German Interest Rates Reach an Effective Level of Zero for Two Year Notes

The Last Gasp of Monetary Policy Takes Place

One of the reasons that Conservatives argue against fiscal stimulus in the form of more government spending is that they say that monetary policy consisting of easing credit and lowering interest rates will do the job.  The fact that in the U. S. and Europe extremely low interest rates have not been effective doesn’t mean their logic is flawed, because the position is not based on logic.

In Europe the flight of funds to safety has now resulted in two year debt issued by the German government reaching an interest rate of just about zero.

Germany sold €4.5bn of two-year government bonds at a record low yield of 0.07 per cent, underscoring the strong demand for safer assets amid fears that Greece could be forced out of the eurozone.

The German Bundesbank said the two-year “Schatz”, which was sold with a zero-coupon for the first time, received bids for €7.7bn, compared to a maximum sales target of €5bn.

The demand for German debt is the result of investors drawn by the need for safety above all else.  But the results in Germany also tell a much darker story.  They tell that Germany can borrow money for essentially zero interest, but that the country is unwilling to invest in Europe and to stimulate the European economy away from austerity and towards growth. 

Ultimately the German economy itself will suffer, because it is export driven and when Germany’s customers suffer economic woes they are unable to buy German goods.  Germany will learn this lesson the hard way.