When Alan Greenspan uttered “there is no barrier for U.S. Treasury yields going below zero”, you know that conventional economists have embraced negative interest rates as real possibility in North America. We know that Europe and Japan have entered into the realm of negative interest rates for many years. But pundits in the US have always said: “it couldn’t happen here”. Yet, it is hard to ignore that over $15 trillion of sovereign debt is trading in negative territory. Greenspan speaks of an “international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower”. In other words, there are forces outside the US that are influencing the downward direction in yields.

Greenspan claims that “zero has no meaning” in the bond market, a rather sanguine attitude towards the collapse of bond yields.  This is rather a cavalier approach when, in fact, zero or negative bond yields tell us a lot of what is taking place throughout the developed world, such as:

• A savings glut exists in many countries, especially in Asia and Europe; excessive savings or, its mirror image, underconsumption; in the true Keynesian tradition, we need to spend more today to generate higher growth, not save so much for the future;
• Demographic changes go hand-in-hand with excess savings; as we live longer, we are more concerned with having funds for future consumption than current expenditures;
• Negative rates are a weapon in a currency war since interest rate differentials create opportunities for currency speculation; for example, Switzerland is considering dropping its bank rate further to minus 1.0 % to dampen the rise of the franc;
• Excess reserves are building up within the domestic banking system; central banks prefer that domestic banks create credit, rather than deposit excess reserves with the national central bank; negative rates discourage deposit-taking institutions from creating credit;
• There is a worldwide slowdown underway; recent data on industrial activity in Germany and China and the UK indicate economic contraction; the US is slowing in major sectors and job creation has slowed considerably; recessionary forces are taking hold.

Whether one believes that negative rates couldn’t happen here,  we must entertain the prospect that we will follow the lead set in Germany and Japan and, at a minimum, move towards zero rates.