Sub-Zero is a line of overpriced appliances that routinely make their way into upscale kitchens, though I haven’t seen any studies showing that 37 degrees inside a Sub-Zero is more effective at keeping milk fresh than 37 degrees in other brands.
Sub-zero also is becoming the standard for interest rates around the globe. Last week, the Bank of Japan joined the European Central Bank and several of its counterparts on the Continent by setting one of its policy rates at minus 0.1%. That set off a furious, albeit short-lived rally in global equity markets.
Whether sub-zero interest rates actually work is open to debate, however. So says Richard Koo, the chief economist of the Nomura Research Institute.
“In my view,” he writes, “the adoption of negative interest rates is an act of desperation born out of despair over the inability of quantitative easing and inflation targeting to produce the desired results.”
The failure of the BOJ and the ECB to meet their inflation and growth goals is shared by the Federal Reserve and the Bank of England. None of these central banks understand that their textbook solutions don’t fit the real economy, Koo asserts.
Ultra-low interest rates in theory spur corporations to borrow to make real investments in plant and equipment and spur households to purchase houses and durable goods. Instead, the private sectors in both Japan and the U.S. have run savings surpluses, hallmarks of what Koo calls a “balance sheet recession.”
The lack of recognition that the private sector seeks to minimize debt rather than maximize profits explains why record-low interest rates haven’t set off a boom or inflation. Indeed, it reflects a “crisis in macroeconomics,” he says. And on a more practical level, why corporations sit on record hoards of cash (taxes aside).
In actuality, the use of ultra-low or sub-zero interest rates actually has another macroeconomic impact: It devalues a nation’s currency. Manipulation of exchange rates is supposed to be verboten among central banks, however.
And in the case of the U.S. authorities, the Treasury is in charge of currency policy, not the Fed. If the dollar swings as a result of the Fed’s moves, they can say they had nothing to do with it. That’s even though, as the central bank controlling the world’s reserve currency, it has a lot to do with the greenback’s value.
To be sure, some other economists boldly assert that negative interest rates could work if it weren’t for paper currency. After all, folks could simply stuff dollar bills in their mattresses and get zero percent — which still is better than a negative yield. (And that’s what investors are getting in some bond markets; the two-year German bund hit a minus 0.5% yield Wednesday.)
The solution is to get rid of paper currency. That’s the not-so-modest proposal put forth in an International Monetary Fund Working Paper by economists Ruchir Agarwal and Miles Kimball.

They suggest a shift to electronic money (presumably the likes of Bitcoin) from paper currency, and let the value of paper money deviate from its par value. That, the authors assert, would “stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates and economic activity are quite low, as they are currently in many countries.”
One wonders how kindly the populace would take the notion of the deliberate, overt manipulation of their paper currency by their government. Of course, it was simpler if subtler during times of inflation, as in the 1970s. Even with nominal interest rates high at 9%, if inflation was 10%, real interest rates were minus 1%. And dollar bills lost value as prices rose.
Now, with flat-to-falling prices in Europe and Japan, their central banks have had to push interest rates below what was thought to be the zero bound to accomplish the same thing. And in the U.S., the Fed just began in December to lift its policy rates from near zero. So it’s headed on the opposite tack.
The actual effects of the BOJ’s move have been seen in currency markets. The Japanese yen weakened sharply from 118.50 to the dollar to 121 after the drop into negative-rate territory Friday.
Since then, however, the yen has more than retraced its retreat, strengthening sharply to 117.80 by Wednesday afternoon. The euro did a similar round-trip, from $1.09 to $1.08 late last week, before rebounding strongly to $1.11 Wednesday.
So much for the power of negative interest rates to push currencies lower.
In actuality, the rallies in the yen and the euro reflect sharp drops in the dollar as the odds of further Fed hikes have faded. Based on federal funds futures, odds are less than even for another quarter-point increase until well into 2017.
Failing radical solutions such as supplanting paper currencies, it’s not apparent that negative interest rates stimulate much of anything other than bond-market rallies. The Treasury 10-year yield hit a one-year low of 1.80% early Wednesday.
And one other asset class has been stimulated: gold and gold mining shares. The metal has crept up to a three-month high of $1,142.20 an ounce for the April Comex futures while the SPDR Gold exchange-traded fund ) is up 1% Wednesday afternoon. The Market Vectors Gold Miners ETF meanwhile has bounced by 22% from its intra-day low on Jan. 20.
Maybe the gold market sees governments succeeding in one respect with negative interest rates: to debase their currencies.