For the first time since the Great Depression, the world is in a liquidity trap.
The unintended consequence of many central banks pushing negative interest rate policy is conjuring deflationary headwinds, stronger currencies and slower growth — the exact opposite of what struggling economies need. But when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors.
When central banks reduce policy rates, their objective is to stimulate growth. Lower rates are designed to spur savers to spend, redirect capital into higher return (i.e., riskier) investments, and drive down borrowing costs for businesses and consumers.
Additionally, lower real interest rates are associated with a weaker currency, which stimulates growth by making exports more competitive. In short, central banks reduce borrowing costs to kindle reflationary behavior that helps growth. B