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.

 

 
 

 
 

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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

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:

  • The Golden Age Has Just Begun
      Some Things Actually Go Up Before and During the Fall... In recent issues of Seasonal Insights I have discussed two asset classes that tend to suffer  performance problems in most years until the autumn, namely stocks and bitcoin. I thought you might for a change want to hear of an asset that will be in a seasonal uptrend over coming months.   Many things, including bitcoin, stocks and leaves tend to fall in the aptly named fall... but some things actually start to...
  • A Look at the Gold and Silver Price Drop of 3 July, 2017
      Mystery Nosedive The price of gold dropped from $1,241 as of Friday’s close to $1,219 on the close Monday, or -1.8%. The price of silver fell from $16.58 to $16.11, or -2.9%. It is being called a gold and silver “smash” (implication being that one party or a conspiracy is doing the smashing).   The flight of the gold rocket, different phases [PT]   Our goal is to help you develop a clear understanding. The move was no mystery. Monetary Metals makes an intensive...
  • Adventures in Quantitative Tightening
      Flowing Toward the Great Depression All remaining doubts concerning the place the U.S. economy and its tangled web of international credits and debts is headed were clarified this week. On Monday, Mark Yusko, CIO of Morgan Creek Capital Management, told CNBC that:   “…we’re flowing toward the path of 1928-29 when Hoover was president. Now Trump is president. Both were presidents with no experience who come in with a Congress that is all Republican, lots of big promises,...
  • Tales from the FOMC Underground
      A Great Big Dud Many of today’s economic troubles are due to a fantastic guess.  That the wealth effect of inflated asset prices would stimulate demand in the economy. The premise, as we understand it, was that as stock portfolios bubbled up investors would feel better about their lot in life.  Some of them would feel so doggone good they’d go out and buy 72-inch flat screen televisions and brand-new electric cars with computerized dashboards on credit.   The Wilshire...
  • How Dumb Is the Fed?
      Bent and Distorted POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed? The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.   They're not the best map readers, that much is known for certain. [PT]   [O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and...
  • The Money Velocity Myth
      Popular Imagery of Money on the Move For most financial commentators an important factor that either reinforces or weakens the effect of changes in the money supply on economic activity and prices is the “velocity of money”.   An image from an article on the intertubes that “explains” the velocity of money (one of the articles we came across started out as follows: “The economy runs smoothly only when there is enough money in circulation. How much is enough?” ...
  • Which Is Worse? America or France?
      French Fraud POITOU, FRANCE – “Which is worse? America or France?” The question must be put in context. We were invited to dinner with local farmers last night. Jean-Yves and Arlette live in a modest house in the nearby town – an efficient and cozy place built about 25 years ago. They’ve added a solarium to the back, where we had dinner.   FAF – French-American Friendship. These days it's a “which is worse” competition... [PT]   Arlette operates a...
  • The Student Loan Bubble and Economic Collapse
      The Looming Last Gasp of Indoctrination? The inevitable collapse of the student loan “market” and with it the take-down of many higher educational institutions will be one of the happiest and much needed events to look forward to in the coming months/years.  Whether the student loan bubble bursts on its own or implodes due to a general economic collapse, does not matter as long as higher education is dealt a death blow and can no longer be a conduit of socialist and egalitarian...
  • Gold and Silver Capitulation – Precious Metals Supply & Demand Report
      Last Week in Precious Metals: Peak Hype, Stocks vs. Flows and Capitulation The big news this week was the flash crash in silver late on 6 July.  We will shortly publish a separate forensic analysis of this, as there is a lot to see and say.   Silver - 1,000 troy ounce good delivery bars, approved by the COMEX. Whatever you do, do not let one of these things land your feet. For readers used to the metric system: these bars weigh approximately between 28 to 33 kilograms...
  • No “Trump Bump” for the Economy
      Crackpot Schemes POITOU, FRANCE – “Nothing really changes.” Sitting next to us at breakfast, a companion was reading an article written by the No. 2 man in France, Édouard Philippe, in Le Monde. The headline promised to tell us how the country was going to “deblock” itself.  But upon inspection, the proposals were the same old claptrap about favoring “green” energy... changing the tax code to reward one group and punish another...  and spending more money on various...
  • Putting the Latest Silver Crash Under a Lens
      An Unenthusiastic Market On Thursday, July 6, in the late afternoon (as reckoned in Arizona), the price of silver crashed. The move was very brief, but very intense. The price hit a low under $14.40 before recovering to around $15.80 which is about 20 cents lower than where it started.   1 kilogram cast silver bars from an Austrian refinery. These are available in 250 g, 500 g and 1 kg sizes and look really neat. We use the 250 g ones as paperweights, so this is an...
  • What Really Happened When Gold Crashed, Monday June 26?
      The Earth is Still Round Let’s establish three facts up front. One, the volume of contracts traded was not “millions” (as at least one conspiracy theorist is claiming). During the 1-minute window when the price of gold dropped from $1,254.10 to a low of $1,236.50 and recovered to $1,247, 18,031 August gold contracts traded. There was negligible volume in the October and December contracts. Two, the Earth is round. This did not occur while “everyone” was sleeping (as at least...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

savant