Tag Archives: Negative interest rates

The ECB’s Latest Big Mistake, by Daniel Lacalle

Whatever the central banking cult might believe, issuing endless debt at negative interest rates is not a recipe for last prosperity. From Daniel Lacalle at dlacalle.com:

One of the great mistakes among economists is to receive the measures of central banks as if it was the revealed truth. It is surprising and concerning that it is considered mandatory to defend each one of the actions of central banks. That, of course, in public. In private, many colleagues shake their heads in disbelief at the accumulation of bubbles and imbalances. And, as on so many occasions, the lack of constructive criticism leads to institution complacency and a chain of errors that all citizens later regret.

Monetary policy in Europe has gone from being a tool to help states make structural reforms to become an excuse not to carry them out.

The steady funding of deficits of countries that perpetuate structural imbalances has not helped strengthen growth, as the Eurozone has seen constant GDP estimate cuts already before the Covid-19 crisis, but it is whitewashing the extreme left populists that defend massive money printing and MMT, threatening the progress and growth of the eurozone. Populism is not fought by whitewashing it, and the medium and long-term impact on the euro area of this misguided policy is unquestionably negative.

Today, citizens are being told by numerous European extreme left politicians that structural reforms and budgetary prudence are things that were implemented by evil politicians with malicious intent, and the message that there is unlimited money for anything, whenever and however is whitewashed by the central bank actions.

It is surprising to hear some serious economists at the European Central Bank or the Federal Reserve say that they do not understand how the idea that money can be printed eternally without risk is spread all over the political debate when it is central banks themselves who are providing that false sense of security. The central bank may disguise risk for a time but does not eliminate it.

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Doug Casey on the Disturbing Trend to Tax Savings and Eliminate Cash

Congruent with the coronavirus outbreak, governments are increasing their control of  the financial systems. They’ll keep you locked in your homes and your money locked in their banks. From Doug Casey at internationalman.com:

tax on savings

International Man: Let’s start with the basics. What exactly are negative interest rates? Could they exist in a free market without state intervention?

Doug Casey: Right now, over $17 trillion of bonds, and a lot of bank accounts—especially in Europe—are offering negative interest rates. It’s something that can only exist in Bizarro World, something that’s really a cosmic impossibility in a normal world. It’s especially true since almost all the world’s banks are zombies—bankrupt. Fractional reserve banking—which is only possible in a world where central banks control the money supply—is intrinsically unsound.

The economy is head over heels in debt. If things slow down—as they do now, due to the hysteria over The Virus—lots of loans will go into default. It won’t be because of The Virus itself, however. Coronavirus is just the pin that broke the bubble.

Negative rates are a political phenomenon, not a market phenomenon. It’s quite amazing to see bankrupt governments issuing negative rate bonds. It’s what’s been called return-free risk.

The whole financial world is in a bubble because of the trillions of currency units created since the crisis unfolded in 2008. Bonds are in a hyper bubble—the worst possible place to be. They’re a triple threat to capital—interest rate risk, currency risk, and default risk. And, again, at negative rates, they are truly a return-free risk.

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Why Sweden Ended Its Negative Interest Rate Experiment, by Daniel Lacalle

To borrow from Orwell: there are some ideas that are so stupid on central bankers can believe them. From Daniel Lacalle at mises.org:

Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists, who start with a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and that therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.

Inflation and growth are not low due to excess savings, but because of excess debt, perpetuating overcapacity with low rates and high liquidity, and zombifying the economy by subsidizing the low-productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.

Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it. They do not strengthen the credit capacity of families, because the prices of nonreplicable assets (real estate, etc.) skyrockets because of monetary excess, and the lower cost of debt does not compensate for the greater risk.

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The Destruction of Civilization – Implications of Extreme Monetary Interventions, by Claudio Grass

Take interest rates to zero or negative, and you’ve rendered time worthless, at least in a monetary sense. That threatens one of the foundations of civilization. From Claudio Grass at lewrockewell.com:

When I was asked to write an article about the impact of negative interest rates and negative yielding bonds, I thought this is a chance to look at the topic from a broader perspective. There have been lots of articles speculating about the possible implications and focusing on their impact in the short run, but it’s not very often that an analysis looks a bit further into the future, trying to connect money and its effect on society itself.

Qui bono?

Let us begin with a basic question, that lies at the heart of this issue: Who profits from a loan that is guaranteed to pay back less than the amount borrowed? Obviously, it is the borrower and not the lender, which in our case is the government and those closely connected to it. Negative rates and negative yielding bonds, by definition favor the debtors and punish the savers. In addition, these policies are an affront to basic economic principles and to common sense too. They contradict all logical ideas about how money works and they have no basis and no precedent in any organic economic system. Thus, now, in addition to the hidden tax that is inflation, we also have another mechanism that redistributes wealth from the average citizen to those at the top of the pyramid.

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Negative Interest Rates and You, by Mark Nestmann

Negative interest rates are playing havoc with people’s retirement planning. From Mark Nestmann at nestmann.com:

At the end of this past August, an astonishing $17 trillion in global debt had negative yields. About 30% of investment-grade bonds had yields below zero. If you bought these bonds and held them to maturity you were guaranteed to lose money.

Since then, the glut of bonds with negative yields has gone down by about $5 trillion. And that’s led to serious pain to anyone who bought them.

Interest rates throughout the world have been falling almost continuously since the 1980s. The first country to impose negative interest rates on a consistent basis was Sweden, which introduced a -0.25% rate on its “deposit interest rate” in 2009. The much larger European Central Bank (ECB), which sets monetary policy throughout the 19-country eurozone, followed suit in 2014 when it imposed a negative rate of -0.1%.

Negative interest rates were meant to be a temporary emergency measure to prop up moribund European economies. But they’re also a great way for cash-strapped governments to pay the bills.

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Netherlands Headed For Unprecedented Crisis: Millions Of Retirees Face Pensions Cuts Thanks To The ECB, by Tyler Durden

Zero and negative interest rates are catching up to European pensions. From Tyler Durden at zerohedge.com:

When one thinks of pensions crisis, the state of Illinois – with its woefully underfunded retirement system which issues bonds just to fund its existing pension benefits – usually comes to mind. Which is why it is surprising that the first state that may suffer substantial pension cuts is one that actually has one of the world’s best-funded, and most generous, pension systems.

According to the FT, millions of Dutch pensioners are facing material cuts to their retirement income for the first time next year as the Dutch government scrambles to avert a crisis to the country’s €1.6 trillion pension system. And while a last minute intervention by the government may avoid significant cuts to pensions next year – and a revolt by trade unions –  if only temporarily, the world finds itself transfixed by the problems facing the Dutch retirement system as it provides an early indication of a wider global pensions funding shortfall, not to mention potential mass unrest once retirees across some of the world’s wealthiest nations suddenly finds themselves with facing haircuts to what they previously believed were unalterable retirement incomes.

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Negative Yielding Bonds Turn into Punishment Bonds, by Wolf Richter

There’s nothing more predictable in financial markets than the losses that have begun to be inflicted and will continue to be inflicted on those who have bought bonds bearing negative interest rates. From Wolf Richter at wolfstreet.com:

After peak negative-yield-absurdity in August, bond prices fell – the “bond bloodbath” – and the mountain of bonds with negative yields has plunged by $5 Trillion, or by 30%, despite rate cuts.

The 10-year US Treasury yield rose on Friday to 1.94%. That’s still very low, and below inflation as measured by core CPI (2.4%), but it’s up nearly 50 basis points from the lows at the end of August. During this time, the Fed has cut its interest rate target twice, by a total of 50 basis points, and short-term Treasury yields have fallen by about that much. With the one-month yield now down to 1.56% and the 10-year yield up at 1.94%, the yield curve has un-inverted and steepened.

US debt isn’t the only place where long-term yields have been rising despite major central banks’ action or at least verbiage on the rate-cut and QE side. The rise in long-term yields despite ultra-low or negative shorter-term yields has reverberated around much of the world.

When yields rise, bond prices fall, and what has been going on has been described as “bond bloodbath.” That term may be pushing it, considering what a real bond bloodbath could look like.

But for holders of long-term bonds that they bought with negative yields, it is a very unpleasant experience when prices of those negative-yielding bonds also drop. And that’s what they’re facing now.

n the Eurozone, where the ECB in September cut its deposit rate deeper into the negative, long-term yields have risen across the board.

The German 10-year yield rose to -0.26% on Friday, up nearly 50 basis points from the low at the end of August. The 20-year yield became positive (0.03%), and it has pushed the 30-year yield further into the positive.

Germany’s 30-year bonds are infamous for the government’s efforts to sell them at a negative yield of -0.11% on August 21. The bonds were offered with a 0% coupon – so no interest payments for 30 years – and at a premium, in order to achieve the negative yield of -0.11%. This effort that mostly failed: €2 billion of these insane bonds were offered, but there weren’t enough brain-dead investors, and those that the government could round up bought only €824 million. That day marked peak-negative-yield absurdity.

The French 10-year yield transitioned into the positive on Thursday for the first time since July and closed on Friday in the positive (+0.023%), up almost 50 basis points from -0.45% at the end of August.

The Spanish 10-year yield which had come close to zero at the end of August rose to 0.39% by Friday.

The Belgian 10-year yield, which had dropped as low as -0.38% at the end of August, turned positive on Thursday for the first time since July and closed on Friday with a yield of 0.02%, up 40 basis points from August.

The Italian 10-year yield, which never made it into the negative despite Draghi’s best efforts, rose 30 basis points from 0.82% in early September to 1.18% on Friday.

In Switzerland – the first country to actually sell new 10-year bonds with a negative yield in April 2015 – the 10-year yield had bottomed out at -1.10% on August 16, and has since soared 70 basis points to -0.40%. Those are true punishment bonds for folks who bought them in mid-August. For those buyers, the annual yield will be -1.1% until they get rid of those bonds, but now the bonds are also losing value, and if those August buyers want to sell the bonds, they will also have a capital loss.

In Japan – the second largest government bond market in the world, if you can call it a “market” though it’s totally controlled and dominated by the Bank of Japan – the 10-year yield has risen from -0.29% at the end of August to -0.06% now.

And this has played out across much of the negative-yield world, where short-term yields remain negative, but long-term yields have risen as bond prices have fallen.

The mountainous amount of negative yielding debt had peaked at a mind-bending $17.03 trillion on August 29, but has since then plunged by $5 trillion, or by 30%, to $11.94 trillion on Friday, still a huge gigantic amount of sheer absurdity, but the lowest amount since June, according to the BNYDMVU Index, posted by Bloomberg’s Lisa Abramowicz (click to enlarge):

This comes at a time when investors are having to absorb a flood of government and corporate debt coming on the market in the US, Europe, and elsewhere, looking for buyers.

The ECB, the Bank of Japan, and the Swiss National Bank have already admitted that negative interest rates weaken banks and have recently offered deals to banks to “mitigate” those destructive effects. Bank stocks in Europe and Japan are trading in the realm where they’d traded decades ago.

But negative interest rates or very low interest rates have an even more destructive impact on the real economy: They not only create asset bubbles, and all the risks that come with them, but they also distort or eliminate the most important factor in economic decision making – the pricing of risk. Here is the transcript from my podcast, How Negative Interest Rates Screw up the Economy

Dalio: “The World Has Gone Mad And The System Is Broken”, by Ray Dalio

Ray Dalio runs one of the world’s largest hedge fund complexes. He offers a good diagnosis of the world’s very sick financial system. From Dalio at Linkedin.com via zerohedge.com:

I say these things because:

  • Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises.

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Lagarde: “We Should Be Happier To Have A Job Than To Have Savings”, by Tyler Durden

There are junior high school students who know more about how economies function than most of the world’s central bankers. From Tyler Durden at zerohedge.com:

Any hopes that the replacement of Mario Draghi, who on Halloween left the ECB more polarized than ever, as the core European nations revolted against the Italian’s profligately loose monetary policy in an unprecedented public demonstration of discord within the European Central Bank…

… with the ECB’s new head, former IMF Director and convicted criminal, Christine Lagarde would result in some easing of tensions, were promptly crushed when Lagarde picked up where Draghi left off, calling on Germany and the Netherlands to use their budget surpluses to fund investments that would help stimulate the economy, in a sharp rebuke that will not win the former French finance minister any friends in fiscally conservative Germany.

In an appeal to Germany’s sense of solidarity, and in hopes that Germany’s memory of hyperinflation has faded enough, Lagarde said that there “isn’t enough solidarity” in the single currency area, adding: “We share a currency, but we don’t share much budgetary policy for now.”

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The Road To Serfdom… Via Credit Markets, by Peter Earle

Current monetary abominations like negative interest rates can only lead to disaster. From Peter Earle at The American Institute for Economic Research via zerohedge.com:

On the morning of Monday, September 15, 2008, at 6:55 a.m., I arrived at my turret on the trading floor of a Manhattan-based hedge fund and flipped on my Bloomberg terminal. As the head of trading, I was in the habit of looking at sovereign debt markets before checking our positions from the previous trading day. But on this morning, reviewing world bond markets took on a particular urgency. Lehman Brothers was filing for bankruptcy and the entire world was in the throes of the worst financial crisis in 75 years.

What I saw was that, all over the world, short-term debt markets – “bills,” in industry parlance – showed negative yields. In virtually every industrial nation, firms and individuals were seeking the safety of the printing press, effectively handing $100 to governments for the assurance of receiving $98 in four weeks.

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