The last few blogs here on globalEDGE have not been too optimistic and may make one think that the world may indeed end in December (as the Mayans allegedly predict). This blog will not be much more optimistic. However, instead of just talking about recessions, this will explore some of repercussions or causes that are being observed right now. Specifically, this will explore the potential permanent change in the financial services industry.
This subject become very pragmatic over the course of the summer when Germany issued bonds for a negative yield. That is, investors actually paid Germany to have the German government borrow from them. If this seems odd, it’s because it is- normally the borrower must always pay in order to borrow money now. As the Financial Times post shows very well, this has explicit consequences in the mechanics on the financial services industry model. Banks typically were able to charge a yield for giving money now in the promise of having money later and this may no longer be the case.
One reason for this may be the surplus of capital in the system. That surplus appears to be here to stay with the U.S. Federal Reserve increasing its bond purchase program and printing more money off to do so. England’s incoming Chairman has hinted that he will increase capital printing as well—which is especially shocking given that the Bank of England is one of the most conservative central banks in the world. It’s no secret that the Bank of Japan has printed off tons of currency as well. It’s simple economics that the value of a resource (capital in this case) is driven by the scarcity of the resource. Could the continued printing of capital eradicate the value of the current monetary system? Further, how will the financial services industry (which composes roughly 1/3 of U.S. GDP) adjust to these phenomenons? I don’t have an answer yet, but it is certainly something worth discussing.