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Alternative Market Briefing

Other voices: Global negative interest rates, what can go wrong and how can hedge funds help?

Thursday, September 05, 2019

By: Donald A. Steinbrugge, CFA - Founder and CEO, Agecroft Partners

Globally coordinated monetary stimulus prevented a potential economic meltdown in 2008 and helped create a quick rebound in the capital markets. We have since seen the longest economic expansion on record. Unfortunately, the effectiveness of monetary stimulus declines the more it is used. Ideally, it should only be used during recessions in order to reduce a downturn's severity and duration.

Recessions are a natural occurrence in an economic cycle. They are unpleasant when they occur, but can be helpful to the economy in the long term. Recessions drive out inefficient companies and capital is recycled into growing parts of the economy. The longer recessions are artificially delayed, the more severe they may ultimately become. Unfortunately, many governments have over used monetary policy, creating approximately $17 trillion of sovereign debt yielding a negative interest rate. This can be easily conceptualized by viewing the chart below, where we have substituted the word yield with the more appropriate word, expense.

Not only is monetary easing now having little impact in stimulating these economies, but it is significantly increasing the potential severity of a future recession. Overuse has effectively eliminated one of the major tools available to simul......................

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