A new report by Societe Generale analyst Albert Edwards has the financial world buzzing, and not in a good way.
Edwards argued that the United States is much closer to its next recession than most investors believe. Additionally, the current near-zero interest rate environment has laid the groundwork for a negative Fed funds rate for the first time in history.
The Zero Lower Bound
Most investors operate under the assumption that zero is the lower bound for interest rates and that the current near-zero rates in the United States indicate that the economy is still near the low point in its current cycle.
However, Edwards pointed out that, in reality, while below-zero rates may be unprecedented in the United States, they are certainly not unprecedented globally.
In fact, Sweden currently has a -0.35 percent policy rate in place. Even with interest rates at zero, Sweden had been unable to stimulate any significant inflation since the end of 2012, so it reduced rates to -0.25 percent in early 2015 and further to -0.35 percent this summer.
Edwards believes that Sweden’s measures demonstrate that the zero rate bound is not a true limit on rates. “If -0.35 percent is possible, why not -3.5 percent or less?” he asked in his report.
The Negative Dots
If Edwards’ scenario seems far-fetched, look…
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