When I studied economics as an undergrad, the concept of negative interest rates was taught as a theoretical exercise. There had been one brief period in the midst of the Depression when Treasury bill yields were negative, but that was chalked up to a technical matter. Banks needed to buy T-bills to use as collateral in order to maintain the checking accounts of municipalities. These bankers were forced by a shortage of supply to pay more than 100 cents on the dollar. Beyond a circumstance like that, it was hard to conceive of why anyone would pay an issuer for the privilege of lending the issuer their money.

And then the great experiment in monetary policy known under a variety of names in different countries, which we have come to call quantitative easing in the United States, began in response to the collapse of the real estate market and ensuing downturn in 2009. In an effort to stimulate their economies, the monetary authorities in a number of countries began driving interest rates down to zero. Even after reaching that level, the so-called "zero boundary," the central banks kept buying financial assets, driving security prices up and yields down. The policy goal, to kick-start their respective real economies, has had stuttering stops and starts, but buying by the monetary authorities continues. In Europe, the European Central Bank (ECB) has managed to create a negative interest rate environment. In Germany, France, the Netherlands, Sweden and Switzerland, to name a few, investors buying bonds with maturities extending to roughly 10 years pay the lender for the privilege of doing so.

Why, you might reasonably ask, would anyone do this? You would if you thought the costs of buying goods and services would fall by a rate more than the rate you were paying. That is a long way of saying you would be forecasting deflation. But you might ask a follow-up question: Why don’t savers and other lenders just hold cash and not bother investing in anything? And the answer is that the banks are beginning to charge their customers, especially the largest balance customers, a fee for holding their deposits. It’s almost as though the banks took their fee schedules from 10 years ago and turned them upside down, charging fees to the largest rather than the smallest customers.

To a certain extent, this helps explain why the euro has been so weak. Rather than pay a deposit fee or earn a negative return, investors have been selling euros to buy dollars. Any positive return on short-term investments here in the U.S. is better than the alternative they have at home. The dollar has indeed been on a tear compared with all other currencies in the last year, especially in the last six months. As monetary authorities around the globe contemplate new easing programs -- the ECB and the Bank of Japan (BOJ) are doing so now and the Bank of China is likely thinking about it -- the current debate in the United States centers on when the Fed will begin to raise rates. A strong currency is both a good and a bad development. It draws in capital, and it is a tangible expression of confidence in an economy and its currency. On the other hand, it makes exports more expensive. For example, Siemens, pricing in euros, has gained a significant price advantage over General Electric, pricing in dollars, when they both bid on any major project. It is also important to recall that a number of emerging market companies have financed their expansion with funds borrowed in dollars in the last several years. Those debts have just become more expensive to repay.

To us, the current round of easing activity still looks like central banks are trying to help exports by debasing the value of their currencies. In graduate school, we also learned that “beggar-thy-neighbor” policies mostly fail. Companies that price in euros may be gaining a trading edge at the moment, but Japanese exporters might be able to count on a weaker yen to help them. China, too, may feel compelled to let the yuan sink in order to boost export activity. A key issue for the global economy will be how smoothly China’s transition from an investment- and export-based economy to a consumer-based one proceeds. The prices of commodities that would be sensitive to a pickup in industrial activity -- steel, iron ore, copper and the like -- remain sluggish. It takes, after all, a lot of refrigerators to be the equivalent of a new super highway or new city. China also faces some problems it hasn’t had to before. It may be just entering the “morning after” phase of a real estate boom, much like what the U.S. experienced in 2008 or Japan went through in the early 1990s.

Moreover, much of China's external debt, a lot of which is held by European banks, is dollar-denominated. As we noted above, if China weakens its currency to stimulate exports, the cost of servicing the debt goes up. (What a turn of events! It wasn’t that long ago that everyone wondered what would happen if China stopped buying our debt. Could the shoe be on the other foot?) If China is not going to be a locomotive to power global growth, concerns about what will generate a strong and sustainable recovery in the near term are justified.

From an investment perspective, economic growth is likely to remain sluggish, and the deflationary consequences of the global overhang of debt will continue to weigh on prices. In such a sluggish environment, only the strongest companies are likely to meet growth expectations. For investors, this means that simply continuing to plow new money into index funds and their exchange-traded fund cousins may not be the solution it has been over the last several years. The need (and the opportunity) to differentiate between “winners” and “losers” could well make active investors the more attractive solution, particularly on a risk-adjusted basis.

Ralph Segall, CFA, CIC is Co-Founder and Chief Investment Officer of Segall Bryant & Hamill as well as Senior Portfolio Manager. Segall Bryant & Hamill has approx. $10AUM in domestic, international and emerging market strategies.