The three major currencies in the world are the US dollar, the euro and the Japanese yen. The cost of borrowing in these currencies is extraordinarily low, and about to get much lower. The interest rate in the US is 1% and will likely head lower when the Fed next meets in mid-December. To be specific, the target rate is 1% but the Fed’s effective funds rate is much lower. At last count the effective rate was just 0.23% so at this stage another 50 basis point but in December seems like a done deal.
Moving over the Europe, the hard money’ men running the ECB have just lowered interest rates to 3.25%, with more cuts expected. And low growth, high saving Japan has an official borrowing rate of just 0.30%.
Looking at the other major currencies, the Bank of England just shocked markets with a massive and unprecedented 150 basis points to 3%, indicating their economy is in real trouble. Switzerland’s interest rate was also reduced on Thursday by 50 basis points to 2%. Canada’s official rate sits at 2.25%, Sweden’s 4.25% and Norway’s 5.25%. Recent moves in these countries have all been down and the bias remains for lower official rates.
In the Asia Pacific Region, Australia’s official interest rate was reduced by a more than expected 75 basis points on Tuesday to 5.25%; New Zealand is at 6.50%, China, now on an easing path, has a rate of 6.66%, while Hong Kong and Singapore, with strong links to US trade, have similarly low rates of 1.50% and 1.24% respectively.
In short, the major developed financial centres of the world are all lowering the cost of credit. It remains to be seen how effective this policy will be, given large numbers of these countries’ population already have too much debt. However, the resulting lowering of debt servicing costs will take some pressure off the consumer.
Combined with expansionary fiscal policy (they’re all Keynesian’s now!) global policy makers really are throwing everything at the economy. A recent press release from the US Treasury indicated the US government’s borrowing requirement for the three months to December will be $550 billion, an amount that includes $260 billion for the Supplementary Financing Program (SFP), which we’ll explain in a moment. This comes on top of a $530 billion borrowing binge in the prior quarter, which included $300 billion in SFP borrowing.
The SFP was established in September when it become clear the Fed had much more bailing out to do. All the Fed’s lending facilities, which hold dodgy mortgage debt or short term commercial paper, need to be purchased with something. As the Fed’s own stash of Treasury securities was dwindling, the Treasury issued more paper onto the market and gave the cash to the Fed, who on-lent it to the US banking system.
Looking at the Fed’s balance sheet, you’ll see a massive increase in assets and liabilities over the past year (which reflects the huge expansion of Fed credit). The quality on the asset side looks poor, while the growth in liabilities is essentially US Treasury’s, with the SFP approaching $600 billion.
We’re not sure how long the Fed can continue borrowing from the Treasury like this.
