Negative interest rates that have spread through Europe and Japan are coming soon to the U.S., according to a Societe Generale strategist.
A "deflationary bust" in which officials pour still more money into the system will take the benchmark U.S. 10-year Treasury note to minus-1% and 30-year bond yields negative as well, the firm's Albert Edwards contends in an analysis on the state of financial markets.
In the consistently bearish strategist's latest note to clients, Edwards takes on the "new level of fiscal debauchery for the U.S." that he said will continue as policymakers look for ways to maintain the recovery.
Edwards said he is "now more convinced than ever before that the coming deflationary bust will take the US 30y yield below zero. I am also convinced that helicopter money will be the chosen way out of this deflationary quagmire, especially as it becomes increasingly clear that there is now no way left to reverse every government's exploding fiscal liabilities. The Ice Age is nearing the end."
Some $11 trillion of global sovereign debt is carrying negative yields. Most of the German, French and Japanese yield curve is below zero as those nations have looked to push money off the sidelines and back into their sluggish economies.
Negative rates happen when bond investors pay such a high premium on bonds that their coupon returns actually cause them to lose money by lending it to the government. Negative deposit rates also are common in these areas. President Donald Trump has said he would like to try negative rates in the U.S. The nation is in the midst of trillion-dollar budget deficits and a debt of more than $23 trillion.
The idea of Modern Monetary Theory is gaining adherents in the U.S. Proponents say that fiscal stimulus should be used to boost the economy and that deficits don't matter as long as inflation is low. They look to central banks like the Federal Reserve to keep rates low to reduce the cost of borrowing that high deficits require.
"You can call it Modern Monetary Theory (MMT), you can call it 'Fiscal and Monetary Co-operation', or you can call it whatever you like, but there is only one realistic way out of this mess – and that is for governments to inflate away their debts," Edwards wrote.
He added that the inclination toward "helicopter money" will grow in the years ahead.
"Does anyone seriously believe that any democratically elected government would be willing to raise taxes or cut government spending and future pension/health benefits in a bid to delay the fiscal timebomb? Of course they wouldn't!" he wrote. "And any government that attempts to do so will be hounded from office by an indignant public armed with pitchforks and much else besides."
To be sure, most U.S. policymakers have rejected the idea of negative rates.
Federal Reserve Chairman Jerome Powell said about six months ago that if the central bank found itself in need of stimulus, it would cut rates or possibly buy up more bonds through quantitative easing.
Still, Edwards said the idea of direct money injections rather than QE might prove irresistible for government officials, despite the inflation that could result. The Fed then might be pressured to keep rates low to make financing costs manageable.
"Helicopter money will work for Joe Sixpack much more effectively than it will for Mike Moneybags – and so it will be much more widely popular," he said. "Once politicians have their hands on this policy tool, make no mistake, they will never ever hand it back to the Central Banks."