Capital Markets | Q&A

Axel Merk is president and chief investment officer of Merk Investments, manager of the Merk Funds.

Global Finance: How long will interest rates remain negative?

Axel Merk: On a real basis, interest rates will stay negative for a very long time. The global economy cannot afford positive rates. Data on inflation in Europe and the US are not all that different, but are interpreted differently. Janet Yellen [chair of the Federal Reserve Board] says low inflation is not a problem, but Mario Draghi [president of the European Central Bank] says it is a major problem. If the economy weakens and the global slowdown hits the US, Yellen will change her mind and lower rates. Investors must get used to buying bonds with negative yields.

GF: How will negative rates affect the banking system?

Merk: A negative-interest-rate environment does change banking. QE is different in Europe, because financial institutions cannot park excess reserves at the Fed [the ECB charges a fee on excess reserves]. Eurozone issues are not related to monetary policy. European banks continue to be impaired. Cheaper money does not increase economic demand, although it weakens the euro. Germany is the only place this policy [weakening the euro] is working, since it boosts exports, but it doesn’t help the periphery.

GF: As central banks take greater control of markets, should they be held more accountable?

Merk: Central banks should regulate the amount of credit, but not allocate credit to certain sectors. That would be entering fiscal territory, inviting a political backlash. The answer is for central banks to abandon unconventional policies and not try to solve all problems.