With stunning psychological impact, world oil prices have broken the zero lower bound and have gone negative. Even relatively sophisticated investors have asked, “how is that possible?” Too much supply, not enough storage tank capacity, and fully tanked-up, topped-off super-tankers stranded out at sea with nowhere to go. Its like musical chairs but with no chairs.
The psychological barrier having been broken in a Kafka-esque COVID manner, do negative oil prices forbode a change, likely involuntary, of putting negative interest rates on the table for U.S. monetary policy, one that has long been eschewed like the plague. Without the participation of the U.S. in the global market’s $15 trillion of government bonds bearing negative interest rates, NIRP is a bit of an orphaned monetary tool for the rest of the world’s central banks who have to contend with the “exorbitant privilege” bestowed upon the U.S. dollar as the global reserve currency.
But in the extreme uncertainty of re-opening the world economy, one can expect some pretty strange anomalies to emerge. Having crashed into a brick wall and totaling the car, it might be more challenging to get back to the business of business for the global financial system than people might realize. As such, everything should be on the table including negative interest rate policy since no one knows how a recovery will unfold. Keep your options open at all times. Never say never. And follow Warren Buffett’s views on negative interest rates which he calls “the most important question in the world.”