Nickelback is one of my favourite rock bands. A group of guys from Hanna, Alberta, Canada who have created a number of great hits. One of my favourites is Rock Star.

After listening to the tune I couldn’t help but think of central bankers. That’s right, when I listen to rock I like to meditate on central banking actions.

Since the Great Recession, the central bankers of the world have become the rock stars of the financial world. Every Fed meeting and ECB conference is followed by hordes of adoring financial analysts and investors. Many parse every single word or phrase in an almost fanatical obsession. They have been cheered by many fans to be the sole reason why the world economy didn’t spiral into the abyss. So what is the song track?

Intervention bull market

There is this almost incessant ideal floating around that governments and especially central banks need to do something to get economies going and “fix things”. There is the idea that constant interventionism in a complex system will somehow yield positive results. As Nickelback suggests:

I’m through with standin’ in lines to clubs I’ll never get in

It’s like the bottom of the ninth and I’m never gonna win

This life hasn’t turned out

Quite the way I want it to be

(Tell me what you want)

I need a credit card that’s got no limit

So with the world’s various economies frustrated by low inflation and anaemic growth how are the central banks “gonna do it?”

I’m gonna trade this life for fortune and fame

I’d even cut my hair and change my name

Central banks ‘cut their hair’ and ‘change their name’

They haven’t so much cut their hair as they have shaved their heads. Interest rates have been hacked globally to microscopic levels. Central banks around the world have lowered rates to levels never seen. They have gone bald to become global economic rock stars. They have also changed their policy names.

We have gone from zero interest rate policies “ZIRP”, to negative interest rate policies or “NIRP”.

I find that negative interest rates make little sense, but the rock star monetarists argue that they are just low interest rates carried further — in other words it is the same music, just played louder. The thought is that if consumers and corporations have to pay a price to store their cash at banks, they will go out and spend and invest it instead. To quote Nickelback, people will consume like rock stars and “live in hilltop houses driving fifteen cars”. But is the hit parade over and is the current album being played actually good music? What behaviour are these songs creating? Here are three:

1. Currency wars

When rock stars try to compete against interest rate polices they beget currency wars. Think of it as bands competing for ticket sales. Capital will generally seek to leave a negative rate currency in search of better returns, and so depress that currency’s value over time. Central banks like that because lower currency values help their exporters (sell more cheap tickets), and also help them hit inflation targets that help pay down debt in a world where deflation would be disastrous. The competitive nature of this game is obvious and the various central banks (with the exception of the US) have all taken turns to devalue recently.

2. Too low to not fail

One of the negative derivative effects of irrationally low interest rates is the mispricing of money.

When the cost of capital gets priced at artificially low levels and for longer periods of time you are likely to get a misallocation of capital or excessive investments at lower than normal net present value return assumptions. In more simple terms, you allow some excessively levered companies to survive when they should have failed in a higher interest rate environment.

In other words, there are too many bands playing and none of them can make decent money when they continue to split the ticket sales. The lack of corporate failures in certain industries actually perpetuates exactly what central banks are trying to fight — deflation.

The “rock stars” are extending the party and no one is going home. As a result, various industries essentially have so much competition that they have essentially no pricing power or the volumes necessary to be more profitable. Indeed, there’s a creeping realisation that much of the excess liquidity of the past few years flowed into overproduction and so created short-term jobs but long-term deflationary pressures, an unintended consequence of the most extreme sort.

Very low or negative interest rates seem to result from a number of sources creating too much liquidity and too little growth derived from this surplus capital.

3. Levitate asset prices

The rock star extraordinary monetary policies of the past few years have done exactly what they were intended to do: raise asset prices. Don’t take my word for it, listen to Dick Fisher, the immediate past president of the Dallas Fed, speaking earlier this year: “What the Fed did, and I was part of it, was front-loaded an enormous market rally in order to create a wealth effect ... and an uncomfortable digestive period is likely now.”

For the finance gals/guys try discounting a cash flow stream with a negative discount rate. Technically, you get an infinite number. Asset prices can become unhinged if financial theory is taken too far.

There is a great deal of analysis that suggests massive monetary policy has done little for the economy but a great deal for financial assets. This is one epic party that the rock stars have been having for years now. It’s the hangover that worries me.

Fame is fleeting

Most rock star fame is fleeting. There seems to be only so many hit albums they can produce. The problem, according to Stephen King, an economist at HSBC, is that “the combination of weak nominal GDP growth and low interest rates suggests that central bankers’ monetary powers are beginning to wane.” We are beginning to see this fame fade. The last sessions of monetary easing should have, in theory, weakened currencies, but the euro rose after the ECB’s move and the yen has rallied a great deal. It is taking an even better song/album to impress the fans.

Ceteris paribus, a fall in real interest rates would be expected to also stimulate both consumption and investment spending. But this has not been the case in the longer term. According to GaveKal, lending in Denmark, Switzerland, and much of the ECB rose initially but then trailed off after negative rates were imposed.

ING’s recent survey of depositors found more than three-quarters of the respondents said they would withdraw some of their funds rather than incur a charge by the bank for holding them. One-third said they would keep the cash in a safe place instead of spending it. The equity markets in Japan and Europe have been markedly negative, especially for the financial sector, some months after imposing negative rates. There is very little evidence to suggest the music the rock stars are playing is popular over time. Markets and economies are becoming bored with their tune.

Exit stage left

At this stage in the world’s economic recovery, a new brand of music is needed. Low interest rates have not encouraged much aggressive consumer spending, so negative rates may only provide a modest boost. Economic and geopolitical uncertainties seem to be making consumers and corporations focus on paying down debt and/or maintain cash reserves rather than consuming.

Much of that money had helped push stock prices higher but now investors are demanding growth. Devaluations can offer a short-term reprieve for the country that devalues but do nothing to fix the long-term structural problems they may have. These structural problems, in most cases, have led to too much debt and not enough real growth.

Currency devaluations are an attempt at a monetary solution to a structural problem. Monetary solutions cannot fix structural problems in the long term. The rock stars have aged and it’s time they stopped touring.

In my view, monetary accommodation is not the most efficient way to stimulate an economy from this point forward. The way to fix structural problems is with structural solutions such as fiscal policy, infrastructure investment, tax cuts, reduced regulation, education and technology.

Structural solutions, however, require political leadership and some form of consensus. Right now, leadership and consensus are in short supply. The world now needs a new set of rock stars.

Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and can be reached at nkowalski@anchor.bm