Like a shark, credit must keep moving.

Loans fall due and must be repaid, rolled over, or in the extreme, defaulted on.  And it took a viral incursion to unmask the weaknesses threaded through the architecture of the global financial system.   An obfuscation of the cost of credit is the hardly remote cause of now furious fires upon which central banks continue to train their gushing liquidity hoses.

But the firemen are also the arsonists.

It has been the central banks suppression of borrowing costs (the Fed, the ECB, the BoE, the BoJ) that has white-anted tracts of the global economy’s financial integrity.

Said Walter Bagehot, Victorian-era editor of the Economist: John Bull can stand many things, but he can’t stand 2%.  Needing income, investors will take increasing risks to get it when faced with a rock-bottom cost of capital.  

2% invites trouble; 0% demands it.

Interest rates pervade every inch of investment rationale.  They are the critical prices that measure investment risk and set the present value of estimated future cash flows - the bedrock of valuation.  The lower the discount rates, ceteris paribus, the higher the prices of stocks, bonds and real estate — and the greater the risk of holding those richly priced assets.

In the last decade, the central banks have set about buying all manner of financial assets - the Fed their standard bearer, supporting the purchase of commercial paper, residential mortgage-backed securities, Treasurys, investment-grade corporate bonds, commercial mortgage-backed securities and asset-backed securities. It has abolished bank reserve requirements. 

The Fed has become a de facto commercial bank.

The superabundance of central balance sheet securities is the kernel of the world's trillion-dollar boom-time deficits.  Low interest rates have underscored that borrowing, as they have the rise of profitless startups, of corporate share repurchases, of the unnatural solvency of loss-making companies that have funded themselves - the best example being the Fed’s most obliging debt markets.  For savers in general, and the managers of public pension funds in particular, lawn-level interest rates confer no similar gains.

Negative nominal bond yields are a 4,000-year first.

The coronavirus pandemic would have dragged forth a dramatic response from the central bank in any case.   Not even the most conservatively financed economy could long endure an official order to cease and desist commercial activity.  But fragile corporate balance sheets and overextended markets go far to explain the immensity of the interventions.

Perhaps never before has the world carried more low-grade debt in relation to its earning power than it does today. And rarely have equity valuations topped the ones this year.

Drowning in ultralow interest rates, companies and individuals alike borrow and lend in a kind of false economy.  Covid-19 will sooner or later beat a retreat.  For the sake of honest prices and true values, it would be well if the central bankers did the same.