Rewardless Risk
February 1, 2016·0 comments·monetary policy
Central banks claim their primary duty is stabilizing the banking system. Yet they're now implementing negative interest rates that force banks to make loans with zero compensation for risk. The contradiction deepens as the BOJ's move signals a global pattern: central banks are weaponizing monetary policy for domestic political purposes, willing to destabilize their own financial systems to do it.
- Negative rates reverse the penalty structure. Banks are fined for holding capital conservatively and pushed to lend into an overleveraged corporate sector where risk goes unrewarded. This is the opposite of what happened during 2008, when the Fed paid interest on reserves specifically to stabilize banks.
- The credit cycle is rolling over everywhere. When defaults accelerate and risk becomes real, banks forced into negative-rate regimes will face a destabilization they can't escape. The current calm in credit markets masks an incoming stress that these policy structures are unprepared to handle.
- This is now a coordinated global pattern. The ECB moved first. The BOJ followed last week. A line has been drawn. Market participants now expect negative rates as standard policy, and the Fed will eventually join the club when volatility returns.
- Central bankers are openly abandoning their original mandate. Negative rates aren't about price stability or employment. They're about weakening currencies for domestic political gain. The BOJ, ECB, and Fed are using their banking systems as tools in competitive devaluation wars.
- The illusion of central bank independence is gone. These institutions once claimed to exist above politics, as stewards of financial stability. Negative rates expose that claim as fiction. Central bankers are now just politicians in different robes, prioritizing short-term currency wars over long-term system stability.
The Why of Epsilon Theory
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
