacerbating household high level of debt.

In fact,  the Sterling depretiation was driven mainly by the uncertainty associated with the BREXIT.

The Outlook

 Unfortunately, despite the ineffectiveness of unconventional policies in reviving the potential growth and productivity and the severe damages that these policies afflict on the market infrastructure and trade, Ms. Yellen has stated in her recent speech that;

Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis to put additional downward pressure on long-term interest rates and so support the economy--specifically, forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities.   

While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.

Her influential predecessor Mr. Bernanke has gone even further and in his recent blog has advocated Helicopter money:

I consider the merits of helicopter money as a (presumably last-resort) strategy for policymakers. I make two points. First, in theory at least, helicopter money could prove a valuable tool. In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high. However, second, as a practical matter, the use of helicopter money would involve some difficult issues of implementation. These include (1) the need to integrate the approach with standard monetary policy frameworks and (2) the challenge of achieving the necessary coordination between fiscal and monetary policymakers, without compromising central bank independence or long-run fiscal discipline. I propose some tentative solutions for these problems.

Apparently, Ms. Yellen, Mr. Bernanke and other central bankers do not believe in any intertemporal optimization, i.e., too much borrowing now only transfers consumption across time from the future toward present. This partly explains why currency wars, lower interest rates, and various QE programs have done little to restore growth.

Policy makers should realize how important the role of capital formation in the supply side is. They should realize that for a successful working of international trade currency values, like any other price signals, must be informative about their relative purchasing power, and these can only be discovered in transparent markets, where the fundamental relationships between financial assets and the real sectors are respected -- where the banks are healthy and tax payers are not on the hook for the rescue of Too-Big-to-Fail zombie banks.

Central Bankers' Weekend at Bernie's! Will the Shanghai's Ceasefire in Currency War hold?

Monetary authorities around the world are busily introducing ineffective policies that they hope would create growth. As a result the state of the global economy increasingly looks like approaching the instant when Wile E Coyote runs off a cliff, but keeps spinning his legs, unaware that an impending hard landing is practically unavoidable.  Actually, the unresponsive world economy can be represented by yet another illustrative allegory, the movie Weekend at Bernie's, where two financial professionals (a metaphor for the central bankers), who have discovered a large insurance fraud scam in their company (a metaphor for Too Big to Fail, QEs, or negative interest rates, etc.), are invited to a party at their boss’s beach house over Labor Day. Only when they get there, they discover that their boss Bernie (the global economy) is dead from what looks like a drug-overdose (the massive $225 trillion of debt, and $600 trillion of toxic assets.)  Instead of doing the right thing the two executives decide it better to pretend he’s still alive so they can keep partying! 

Like the young executives in Weekend at Bernie's central bankers around the world have been increasingly using unconventional policies to prop up the global economy, expecting to convince investors that their policies are working and hoping nobody would notice all the Bernie's vital signs have been extinguished, i.e., the transmission mechanism of monetary policy is shattered . The world’s largest four central banks bought assets worth $1.2 trillion in 2015, similar to the amounts purchased post-Lehman and during the 2013 euro-area crisis, with a very little impact on growth. Meanwhile, they are futilely waiting for cheaper oil impacts come to rescue and give a boost to the world economy.  The fact that growth has not yet accelerated after the collapse of oil prices is blamed on the lag structure of impacts and not on the prevailing global uncertainty about the outlook that has weighed seriously on financial markets.

Negative Interest Rates, and market Volatility 

Both the Bank of Japan and the European Central Bank cut rates further into negative territory this year, and both saw their currencies strengthen. This is largely because markets has started to realize that these prop ups are not able to revitalize the economy. Particularly, when in the words of Governor Carney in his G20 speech in Shanghai

 “Volatility has spilled over into corporate bond markets with US high-yield spreads at levels last seen during the euro-area crisis. The default rate implied by the US high-yield CDX index is more than double its long-run average. And sterling and US dollar investment grade corporate bond spreads are more than 75bp higher over the past year. "

That volatility has not disappeared, it will show up soon with Brexit referendum and in the meanwhile, after the latest Fed’s move, is morphed into more of exchange rate volatility.  

Business Fixed Investment, and Intensive Margin

While, the FOMC statement in March  reported that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months, it also noted that business fixed investment and net exports have been soft. Undeniably, the strong US job gains in the absence of strong fixed investment, contrary to Fed’s reading, cannot point to additional strengthening of the labor market. As we have repeatedly argued in the past the strong job gains have been mostly emanating from a greater business focus on intensive margin due to the prevailing uncertainty. An intensive margin implies that instead of investing on latest technology firms hire more labour and utilize their existing equipment capacity more intensely. The substitution of transitory labour intensive tactics ( such as introduction of extra production shifts for part-time workers) instead of committing to irreversible longer-term fixed-capital investment has been the main reason for increased use of contingent employment and weak wage growth.

   

By the mid-March, the experience of five consecutive weekly gain for various stock indexes including the Dow, S&P and Nasdaq created the impression that the recent weakness in markets is over.  Recall that the weakness has been observed since the Fed’s December interest rate rise.  Many market analysts were excited that an estimated loss of more than 6 trillion dollars since early January has been recovered, and  reported that their earlier  concerns about slowing global growth is now waning and the outlook for commodity prices has improved.  Nobody, mentioned any fundamental factors. Some attributed the recovery to a rather sharp rise in oil prices and expectations of higher US growth, despite the global slowdown.

High Debt, Banks' Non-performing Loans, and Shanghai's Accord

Yet these factors pale in significance when viewed against global debt, including the U.S. gross national debt  that according  to some estimates would reach a level of $24 trillion by 2020, or just over 100% of gross domestic product, which can surge to $27 trillion if Mr. Trump’s tax cuts are implemented, assuming, of course, that the global economy withstands the shock to international trade stemming from his anti-trade rhetoric. Similarly European sovereign and private debts are quite high while banks’ non-performing loans are disturbingly rising. These are fundamental factors which would not allow a return to a smooth normal growth path – even if policymakers are content with a slow growth trajectory. Wile E Coyote has now reached the edge of debt and QEs cliff.

Given the urgency of the moment, many of us expected that the G20’s February 25th meeting in Shanghai would come up with some fundamental agreement to rebalance the global economy,   would try to readjust  values of   various currencies by employing some version of Purchasing Power Parity, and would restructure  debts. It was hoped that such policies would rescue the banking sector before a full blown financial crisis set in.    Regrettably, once again the International Monetary Fund (IMF) did come up with an entirely inappropriate policy recommendation and instead of arguing for resolving the global financial imbalances, a restructuring of global debts, and an end to currency wars, argued for a coordinated stimulus program!   Fortunately, it was soundly rebuffed by both Germany and the United States.

Nevertheless, the flurry of erratic monetary policy announcements after the Shanghai meeting has led some to conclude that there must have been a secret Plaza type Accord in Shanghai to adjust exchange rates and create some semblance of truce in the currency wars. However, for that  hypothetical accord to be successful the necessary conditions are transparency and completeness, neither of which exist.  In other words the accord must deal with the astronomical global debt, and must provide a framework for the orderly currency readjustments.    All in all, though, judging from the inconsistency of various monetary policies it appears that a putative Shanghai accord, even if exits, would be ineffective and short lived.

  

This is evident from the ECB’s March 10th policy announcement of an array of new unconventional policies.  Mr. Draghi  cut the three official interest rates;   increased the volume of asset purchases; offered more generous terms on targeted longer-term refinancing operations, and introduced a liquidity facility for banks pegged to the quantity of loans on their balance sheet. Given the ineffectiveness of these measures, the only motive that may be detected  for their introduction is a hope for a further depreciation of euro. However, this tactical move in the current currency wars, backfired, as it has been the case for Japan. Both currencies appreciated instead of depreciating. 

Being oblivious to the longer-term damaging impacts of negative interest rates on the financial sector, and their  distortionary impacts on intertemporal preferences,  ECB  reduced euro area deposit rate further down into the negative zone (from -0.3 to -0.4) per cent.  As the chart below shows, it is hard to believe that this move will have any real impact on growth, or will cause a change in the provision of liquidity. The only impact would be on the expected slope of the yield curve of up to ten-year maturity, which now is expected to remain relatively flat for a longer period, exerting more damage to the already fragile banks’ balance sheet.

A flat yield curve removes the banks’ maturity transformation opportunities.  A bank’s ability of intermediation in the credit market, to transform short-term savings into long-term loans, is critically compromised  by the flat slope of the yield curve.  Thus, banks’ profitability is now seriously impaired. Long term rates are low because markets are anticipating a hard landing is inevitable.

In terms of helping the global economy the US Federal Reserves’ policy action on March 16th was not much different.   Ms. Yellen markedly revised the pace at which her bank expects to lift interest rates, justifying the revision by referring to global worries that could adversely impact America’s recovery. This was despite the fact that core inflation in the US, excluding the deflationary impact of lower oil prices, has now ticked up to 2.3 per cent, which is above target for headline inflation of 2 per cent.  Ms. Yellen has halved the number of rate increases that are expected for 2016 to two 25 basis points moves.

However, given our argument with regard to economy’s greater use of intensive margin, the inflation scenario is now much more complicated.   The use of intensive margin indicates a lower growth of the aggregate potential output, as investment for extensive margin is being delayed or abandoned. This would imply a lower non-accelerating inflationary rate of unemployment (NIRU).  A lower potential growth rate determined by an aggregate short-term cost function would cause inflation rate to pulsate in accordance with the on-off use of contingent factors of production. The impact of these bouts of inflation rate on the expected inflation could become a potent source of stagflation.

It is certainly true that the US is now worryingly more exposed to the global volatility.  The alleged surprise of those that consider the Fed’s mandate is to worry about the US inflation and unemployment, or that did not expect a greater Fed's sensitivity to the worldwide repercussions of US monetary policy decisions, is at best disingenuous. It is hard to believe that Fed is not using a structural model in which some forms of covered or uncovered interest rate parity relationships play an important role in determining the value of the US dollar against other currencies.  In other words, global events would impact the Fed’s policy rate setting via this channel, and then reverberate through the balance of trade. As soon as one uses a structural model with some interest parity conditions the sensitivity to global impacts would be a foregone  conclusion. 

Of course, Fed must be acutely aware that all over the world there are now over $7 trillion worth of bonds with negative yields. In other words both governments and banks are now being paid to borrow from the various central banks in the euro area, Japan, Sweden, Denmark, and Suisse.   This would elevate the already unsustainable   level of global debt. A hard landing is becoming even more devastating and painful, when banks are now more vulnerable, more exposed, and larger.