Citi FX has released a scathing assessment of negative interest rate policies being implemented by central banks, describing the widespread economic experiment as the equivalent of letting doctors carry out untested surgical techniques on every patient in a hospital.
In a brief note sent to clients on Thursday night, Citi analyst Gregory Marks provides a brutal analysis of the policies, which are currently being implemented by, among others, the European Central Bank, Bank of Japan, and Sweden’s Riksbank.
He invokes what he calls the “Havenstein experience” to attack the policy, basically arguing that we shouldn’t trust the decisions of central bankers just because they are in a position of power.
The Havenstein experience centres around a great Prussian figure called Rudolf von Havenstein. He was first a judge, before becoming the president of the Prussian State Bank from 1908 to 1923. While there, he presided over an unprecedented period of hyperinflation, and a total economic collapse in the once great empire. Here is a little more from Marks on the issue (emphasis his):
During Havenstein’s time at the Reichsbank, it was widely believed that the rate of inflation and the money supply had nothing to do with each other. For some context, the gold standard was suspended during WWI and Keiser Wilhelm II did not enact an income tax (unlike France) to pay for the war, choosing to pay by borrowing. The war was lost and over with, but the debt remained. In order to ‘help’ the government and people, old Havenstein went on a printing spree. Good idea right? Remember, at that time it was believed that the rate of inflation and the money supply had nothing to do with each other. The end result was crippling hyperinflation, economic collapse and a negative shift in the political spectrum.
Using a figure from nearly 100 years ago to make a point about monetary policy may seem like a pretty glib thing to do, but Marks’ basic argument is this: we shouldn’t always totally trust the most powerful figures just because of the offices they hold. What happened with von Havenstein in the early 20th century is happening with central banks and negative rates now, Marks argues.
Just because the people in charge of monetary policy are extremely intelligent, well-educated and have doctorates and qualifications coming out of their ears, it doesn’t mean “they are exempt from occasionally being utterly misguided in their perceptions of positives versus negatives when it comes to economic theory and policy.”
More on the Havenstein experience from Marks here (emphasis ours):
We should be invoking Havenstein to identify the present flaw in institutional thinking around current monetary policy, specifically negative rates. In other words, the lesson here is that, unfortunately, people believed in the efficacy of a completely irrational policy because it was put in place by a qualified and experienced policymaker — this instead of questioning the common sense merit of its possible outcome.
Marks concludes by comparing allowing negative rates to letting surgeons carry out experimental surgery on patients, saying: “Experimental procedures can produce unintended consequences and their efficacy must be rigorously tested before wide release and adoption. So as a society, we do not let doctors perform experimental procedures on everyone who walks through the hospital doors.”
He adds: “For some reason, there are a lot of PhD holders from a different industry who are doing just that to entire nations and economic zones. This isn’t a theoretical petri dish. It’s the global economy.”
Citi FX joins a growing number of influential people and institutions railing against negative interest rate policies. Earlier this month, for instance, Deutsche Bank argued that the ECB’s insistence on continuing to use negative rates is putting the entire European project at risk, while Commerzbank is considering taking money out of storage with the ECB and physically storing cash in its own vaults to avoid paying the penalty imposed by negative interest rates. Renowned US investor Jeff Gundlach recently called negative rates the “stupidest idea” he has ever come across.
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