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Dear R. Hunter,

Although US election news is overhanging all today, there are global
economic issues driving key policy trends that require equal focus.
Foremost among these are negative rates, now affecting some 15% of
deposits worldwide. Underlying questions include what is the role of
capitalism, when the cost of capital is free? Capitalism began as a way
to finance manufacturing and trade. Looking forward to a world of
individually based 3-D on-demand manufacturing and fintech, what is the
future of investing and the role of financial institutions? The times,
they are a changin'. Attached please find a special DHGE report by Dr.
Robert Madsen on negative interest rates. Madsen disputes the idea that
monetary policy has run its course, and talks about "the monetary policy
that dare not speak its name" currency depreciation which could become a
competitive downward spiral. As has been reported recently, some feel
that Chinese purchases of Japanese government bonds, as they unwind
their US dollar debt, is behind some of the unexpected strength of the
yen. Here is a preview of Madsen's paper:

For decades economists thought that zero represented the lower bound on
interest rates. Over the last few years, however, market forces and
monetary policy have conspired to drive rates in many countries below
that threshold. Now a quarter of the world economy is overseen by
central banks with negative short- term interest rates and well over 10%
of the world's bonds trade at yields below zero. Furthermore the process
has not run its course inasmuch as several monetary authorities have
declared their intention of pushing further into this terra incognita.
This matters for two reasons: what negative rates reveal about the state
of the underlying global economy, and the risks that those rates pose
for economies, exchange rates, and financial markets going forward.
Those risks are likely to rise substantially over the next couple of
years and could spread to the United States as well as Europe and Japan.

"If it were possible to take interest rates into negative territory I
would be voting for that." --Janet Yellen, February 2010

With all best wishes,

Lyric Hughes Hale

David Hale Global Economics, Inc.

http://davidhaleweb.com
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