Negative Yields Tighten Deflation's Grip

RickAckerman's picture


Savers and retirees aren’t the only ones getting screwed by interest rates that have been artificially suppressed by central banks around the world.  These days, banks themselves are finding it increasingly difficult to earn even a nominal return on instruments they consider safe. Just last week, Denmark’s Nationalbanken set its deposit rate below zero for the first time, effectively charging commercial banks and others a fee for parking their surpluses in krones. There are numerous reasons why the krone would be a magnet for idle money. For one, Denmark’s economy is among the strongest in Europe. Also, because Danes rejected euro-zone membership in 2000, they enjoy a degree of political and economic autonomy that their neighbors do not have. This will presumably make Denmark less susceptible to the shock waves that follow the inevitable implosion of Greece, Spain, Italy et al. Small wonder, then, that the global stewards of OPM would consider the krone a safe haven even though it now guarantees them at least a small loss on their money. From Denmark’s standpoint, the decision to follow the European Central Bank’s latest rate cut was unavoidable. The alternative would have been to sit idly by as the krone appreciated, hobbling the country’s exports and destabilizing its balance sheet.



Meanwhile, those who have been predicting hyperinflation should have noticed by now that the trillions of euros that have been injected into the banking system are having the opposite effect. For in fact, all those euros have merely weighed down the return on capital with a mountain of liquidity for which there has been no market demand. Moreover, as benchmark rates around the world sink below zero, the U.S. Fed’s vital objective of managing (i.e., promoting)  inflationary expectations lies nakedly exposed as a failure. Under the circumstances, the odds of inducing inflation — other than a few days’ worth, perhaps, on the world’s bourses — seem to be growing increasingly remote. At the very least, negative rates do not bode well for the central banks’ efforts to keep a nearly quadrillion-dollar ($1,000,000,000,000,000) derivatives bubble from mutating into a deflationary black hole. It could do so simply because the income side of the  bubble cannot indefinitely resist the gravitational pull of negative yields on risk-frees.

The Real Burden of Debt

Although we have been in the hard-core deflationist camp since the early 1990s and have written on the topic for publications including Barron’s and the San Francisco Examiner, we were persuaded more recently by the excellent arguments at FOFOA blogspot that hyperinflation was indeed possible if not inevitable. But for now the argument is moot, since it is clear that  deflation is overwhelming the central banks’ collective efforts to keep the economies of the world from collapsing. As this drama unfolds, perhaps the best way to understand the hyperinflation/deflation conundrum is to think of the latter not as a decrease in the money supply as most economists do, but as an increase in the real burden of debt. In this respect, debt deflation is close to suffocating Europe’s economy and seems well capable of doing the same to America’s if the Fed should even hint that it might back off the credit throttle.

Flatlining on Barter

Inflationists would argue that the Fed simply won’t do that — that the central bank will supply whatever quantity of money is needed to keep the financial system liquid. Those who would rely on this outcome should keep in mind that nothing could conceivably be more deflationary than the prolonged bank holiday that might follow a global flash crash.  Anyone who says this cannot happen is not someone whose investment advice you should rely on.  Think it through yourself:  Does it seem at all illogical that on the morning after a worldwide crash, our credit cards having ceased to work in a banking system suddenly bereft of trust, the economy would be running on a cash/bullion-or-barter basis?  At that point Helicopter Ben would have the option of living up to his nickname. And although having the Fed add zeroes to our bank accounts, dispense crates of $100 bills to beleaguered households, and buy up all bonds in all markets might give rise to a fleeting hyperinflationary spike, it could be over so quickly that it would have little impact on an economy already flatlining on barter.

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Sudden Debt's picture

inflation without salary increases... I wonder how that will turn out...

Pejorative Requiem's picture

Inflation, at least in terms of the purchasing power of the USD for household staples, is running 18 - 25% per year. That's not hyperinflation, but it is a far cry from deflation. And don't tell me there's deflation in the housing market to compensate for the cost of other goods; a bubble burst is all that is. If Ackerman is saying it will all end badly in deflation, then he's making a prediction, not a statement about current conditions. Otherwise, somethings wrong with deflation defined as a condition in which investment vehicles like sovereign debt don't return squat, but investments in real inflation hedges (NOT BS scams like inflation indexed bonds) are doing ok, and the cost of your weekly trips to the grocery store are going up by 2% every month.

PulpCutter's picture

Great - let's cut govt spending, so that demand drops even further!!  Yay - we're idiot TeaBaggers on parade!!

Your spending = my demand.  Really difficult concept to understand, apparently.  There's not enough cash in the economy!  A whole generation of recent college grads can't earn, can't spend, and can't develop their skills.  You figure they're going to be ready to produce in order to pay your SS benefits!?  ROFLMAO!

Where's the inflation tsunami you predicted "right around the corner", years ago?  Nowhere.  HELLO?  THAT MIGHT MEAN YOUR THEORY IS WRONG?

Temporalist's picture

Here is a little something to counter:

Adrian Douglas: Deflation -- nowhere to be seen

Arnold Ziffel's picture

"Downward Deflationary Death Spiral" is what my neighbor calls it.

bankruptcylawyer's picture

Many people speak of 'different' standards for the dollar. the dollar is just a unit of trading, whether backed by gold or not. a note or coin for people to trade with. 


the loss of confidence in the unit occurs on two levels. the primary financial level of savings. transfer SAVINGS out of the unit of trade into other things like gold for the purpose of SAVING and then putting the savings back into the unit for purpose of trading. 


and then there is loss of confidence in the unit for trade. this type of confidence loss is displayed in the rise of barter, the rise of black markets using OTHER CURRENCIES , the rise of 'drop outs' living off their own food scavangin and what not, the possible rise of alternative currencies , etc....

now, there are so few people worried about the loss of the dollar as a unit of trade. even to speak of this fear in many circles is considered lunacy, because ultimately, the 'full faith and credit of the united states' mean that the unit of account --and the government requirement that you use this unit ---is backed up by the police and military power of the united states.


Further more, a crash in the value of the dollar for savings purposes leads to an increase in the loss of confidence in the dollar for trading purposes. This is why INFLATION OF THE DOLLAR IN TERMS OF GOLD IS THE MOST IMPORTANT INDICATOR OF INFLATION--POSSIBLY THE ONLY SMOOTH INDICATOR RIGHT NOW.


Crashing the dollar's savings value---which is what the fed is doing now by pushing treasury rates up a hill towards the edge of the cliff (where interest rates can only spike upwards in a manner destablizing to the government and the banking system at large ) threatens crashing the security apparatus.

this is what happened in russia to an extent. once the U.S. is forced to devalue relative to gold, the rest of the worlds dollar currency is used up and becomes worthless to them. It is the U.S. equivalent of the soviet union Looting and scrapping everything they could from the soviet block countries and bringing those scraps back home before pulling out entirely from the soviet union. 


once this happens. you cannot buy cheap shit from all over the world with dollars anymore. you cannot hire cheap mexican labor anymore because remitances will not be worth a shit. You cannot run military bases half way around the world using dollars anymore.

there is a whole DOLLAR dynamic here. and it exists because the dollar is competing in the developing world with other currencies. it is convenient that the Euro is crashing. but China and Russia are getting closer to backing their currencies with gold for the purpose of competing on the international markets. This is in fact HOW the U.S. dollar was first conceived after world war II . 27 years later, it was taken off gold and the rest of the world's pegged currencies started floating. 

paradoxically the yuan--which is pegged, can only allow itself to float once it is backed by gold. Once this happens, it will be game over for the U.S. because this will force the U.S. to officially devalue the currency relative to gold. and that is the endgame for the international dollarization. 

Perhaps the Iran War can be won ( by china and russia )  without even a shot. 

From that point on, the U.S. can do nothing but start full scale war with countries that begin to flee the dollar. THere is no voluntary strategy to win. Only force will work. 




Jack Sheet's picture

Sorry, Dup. Fucking ipad virtual keyboard

Jack Sheet's picture

Groan, shit on toast, - not a g a i n. Wait a year and you can buy a Ferrari for 200$ or what? And Grannie's weekly pension payments will buy her a ton of caviar and 2 new flat screen TVs. Gimme a break.

Jack Sheet's picture

Oh yeah, and check out the highly deflationary CPI year to year growth (heavy sarcasm on) published over at Like the SGS alternate 1990 based value currently at 5% and the alternate 1980 based figure hitting 9%. (Mish deletes comments like this from his deflation sermons.) Even the official blatant-lie CPI is a c*** hair away from 2%. If that is deflation, then I am Lauren Lyster's sister..

NotApplicable's picture

The only deflation Mish is gonna see is in his subscriber base.

As for Shadowstats, well that's a well known terrorist site.

One World Mafia's picture

"The alternative would have been to sit idly by as the krone appreciated, hobbling the country’s exports and destabilizing its balance sheet."

A strong currency would be good for Denmark. It means they'd pay less for imports and less for domestic goods. They don't need to subsidize the outside world.

Sockeye's picture

But Lego exports will drop.

RossInvestor's picture

Rick has taken another stupid pill.  If the economy crashed into a bullion/barter scenario, then fiat currecnies will have been hyperinflated away to toilet paper.  The value of assets dependent on credit (e.g autos, housing, etc.) will crash down to their bullion/barter price.   Meanwhile, the value of food, fuel and other real necessities will rise in real terms.

Ackerman needs to read Jim Willie, John Williams, etc. to get his definitions correct.

covert's picture

contrary to popular rumor, flash crashes are a good thing.


ATM's picture

What he said was that if there was a prolonged banking holiday thus shutting off the electronic monetary system and leaving all those with no ready cash penniless.

JawsMusic's picture

Hyperinflation is not a hyper version of inflation.

Hyper inflation is the loss of trust in the currency.

I see no sign of deflation at the grocery store....


All Risk No Reward's picture

Since money is debt, how, exactly, does one lose confidence in their mortgage, car loan, student loan, etc...  all requiring money to pay it back?

One can't "lose confidence" in money without doing so in their debt as well.

Losing confidenc ein debt pretty much means default and recognize losses - and I have news for you...  that'll be a deflationary firestorm once the banks and pensions are unmasked as smoking holes of valuelessness and interest rates are 10%+.

Now, I can see other countries losing confidence in our money (most likely after we default on the debt owed) and that will surely disrupt our economy and send import prices through the roof and, perhaps, start a shooting war, but I don't see anyone's income going up much - just the common man getting more poor.

The private banking cartel:

1. Owns trillions in cash through their corporate fronts
2. Controls the Federal Reserve System (Bernanke is a puppet show)
3. Defined their mega bank corporations as TBTF&Jail
4. Own trillions in debt instruments
5. Control the money supply
6. Control the media (got media blackouts on certain subjects important to the private banking cartel?)
7. Are issuing 3.6% 30 year loans
8. Control interest rates
9. KNow full well that a deflationary spike pit ahead of book balancing super inflation would act to transfer real, tangible assets from the debtors to their corporate fronts and that saerious inflation now will wipe out their trillions in debt holdings and cash.

It seems to me that you believe the fox will bite off its own leg and leave the hens in the hen house alone.

Bad bet, IMHO.

Whatever benefits these criminals is what they will do. 

Creating a fraudulent monetary system benefitted them, so they did:

Blowing a criminal credit bubble benefited them, so they did - and lied about it (there is no dual mandate, everyone who says there is is either ignorant or lying like Ben Bernanke)

The last 4 years has been all about 1) offloading their worst debt onto the populace so we get to pay it back, 2) sucking trillions via national bankruptcy accelerating bailouts (see first chart above to see why) and 3) give the inner party one last chance to sell out big time using tax payer debt to prop up their stock prices.

Oh, and set the precedent that they are cirminals and society is their b* that will roll over every time they treat us like the b* that we are.

NDAA so the bankster controlled office of "the king" can kill anyone he wants with no oversight.  Corzining the public.  Squatting on the Constitution while, simultaneously telling us how much they value the Constitution.

I could go on and on, but it is a bit much this early in the morning.

LawsofPhysics's picture

Don't try to argue reality with someone who believes in a "science" that is not grounded in reality.

LawsofPhysics's picture

Correct.  Hyperinflation is that extreme when retailers and real producers don't want your fiat as in the percieved value goes to zero.  What part of "goes to zero" does Rick not understand?

Quintus's picture

Spot on.  

It is theoretically possible to have hyperinflation tomorrow with no increase in money supply.  At that needs to happen is for people to lose all faith in the currency and seek to exchange it for something (anything) else immediately.

Typically this has happened due to egregious over-printing, but that is not the only thing that could prompt it.

Loss of confidence in the banking system and fear that a bank holiday is imminent may prompt people to swap as much cash as they can get their hands on for real assets, food, etc.  That would most likely result in hyperinflation.  No printing required.

ATM's picture

as central banks across the globe gobble up all sorts of worthless debt off the balance sheets of the TBTF banks how long will it take before the people suddenly realize that the "assets" underlying their money aren't assets at all?

The only asset that will be left standing on the bank balance sheets is gold. And for that to work gold has to be repriced at a very much higher level.

narnia's picture

Deflation is the contraction of massive amounts of fractional reserve & shadow bank leverage. It's the fact that the debt had no underlying value or genuie productive economic activity to support it, not that it is big.

My guess is the lender of last resort comes in comes in the form of deposit insurance in a new currency, not in a Japanese Ben on steroids.

NotApplicable's picture

Yeah, it's funny what one can call inflation or deflation when any ole IOU can be monetized by TPTB. Until my [ ] bill goes down (ain't gonna happen), there is NO monetary deflation, but rather a financial system IOU deflation, which they then throw every tangible asset at in an effort to make the previous "valuation" stick.

I wonder what will happen once we've completed consumption of the last of the assets? Should be fun.