Nominal rates don’t matter any more. 

We are in a currency war between superpowers.  It’s ironic it’s called a “war” as it’s better orchestrated than Star Wars was.

Life at the zero bound distorts a few things.

1. Risk is unarguably priced as a premium to treasuries (for finance geeks).

2. Risk pricing at the zero bound collapses along a convex curve. Distortions occur because the nominal rate is low punishing savers.  Distortions also occur as credit spreads tighten to new nominal lows, irrespective, of historical ratios. .

3. The demand for yield converges with the demand for risk, something that has not happened in a long time.   Assets become mis priced in both nominal terms and along historical ratios.

4. Looking at nominal differences without noticing historical ratios is like looking through a one mile square of the moon and making grander assumptions about other small areas.

5. Currency operators need to orchestrate a systematic, measured and rotating dance of interest rates in order to give each currency nation a chance to grow – as their local currency declines, and their exports move into favor.

6. If this can he measured it would likely result in a period of global coordinated easing until all currency actors are back on a reasonable secular growth path, ignoring cyclical tendencies.

7. As rates around the world among funding currencies converge, it becomes the real nominal relationship between currencies (ignoring historical tendencies) that stears global tightening or easing.  The wider the spread between two funding currencies then the faster demand should avail itself for the best real return.

8. At the Zero Bound the highest yielding currency will inevitably be teathered to the lowest yielding currency.

9. Global easing and tightening becomes a web of relationships among major funding currencies. The US can no longer “remote control” risk just using Fed Funds. They MUST consider the consequences and risks among all actors.


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