Guest Post: Rediscovering The Price Of Money... When Things Can't Get Any Worse

Tyler Durden's picture

Submitted by Steen Jakobsen, CIO Saxo Bank (via Trading,

I’ve been starting my speeches for some time now by saying: “I am the most optimistic I have been in almost thirty years in the market—if only because things can’t get any worse.”

Is that true, and more importantly, how do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world?

History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world—at least not yet—but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of European youth.

Photo: Eugene Ivanov
The West's central banks' policies are akin to Soviet-style central planning. Photo: Eugene Ivanov

Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion. Italian banks today own more government debt than before the banking crisis, leaving them systematically more exposed to their own government, not less. The spread on government bonds between Germany and Club Med is down below historic averages, but the price has been a total suspension of the “price discovery” of money.

The price discovery of money is the cruel capitalistic part of any system. An economics  textbook would call it the modus operandi by which capital is allocated where it can find the highest marginal utility. In practice, this should mean that the market dictates the price of money beyond one year—while at durations of less than one year, the central banks determine the price of money. The beauty of the system is that money is allocated in an auction where the highest bidder for “money” or “credit” gets filled on the price he or she deems to match his expected price of money.

Contrast the market-driven model with the present “success story” of relatively low sovereign spreads in Europe, which are driven by the European Central Bank president Mario Draghi’s promise to do "whatever it takes" to keep the euro out of trouble. He has threatened to activate the European Financial Stability Facility and the European Stability Mechamism plus the full arsenal of policy tools to ensure stability.

By doing so, he has effectively suspended price discovery for sovereign debt and for money, as the ECB and local central banks will provide infinite liquidity to local banks and hence indirectly to their government in any market conditions. This one-sided offer from the ECB and the market means there is no power to discipline the government with higher rates or to allocate credit more generally. We have simply disconnected the market and the price of money.

This comes after Draghi’s longer-term refinancing operation, a cheap funding for banks with little or no collateral, or the closest thing to quantitative easing you can have without calling it quantitative easing.

This is a problem because corporations that need to finance long-term projects, like building a power station over six to eight years, need a price for the credit they require throughout the building period. Right now they have an almost flat yield curve from zero to 30 years, which would be fine if it were realistic. But the problem is that one day in the “distant future” when the market normalises, interest rates should revert to their normal price, which is roughly inflation plus a risk premium.

In the case of an industrial company, an appropriate loan rate calculation could be something like: inflation plus Libor plus a risk spread, which might work out to about seven percent. Compare this with the rates available for highly creditworthy companies. Recently, Nestle  was able to issue a four-year corporate bond at 0.75 percent—the lowest ever. Yes, it’s nice for Nestle but remember the situation is created by the central banks presence in the market, not just due to the financial strength of Nestle.

A move from less than one percent to seven percent would administer an ugly shock to companies.  We have created a negative vicious circle in which not only investors, but also companies are depending on low interest rates forever. They have priced their future earnings and costs on government support prices rather than on realistic market prices.

The worst thing about the situation, however, is that the reason a blue chip company like Nestle can borrow at less than one percent in the capital market is the lack of alternatives for banks and investors. Less creditworthy small and medium enterprises (SMEs) which make up as much as 80 percent of many countries’ economies are not allowed to borrow. They are deemed too risky to lend to at the current “market rates” even though they hold the key to improving the employment and productivity picture.

They are willing to work cheaper, longer, harder and with higher risk tolerance in order to survive. So the remaining 20 percent of the economy occupied by large and publicly listed companies and banks gets 95 percent of all credit and 99 percent of all political capital. In other words, blue chips receive artificially low interest rates only because the SMEs don’t get any credit. Herein lies my continued belief in the my traditional opening statement: things must get better soon because they can hardly get any worse.

We have never been in a more dysfunctional state at the corporate, political and individual level in history. It’s time to realise that the reason capitalism won the war against communism in the 1980s was its strong market based economy—itself based on price discovery. Now the policymakers in their “wisdom” are copying everything a planned economy entails: central planning and control, no price discovery, one supplier of credit, money and the corollary effect of suppressing SMEs and even individuals.

Finally, history offers a compelling lesson: the last time the Federal Reserve engaged in a sizeable quantitative easing was in the 1940s. The low growth and falling inflation only reversed when the Federal Reserve stopped intervening due to a severe recession brought on by the policy mistakes of keeping QE in place too long.

In 2014, a bout of near or real recession in Germany and the US could kick start the price discovery mechanism again, which will help us to start healing the deep wounds left by years of policymakers compounding their errors with round after round of extend-and-pretend. Getting to the bottom is good in one sense: the only way is up.

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philosophers bone's picture

I'm doing my part.  Going to only leave a very small amount of cash in the bank - just enough to pay the automatic withdrawals / monthly expenses.  I'm taking the rest and getting it out of the financial system.  If I feel the need to keep cash, it will be paper dollars in a vault.  Personal bank runs. 

GubbermintWorker's picture

It had better be paper dollars in a personal vault. Or gold, or silver, or lead, or lead delivery systems, or good water, or food.

markmotive's picture

You think things can't get any worse?

Why do you think wealthy Chinese own gold? Why do you think wealthy Europeans own gold?

Because they know things can get far, far worse.

fourchan's picture

the worst thing a man can experience is the total reevaluation of value.

the realization his values are worthless lower than shit and he must start again with

a new value system and in the process losing everything he worked for and dreamed about.

the time is coming for the disillusionment, soon.

Caveman93's picture

China and India... 10,000 years combined written history. They understand how this has ALWAYS played out. Learn from your elders son.

shermacman's picture

So we should invest in curry or rice?

TwoShortPlanks's picture

First Rule of Bankruptcy: When faced with certain Bankruptcy and subsequent Liquidation of assets, transfer all good assets and equity into a newly created entity, and hang the creditors with the toxic assets and debt of the old.

China’s Bretton coup d'état:

Stackers's picture

I would agree things can't get any lower, except for the small problem of the idiots in charge all have shovels trying to dig even deeper to get us out of the hole they dumped everyone in. Their one and only answer is to dig deeper faster. So there is no bottom until they stop digging

DoChenRollingBearing's picture

I just learned on our trip (arrived back here to Lima today) to Chachapoyas, Peru (N Andes) that Peru may have a "gold belt" that may rival South Africa's "Rand".  But, there is a lot of sentiment against the gold miners.  I learned this in an unlikely place, the village of Cocachimba, next to the world's third tallest waterfalls (Gocta Cataract).

There are many, many wonders in N Peru that we knew NOTHING about before going.  Sonche Canyon rivals our Grand Canyon (as well as Peru's other, deeper Colca Canyon).  The pre-Inca ruins of Kuelap (a 600 meter-long fortress they think).

Peru awaits the adventurous...  So, so much to see...

"The Wonders of Amazonas, Peru"

daemon's picture

" Don't forget toilet paper! "

Dollar notes should be sufficient .


Truthseeker2's picture


All Four Wheels Come Off The Anglo-American Juggernaut

kchrisc's picture

You be a terroriiiist! I'm telling! If your teller hasn't already.



A Lunatic's picture

We are currently (re)discovering the price of Fiat. It's worth as much this time as it was the last several hundred times it was discovered.......Same shit, different group of central planners.......

As for things not being able to get any worse...........ROFL!!!!

Lets Buy The Dip's picture

I had to +1 you there

The thing is people expect thte market to crash, but the economy and the stockmarket, are two totally different Things. When will people realize that. I do not think we crash from here. 

Just look at the market, this guy here is very accurate =>  is saying the BEARS will be reamed hard this week into FOMC meeting. OH dear. 


Bay of Pigs's picture

Gee thanks. Moar Technical Analysis....just the doctor ordered. Let me guess, bullish?

Chip from Australia? Seriously? Why post links to this kind of bullshit?

GeorgeHayduke's picture

"As for things not being able to get any worse...........ROFL!!!!"

Boy do I have to agree with you there. Folks who think that haven't allowed their minds to expand outside the propaganda taught in most high school government classes and that espoused 24/7 by the mainstream media.

My guess is the whole "things can't get any worse" crowd will comprise the first wave of victims and casualties in the "oh shit, things got really worse really quickly" reality that may lie directly ahead. Problems is, if you tried to talk to them about it, they'd just call you a kook. C'est la vie.


LetThemEatRand's picture

"Less creditworthy small and medium enterprises (SMEs) which make up as much as 80 percent of many countries’ economies are not allowed to borrow."

I can attest to that.  And my business is credit worthy by any metric.  Good balance sheet, high income compared to overhead, years of success and never missed a payment on anything.  The fuckers are intentionally trying to destroy small business.  There is no question in my mind.

Caveman93's picture

Jesus!? Should I even consider starting my own at this point??

LetThemEatRand's picture

Fuck yes.  Fuck these fuckers.  Just make sure you have some $$ behind you from someone other than a major bank.

Bro of the Sorrowful Figure's picture

hmm, i wonder which parts of the economy the bernank is trying to stimulate....developers getting construction loans for 3%, FHA mortgage rates at around 2% with 3.5% down, and SMEs literally can't pay the bank to lend a dime.

flash338's picture

Fuck the banks. We need a crowdfunding site for small business loans going mainstream 

Amagnonx's picture

This is a great idea - however a great deal of the problems faced by small business are due to adverserial regulation, accounting and taxation compliance.


It needs to be more broadly understood that these systems are absolutely destructive, and should be treated the same as any attack on liberties - as spying, as censoring of the internet.

Amagnonx's picture

I absolutely agree - they have been destroying small business for years, because they can centralize economic power into corporations.  In a mega corp they can control billions in capital with just a handful of board members.


Regulation, complex taxation, equal opportunity - these factors are aimed directly at destruction of the SME's (especially at risk is the marginal capitalist).  It is the marginal capitalist who sits between labor and capital - he either decides to run his business at the same income as he could earn a salary, or he doesn't.  When he choses to run a business, then he cuts into corporate profits, and tightens the labor pool increasing wages and salaries.


Destroying SME's, and by raising the threshold of capital for the marginal capitalist - all salaries and wages will fall.  Ultimately it is workers who suffer the consequences.

therevolutionwas's picture

'a move from less than one percent to seven percent would administer an ugly shock to companies.'.......It may do that, but it would totally implode the US gov't.  The gov't could not pay the interest on the debt.   It would be THE END.

Singelguy's picture

Average current interest rate on the debt is 1.9%. The cuurent interest expense is about $240 billion a year. If rates rose to 7%, the interest expense would triple to about $750 billion but it would take a few years before the entire debt was rolled over to the higher average rate. If taxes were not raised and/or spending cut, it would eventually increase the defict to another $500 billion per year. It would not necessarily be the end but it would accelerate the coming of the end.

shermacman's picture

Maybe. But I suspect that by the time we start seeing an increase to 2.5% the panic will be on. Who would by US Treasuries at 4%? Then 7% will be a stepping stone. 

Notarocketscientist's picture

You hit the nail on the head.  Who is this clown who wrote this article?  Oh right - Saxo ... a bank.

What fairy world does he live in where interest rates can go to 7%?   Work out 7% on 17 trillion.  Work that out against every car loan, mortgage, etc etc etc...   7% is IMPOSSIBLE.

Didn't this fuckboy just see what happened when Bernanke hinted at taper?   Rates started to climb and the collpase we starting... then he of course retreated BIG TIME

And I bet this donkey pulls down half a buck a year spouting this shit (I mean these words of wisdom)



highly debtful's picture

This is not the first time I read an article of Steen Jakobsen. He is a banker worth listening to. A rare breed.

kito's picture

I stopped reading after this jackass declared "things can't get any worse".

starfcker's picture

kito you are exactly right, it can't get any worse? bitching is a whole lot better than starving. right now, as FUBAR as this situation seems, lots more people may be bitching, but a whole lot less people are starving (god's work) this is going to take a long time to clean up, but we aren't close to that point yet. i've thought for a while that while i railed against NAFTA for close to 20 years, and still despise the decision to disenfranchise hundreds of millions of americans who played by the rules, NAFTA alone would have been a snap. we could have absorbed mexico with minimal downside in less than a decade. but these fuckers dared to think big. let's do the whole thing at once (eat your peas). starting to wonder if the whole thing might actually work one day.

kareninca's picture

Yes, his claim that "things can't get any worse" is literally the stupidest thing I have read on ZH; nearly the stupidest thing I have read anywhere.

CrashisOptimistic's picture

Way too much focus on credit and debt and things monetary.

Money has value only because it is agreed upon.  Money doesn't move food to shelves.  Money doesn't move food from seeds to trucks.  Money isn't calories or joules.  Only those parameters mean something, regardless of party agreement.  Money is not the cause of the societal upheaval underway.

Clearly, that has to be some core reality that is driving this descent -- and don't misunderstand, this is not some diatribe denying money matters.  The point is the descent is taking money with it, not vice versa. 

The cause is likely oil scarcity.  Price sub $20 in 2000 and $147 in summer 2008, before anyone even knew the words Quantitative Ease.   Lest we care about money too much as regards oil, the issue really is net oil joules scarcity.  It requires too much effort to get the flow now.

What do we do about it?  We select who to kill, because it's per capita joules at issue here.  Kill people.  Those remaining will do better and talk about how "all those doomers were wrong again.  They said the world was ending, but here we are".


olto's picture

Boy o boy!

and all the while I kept reading it was the Fed----it was really Draghi and the EU------And then it was the EU to blame when it was secretly the Fed

Like a tennis match and the BOJ awaiting the winner

really more propaganda than truth I fear


ebworthen's picture

Real price discovery is paying people a decent wage for their labor.

The kleptoligarchy of the crony capitalist's colluding with corrupt governments make slaves out of people in poor countries or those without rights - and debt serfs out of the citizens of "developed" countries of "freedom".

No mistake that they speak of "capitalists" in China for a populace who are essentially slaves under a Military Government - while the collusion of Corporations and Governments in the West have off-shored career employment and pushed a great majority of their citizens into debt serfdom and bankruptcy.

The people's of the world are oppressed either overtly or covertly by bankers and financiers colluding with complicit politicians who speak out of both sides of their mouths. 

How prosperous is someone who has a job but no human rights, or someone who has supposed rights and freedom but can barely get by?

Rather than topple the lustfully greedy money changers and their crony political lackey's as should happen - when things get bad they'll whip their populations into a nationalistic frenzy and set us all at each others throats.

disabledvet's picture

this is a very complex issue and it's far too easy for their to be a "racers the bottom" should some type of generalized price decline take hold. One way to "take charge" of Globalized Capital is to begin serious negotitations vis a vis regulatory "harmonization" and the USA and Europe. the dislocation between the uber euro and the uber price for energy in Europe strikes me as a very dangerous thing. first off it smacks of price manipulation on "the grandest of scales." secondly though it gets in the way of a transatlantic partnership stretching back decades. (and no the NSA is not helping either.) by no means am I an expert on European energy markets but we're all cut from the same cloth at a certain level (US education system is based on the German model for example) and so the fact that there exists any difference at all strikes me as odd. I can't get it out of my head that there is planning involved here and an extreme financial event is on the table. the trading in dollar/yen is highly irregular and the amount of dollars "sloshing around" (internally inside the USA) is truly staggering. we'll see what happens but "not going into Syria" and "Detroit bankruptcy" and "ACA confoundings" says to me we're kinda at a loss here in the USA. Ye olde "that's it we're gonna take our toys and go home now" moment. ironically we're doing this just as we're rolling in taxpayer dough at an axtraordinary rate. part of me says as a result of all this monies that "we suck" vis a vis what we could be as "America" doing...and I guess in my view what we should be doing. Meh. "there's always the money too" I guess. I do agree the working and employed American people are long over due for something other than a decline in wages and benefits.

kchrisc's picture

Money has no price, as it is only a medium of exchange.

I grow tomatoes and you grow potatoes. I sell my tomatoes to you for 1 gold Oz. and then buy your potatoes for one gold Oz. I'm better potatoes and you're better tomatoes.

Now a third party comes along with printed 'gold' and buys our tomatoes and potatoes and eats them. We're screwed and he's sitting pretty, at least until I show at his door with a guillotine.

Printing money is THEFT. Period. Its 'price' is destitution and losing one's head.

Seasmoke's picture

What if he has an Uzi when you show up at door. 

Holleyman's picture

Then just stand still, those things can't hit the broad side of a barn

graspAU's picture

“The value of goods are expressed in money, while the value of money is expressed in goods. Money and goods are clearly not the same things, but are exactly opposite things. Goods are wealth which you have, while money is a claim on wealth which you do not have. Goods are an asset; Money is a debt. If goods are wealth; money is clearly not wealth, it is negative wealth, maybe even anti-wealth.”

– Quigley, Tragedy and Hope, pg. 44

Solarman's picture

By 2035 the average age in our country falls dramatically for 20 years.  Retirement programs fall relative to GDP. The Fed can buy every 30 year bond the govt issues at .1 percent and keep the interest payments even or falling.  They then can control the amount of credit in the system.


They then wait out the population bubble.


They have a plan,I believe that this is it. So now we watch to see if and how long they can keep the boulder poised on the mountain top.

q99x2's picture

History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets.

You can include ObamaCare to the above pretty soon..

Vidar's picture

"In practice, this should mean that the market dictates the price of money beyond one year—while at durations of less than one year, the central banks determine the price of money."

Why should the central banks dictate the price of money for any period? Interest rates are a reflection of time preference. When the central planners interfere with them in any way, whether its short-term or long term rates, malinvestment results. Shut down the Fed, ECB, etc, and then we will have a real market system. As long as central banks exist we have central planning of one degree or another.

Rogue Economist's picture

Things can't get any worse?  Bullshit.  They can get a LOT worse.  A few examples of how things can get worse:


1- Iranians aim Ruskie built Surface-Surface Missiles at the Oil Fields of Ghanwar and actually hit the targets.

2- The Chinese put ALL their USTs up for sale 2moro.

3- A drunk, depressed, suicidal TEPCO worker decides to go out with a BANG and drops a few spent fuel rods in contact with each other.

4- The SNAP card system goes down for a week and 47M people take to the streets burning everything combustible

5- Chinese Hackers knock down the entire electrical grid for North Amerika

6- Lake Mead drops another 25' and the turbines start cavitating and have to be shut down.

7- Ocean Phytoplankton Collapse and stop producing Oxygen

8- Obama declares Martial Law and becomes Dictator-for-Life

9- John Boehner stabs Obama in the back and takes over as Dictator-for-Life

10-  Lindsay Lohan finds Jesus and goes on the Wagon.


Things can get a LOT Worse.



Doomstead Diner

starfcker's picture

they can get a lot worse faster than that. the house could buckle and welcome in 50 million new recruits to the free shit army. good neighborhoods will be distant memories, like good schools. problem with that scenerio is, if you believe that a reorientation to the truth of our current reality could solve a lot of our problems, making that move creates far more difficulties. the globalists have won. the bones are in place. americans might not like it, but most of them can accept it. too taxing to resist any longer. but to continue to be lied to and marginalized by the d.c. spokesmodels is going to fester as long as it continues. a change in tactics is overdue. look at ted cruz. loyal to the squid, no doubt, but smart enough to curb his indifference. sort of a conservative (i feel your pain!) clinton. brilliant

Rich V's picture

After falling off a cliff one does not find hope simple because you are close to hitting the bottom.

RECISION's picture

This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of European youth.

Nah... shit, just waste an entire generation, two even.

We've done it before - not a problem.

Just bang a drum - and they'll march themselves to it.

Ain't fuck-all value to an entire generation of european youth that I can see.  Fiat on the other hand, now that shit is useful.

shovelhead's picture

I'm pretty sure that's where we're at.

"So far, so good. No worries."

deerhunter's picture

when is the last time a store clerk said "Have a nice day" and meant it?  That is the person that is going to share their water bottle with you when the power goes out on the train right?  No fuel, no food, no food,  chaos.  No EBT cards, priceless.  I live in the NW suburbs of Chicago.  My bug out families are in Ohio and Michigan.  Land,  food,  ability and knowedge to grow it.  Trouble for me is I need to leave the day before SHTF to get their alive on our freeway system  or travel north through Wisconsin to eventually get east.  Such a dilema.  What truly is valuable to you?  The wife,  the kids,  the job,  the car,  the house.  What is valuable?  The green paper we spend in exchange for the labor of others in the form of food.  See food used to be produced by the people that ate it.  They knew what it took to grow,  to fend off the rabbits and deer and other pests.  Food will always have value.  Hope you have some.  Your family will always have value,  hope you have good relationships.  Your neighbors could have value if you have cultivated good relationships with them.  Hmm,  cultivated good relationships.  Cultivated,  there is that word again.  Takes work doesnt' it.  Work has value both intrinsic and altruistic.  Can't get any worse. 3 days no EBT cards.  Big cities burn.  NDAA, martial law within two days.  Adios America as we knew it.  Hate to see you go.  Can't get any worse,  dumbest thing I have ever read on the Hedge.