Into the Unknown

 

A bird in the hand is worth two in the bush.

– Anonymous.

 

BALTIMORE – The Dow was more or less flat on Friday. After all the excitement early in the year, stock markets seemed to have settled down. In our upcoming issue of The Bill Bonner Letter, we explore the strange territory of “NIRP” – negative-interest-rate policy.

 

1-sovereign_debt$7 trillion of sovereign bonds now trade at negative yields-to-maturity, producing a guaranteed loss for buyers holding the bonds to term.

 

About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments… who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future. Is that weird or what?

At least one reader didn’t think it was so odd.

“You pay someone to store your boat or even to park your car,” he declared. “Why not pay someone to look out for your money?”

Ah… we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it… and using it as he sees fit. It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.

A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for. When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books.

If something goes wrong and you want your money back, you can just get in line behind the other creditors. The future is always unknown. The bird in the bush could fly away. Or someone else could get him. So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.

 

2-euro zone negative yieldsDistribution of negative yielding government bonds across the euro area: Lending euro zone countries money at less than zero seems especially bizarre.

 

A New Level of Absurdity

That’s why bonds pay income – to compensate you for that uncertainty. Inflation, defaults, depression, war, and revolution all raise bond yields because all increase the odds that you won’t get your money back.

That’s why countries with much uncertainty – such as Venezuela – have higher interest rates than countries, such as Switzerland, where the future is probably going to be a lot like the past. Venezuelan 10-year government bonds yield 31%. The Swiss 10-year government bond yields negative 0.3%.

 

3-Venezuela 2-Year Bond Yield(Daily)Venezuela’s 2 year note yields nearly 50% (which is still way below the country’s true price inflation rate). As is always the case with government in danger of defaulting, Venezuela’s yield curve is deeply inverted (hence 5 year bonds yield e.g. only 35% and 10 yr. bonds approx. 32%).

 

The interest you earn on a bond is there to compensate you for the risk that you won’t get your money back. Or that the money you do get back when the bond matures will have less purchasing power than the money you used to buy the bond in the first place.

You never know. Maybe the company or government that issued the bond will go broke. Or maybe the Fed will cause hyperinflation. In that case, even if you get your money back, it won’t buy much.

With interest rates at zero, lenders must believe that the future carries neither risk. The bird in the bush isn’t going anywhere; they’re sure of it. As unlikely as that is, negative interest rates take the absurdity to a new level.

A person who lends at a negative rate must believe that the future is more certain than the present. In other words, he believes there will always be MORE birds in the bush.

 

Boneheaded Logic

The logic of lowering rates below zero is so boneheaded that only a PhD could believe it. Economic growth rates are falling toward zero. And at zero, it normally doesn’t make sense for the business community – as a whole – to borrow. The growth it expects will be less than the interest it will have to pay.  That’s a big problem…

Because the Fed only has direct control over the roughly 20% of the overall money supply. This takes the form of cash in circulation and bank reserves. The other roughly 80% of the money supply comes from bank lending.

If people don’t borrow, money doesn’t appear. And if money doesn’t appear – or worse, if it disappears – people have less of it. They stop spending… the slowdown gets worse… prices fall… and pretty soon, you have a depression on your hands. How to prevent it?

 

chicken of depressionAnd then the future arrived, and reality hit home. There was only one bird, and it was the Chicken of Depression.

Cartoon by Gary Larson

 

If you believe the myth that the feds can create real demand for bank lending by dropping interest below rates, then you, too, might believe in NIRP. It’s all relative, you see. It’s like standing on a train platform. The train next to you backs up… and you feel you’re moving ahead.

Negative interest rates are like backing up. They give borrowers the illusion of forward motion… even if the economy is standing still. Or something like that.

 

Charts by: Bloomberg, investing.com

 

Chart and image captions by PT

 

The above article originally appeared as “Why Negative Rates Can’t Stop the Coming Depression” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Negative Rates and the Coming Depression”

  • Kafka:

    Bill
    If you look at the “debt” as a fiction, a conjuring, not savings from real earnings, then the interest paid on that debt must be a conjuring, a fiction. It is unpayable out of real earnings.
    The quantum is insurmountable so our overlords first attach ZIRP, then NIRP (which decreases the principle outstanding over time). Insanity, yes. You can only borrow so much out of the future until there is no future.
    The only solution now is for Japan (BOJ invented ZIRP) to rediscover honor and shame. Have Kuroda commit Seppuku (I will gladly stand in as his second). For the failure of Japanese Central Banking, a ritual disemboweling to provide guidance to other Central Bankers seems compellingly appropriate.

    K

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist