Europe has just introduced negative interest rates. The idea is to tell the banks to not park their cash in the Eurozone central bank but to lend the money to business. This is a fine idea but the difference between no or little interest rate and a negative one is very marginal.

A negative interest rate is called a haircut. You put $100 on deposit and the next day you get back $99.99. The trouble is a bank manager will tell you the problem with lending even at 5 per cent interest is that you risk losing $100 for a bounty of just $5 a year.

So lending is a dangerous business; 0.2 per cent a year here or there is not going to make much of a difference to the appetite to lend to risky customers.

Before the crash of 2008 a huge amount of money was created by the private sector. The banks created money by creating bonds from assets, for example car loans. These bonds were turned into other instruments and swapped for other bonds, ultimately all the way up the chain to government debt.

Governments used this liquidity to fund spending sprees because bonds are the things banks swap for cash; cash gets spent and spending drives more tax.

When the crash happened, governments destroyed much of this cash-making machinery the private sector was using. Governments had to use their own methods, like QE, to create cash. Sadly, they are rarely as efficient at doing anything as the private sector. 


Resuscitating economies

As such, the re-nationalisation of money supply and its heavy handed operation has cramped the process of recovery and made the US and European recovery long and drawn out. However, governments haven’t been idle. They have tried hard to resuscitate the economies of the west.

The trouble is, it is hard to regenerate an economy from the top down. A few economic diktats do not make for a vibrant economy, as the Soviets found out. Economic growth comes from the bottom up, where millions of people make economic optimisations to make a little extra money. These tiny efforts combine to form the unstoppable engine of economics.

The west has made a series of huge technical macro-economic moves to solve the Great Recession. These interventions will set the development of the world economy for perhaps a generation to come. The key ones are the suppression of interest rates, the taking on of a huge backlog of sovereign debt and the creation of a massive dam of money held behind the technical walls of central banks as they try to reinflate their way to economic growth.

Even after the start of tapering of QE, the US alone is liquidating $600 billion a year of financial instruments into cash or near cash assets. (That is also roughly the US fiscal borrowing requirement.) While not exactly printing money, this is the equivalent of oiling up the US economy for action, like soaking a Turkish wrestler with a bucket of olive oil.

Ultimately it is going to make a mess however much it helps with the recovery. As such, all investors need to think about the end game of the economic policies of the west and where it leaves these states.

The US, Europe and even Japan are on the recovery road. I believe the dam of money will burst and we will get a boom and a bubble. That is great news, of course, until the train comes off the tracks.

Knowing the party is just starting is a big opportunity to profit; and as long as you leave at the right time it’s a licence to prosper. This is why stocks refuse to fall.

But don’t think there is big risk building up in the market because once again — it’s hidden and growing.


— The writer is CEO of ADVFN.com, a financial stocks and shares information site.