See part 1: Deep T. Special: How low do Aussie interest rates have to go?
Let’s say, just as an example, that short term interest rates undoubtedly bottomed on -5%pa for government bonds and -3.5% for bank funding costs or deposit rates as the bottom of the cycle. Over a 5 year period there would be significant decreases in debt and money supply whilst simultaneously reducing asset values. A forecast which is totally against traditional thinking because wouldn’t both private and public sectors borrow like there was no tomorrow with the cheapest cost of borrowing in the known universe?
Cheap is a relative term. Maybe it’s cheap for borrowing for productive purposes but at the bottom of the interest rate cycle and well into negative territory, inflation of asset prices ceases with deflation the norm. So if you add the loss on the asset or risk capital discount to the negative interest perhaps the net cost is a disincentive to invest in non-productive assets as opposed to future business cash flows.
