An article on today's ET says that Britain is thinking about sub-zero interest rates.
Try as I might, I am not able to wrap my head around how negative interest rates work or how they are desirable.
It is a peculiar situation where we see either asset prices going up , like in the stock markets, or yields dropping, like in the rental real estate market, both of which are two sides of the same coin.
Stock prices are more and more controlled by money flows, including cross border carry trades. Underlying strength and cash flows of the business seem to be a peripheral consideration.
Bond yields are dropping. Share prices are shooting up. The world is teetering between an unjustified irrational fear of covid and an equally unjustified irrational euphoria that vaccines will actually result in better health.
Every VC and PE fund, and the local paanwala , is thinking of an IPO, to dump their shares on an unsuspecting public while the going is good.
Classical economic theory holds that we all need to spend money , and consumption drives growth. That was anyway an unsustainable model with the flaw lying in the definition itself. Now we have a situation where a certain set of the population is earning the same as before, with jobs that are virtual and spending less in the real economy since they are shut up inside the prisons created by their own minds, while another section, the one that works in the real economy, is losing jobs in real life and having to learn how to deal with virtual life with even schooling going online.
Where will this end? Like during the buildup to the 2008 crash , no one wants to get off the merry go round so as not to miss out on all the fun, till it comes to a sudden crash. The current situation is similar, though there is nothing merry about this round!
Lovely times indeed ☹️
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