The base case for negative rates lies in the desire to promote a more robust interbank market. The question remains whether such a market still exists in the post credit super cycle world and if so, has it retained its benchmark status? As we posted last month, Harley Bassman of PIMCO has focused on the distinction between "risk free" and "benchmark" . Consider negative rate sets in context of The Matrix.
When Neo pokes his finger through the television screen he believes he is crossing over to another side. In fact, Neo was already in an abstract environment and was merely going deeper into the strangeness. The decades long growth in interbank benchmark lending transpired in the IOER absent world. IOER is a monetary tool utilized on impaired systems. A rate that is positive or negative is inconsequential to the underlying reality and only a function of degree. The Fed increasing the spread between Dollar based activity and Euros, Pounds, Yen and Francs highlights the difficulty of a CB "going rogue."
Negative rate pegging promulgates a deflation fear. Absent the actual deflation, the peg is an interbank lending Hail Mary. The global money market no longer funds itself through unsecuritized non-collateralized interbank borrowing, let alone off balance sheet notional phantasm. Negative pegs are no more mis-guided than quaint concepts of "normalization." "Normalizing" rates is a process that can only occur when/if the global money markets exit their quantitative regimes. That prospect is nowhere on the horizon. As long as quantitative central banking continues, we, like Neo, must begin our analysis from a distorted perspective.