President Donald Trump and his top economic advisor Larry Kudlow appear to be on different pages when it comes to negative interest rates.
Both officials spoke Tuesday at the World Economic Forum in Davos and offered different views on how effective below-zero government bond yields are on stimulating growth. As he has in the past, Trump heaped praise on the practice, while Kudlow said such central bank contrivances are no substitute for pro-growth fiscal policy.
“We’re forced to compete with nations that are getting negative rates, something very new,” Trump said in an address at the annual gathering of the globe’s most prominent elected officials, policymakers and activist celebrities. “Meaning, they get paid to borrow money, something I could get used to very quickly. Love that.”
There’s about $11 trillion worth of sovereign debt in the world that carries negative rates, most of it in Europe and Japan. On the surface, it does look like bondholders pay for the privilege of lending money to governments.
That’s not really how it works, though.
Those purchasing those products pay a premium, or more than 100 cents on the dollar. If the interest earned during the time they hold the instruments is less than the premium they paid, those bonds are said to carry negative yields. No one, though, is remitting payments to governments for holding bonds.
Kudlow, the National Economic Council director, doubted the effectiveness of both negative rates and the quantitative easing measures that central banks have taken over the past decade-plus. Trump has been a big advocate of QE-type programs as well as ultra-low and negative rates.
“Negative interest rates struck me as ineffectual,” Kudlow said during a “Squawk Box” interview with CNBC. “All this negative rates and printing money doesn’t really work, does it?”
Kudlow has long been an advocate of pro-growth policies like tax cuts and lower regulation. Global central banks like the Fed have kept interest rates historically low since the financial crisis and have exploded the size of their balance sheets through aggressive asset purchases.
“There’s nothing wrong with a balance sheet rising,” he said. “But where are the tax cuts? Where are the incentives for people to work the extra hour take the extra incentive and take the extra risk?”