The disastrous era of negative rates may be ending, but it is not over. Imposing negative nominal and real rates is a colossal error that has only encouraged excessive indebtedness and the zombification of the economy. However, nominal rates may be rising, but real rates remain deeply negative. In other words, rates are still exceptionally low for the level of inflation we have.

Negative interest rates are the destruction of money, an economic aberration based on the idea that rates are too high and that is why economic agents do not invest or take the amount of credit that central planners desire.

The debate about recession risk is pointless. We are already in a recession. Real GDP (gross domestic product) in the United States declined at an annual rate of 1.6% in the first quarter.

The Atlanta Fed Nowcast shows a 1.5% contraction in the second quarter. But the underlying figures are scarier. According to the Atlanta Fed, “the GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.5% on July 15, down from -1.2% on July 8”. That is an enormous negative change, -0.3% of GDP, in one week.

They go on to say that “the nowcast of second quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.9% and -13.7%, respectively, to 1.5% and -13.8%, respectively”.

Investment is collapsing, consumption is barely kept alive and if we look at other components, imports are soaring while exports rise less than expected.

The European Central Bank should be hugely concerned about two pieces of news. The euro is on the verge of parity with the US dollar and has accumulated a drop of 17% since 2021, more than 35% since 2008. On the other hand, inflation in the eurozone reached 8.6% in June, 5% excluding the energy and food components. Inflation in more than six eurozone countries, including Spain, is already in double digits with core CPI at multi-decade highs.

Meanwhile, in Switzerland, June inflation was 3.4% with core at 1.9%. Switzerland relies on imports for gas, commodities, and supply chains as much as its neighbors, but it has not engaged in massive printing of its currency.

Most market participants have been surprised by the last six months. The total return of the US Treasury Index was the worst since 1788 according to Deutsche Bank. Stocks closed June with one of the largest corrections since 2008. Bonds and equities are falling in unison, driven by rate hikes and normalization of monetary policy.

However, there is no such real normalization. The balance sheet of the main central banks has barely moved and remains at all-time highs according to Bloomberg. The ECB continues to ignore the highest inflation rate in the eurozone since the early 90s by keeping negative rates. The Federal Reserve rate hikes have been more aggressive, but it is still injecting billions of dollars in the reverse repo market and monetary aggregates remain excessive.