Lost in the cacophony of absurd self-aggrandizing on Wednesday was Donald Trump’s dismay upon learning about Germany’s historic zero coupon 30-year bond auction.
“So Germany is paying Zero interest and is actually being paid to borrow money”, an incredulous Trump tweeted of the sale.
At this point, it’s safe to say the president feels righteously aggrieved each and every time he stumbles on a statistic from the European fixed income market, where the list of mind-boggling factoids grows by the week.
Technically speaking, the German sale was a failure. It was uncovered, with Germany selling just €824 million of the €2 billion it was aiming at. Germany doesn’t see it as some kind of debacle, though, and neither did the market – bund yields moved a couple of basis points higher, but there was no hint on Wednesday that the sale marked a tipping point on the way to a tantrum. Germany’s debt agency wasn’t fazed, saying it “doesn’t view the sale as a failure [and] it doesn’t cause a problem as we can take the remainder on our own books”.
In any case, the nuance hardly matters to the US president. “The US, a far stronger and more important credit, is paying interest”, he lamented, using the news out of Germany as an excuse to lambast the Powell Fed anew. “[We] just stopped Quantitative Tightening”, he said, before bemoaning the “strongest Dollar in history” and asking, in all-caps, “WHERE IS THE FEDERAL RESERVE?”
To answer that latter question, the July Fed minutes suggest the Fed is trying to reconcile a desire to stick with the “mid-cycle adjustment” characterization of the first US rate cut in a decade with a bond market that simply isn’t inclined to let them get away with anything less than a full-on easing cycle.
Trump should be careful what he wishes for. There’s a reason why the entire German curve is negative. Inflation expectations have collapsed across the pond and growth is anemic. Whether he realizes it or not, Trump’s entire push for a weaker dollar is predicated on a desire to avoid importing the kind of disinflation that would risk pushing the US down the “Japanification” road.
Of course, that’s part and parcel of why the president is demanding rate cuts and maligning the ECB’s arm’s-length targeting of the euro, but it’s worth remembering that if everyone chases down the same monetary rabbit hole, that simultaneous plunge is likely to cancel out in terms of the FX channel.
“When all central banks are easing, they are just offsetting each other in a zero-sum game”, BofA wrote last month. “They are in a bad equilibrium, making each other ineffective [and] they all end up with looser monetary policies, but without any change in their currencies”.
The result is inflated asset prices with no impact on the real economy.
It’s something of a catch-22 for Trump. If you cut rates in a bid to “match” other central banks, you might be able to avoid importing disinflation, but the very act of easing aggressively will probably prompt other central banks to ease even further. That’s the “race to the bottom” dynamic. If, on the other hand, you accept the futility of the whole thing from the outset and stick to your guns until the domestic economy shows concrete signs of rolling over, you risk unwanted currency strength in the meantime, which entails importing disinflation which will ultimately force you to ease policy later, at which point you’ll be hopelessly behind.
Perhaps the most amusing part of this is watching Trump slowly put the pieces together. As the picture becomes clearer to him, he’s beginning to understand that it’s all somewhat circular and that his adversarial trade policies are both forcing other countries to ease policy and preventing the dollar from weakening. Unable to accept his own culpability in the creation of what, at this point, is a kind of personal economic hell, Trump simply doubles down on demands for rate cuts, despite the very real possibility that those calls are beginning to undermine voter confidence in the economy.
Germany’s zero coupon debt sale was just another slap in the face for the president in the context of all these dynamics.
In an irony of ironies, the landmark German auction came on the same day that the CBO issued its latest budget forecasts for the US. The projections show that contrary to Trump’s tweet, America is not, in fact, “a far stronger credit” than Germany. Indeed, one of the biggest stories in markets this month is the rumor that Germany may finally be willing to relent on its “black zero” fiscal policy, which stands in stark contrast to the US, which is hemorrhaging red ink.
Meanwhile, in a testament to the fact that negative yields are, in the long-run, more trouble than they’re worth, German Finance Minister Olaf Scholz said the country is pondering a ban on negative interest rates for retail savers, assuming it’s consistent with the constitution. That’s according to FAZ.
How German lenders are supposed to make any money when the entire German curve is negative and passing along negative rates to depositors is illegal is anyone’s guess.