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Swiss Government Becomes First Ever To Issue 10Y Debt At A Negative Yield
It had to happen sooner or later... in the new normal of yield-reaching, collateral-shortage-ing, money-printing economalypse, the Swiss government has become the first ever to issue a 10Y sovereign bond at a negative yield. As WSJ notes, while several European countries have sold government debt at negative yields up to five years of maturity - which means investors effectively pay for the privilege of buying it - no other country has previously stretched this out as long as 10 years. Mission Accomplished Central Bankers?
As The Wall Street Journal reports,
The Alpine country sold a total of 377.9 million Swiss francs (about $391 million) of bonds maturing in 2025 and 2049. On the 10-year slice, the yield was -0.055%, compared with 0.011% on its most recent similar bond two months ago.
In the post-issuance secondary market, Swiss bonds maturing up to 11 years in the future already trade with yields under 0%. But such low yields at the initial point of sale “illustrate well the world we live in,” said Jan von Gerich, chief strategist at Nordea, referring to collapsing yields on debt amid widespread stimulus from central banks around the world.
In January, Switzerland’s central bank scrapped its upper limit on the value of the franc and cut deposit rates to -0.75%. Swiss bonds are likely to remain attractive to investors as long as yields stand above that level.
“The combination of deflationary fears and aggressive central-bank action has caused investors to accept the reality of negative-yield bonds,” said Jeffrey Sica, chief investment officer of U.S.-based Circle Squared Alternative Investments.
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it is all relative, right?
It won't be the last either. Up next Denmark, and then Germany.
But hey -- as long as the stupid Blue & Yellow keeps flying and the EuroCorps keep goosetepping around Brussels its all worth it AMIRITE!?
Economalypse- I wanted to see how easy it would be to say that three times fast but got stuck on the first try.
Shut up, and take my money!!
Japan must be so jealous.
Overheard at the Central Banker's comedy club... "take my cash... please!"
Can someone explain in layman's terms why anyone would willingly buy a bond that they know will be worth less when they go to redeem it? It seems utterly insane to me.
My thoughts exacly.
You might as well buy gold and bury it in your back yard. Should this kind of stupidity come to North America, game over. This would break money markets and the implosion would begin.
This is nothing. What will be REALLY interesting is the first government to issue debt with a negative COUPON. Meaning, every 6 months, bond holders have to SEND MONEY TO THE GOVERNMENT. Can you imagine the logistical nightmare for the government? (Hint: That's why it will never actually happen, they'll be issued as zero coupon bonds.)
Why would one buy debt with a neg nom yield?
1) You are legally required to buy/hold government bonds (e.g., banks, pensions)
2) Your currency is depreciating at a rate faster than the nominal rate on the bond (you're still getting a real return),
3) You have such large amounts of money that you can't physically hold cash.
There's probably more reasons, but those came off the top of my head.
@ml8_ml8The "sophisticated investor": Who can lose the most money over time.
Do you think the guy that dreamed this up wakes up at night giggling? Jesus. This seems insane to me - 'crazy pills' - can someone tell me why you would do that?
I'll try as a pure layman. Because when so much fiat is floating around/being directed by banksters/governments/central banks/Wall Streeters/pension funds, they can invest in stocks which at some point may lose up to 50-80% of their value (think 2008/2009) or you can invest in something that may only lose 1% (provided the government issuing the bonds do not go bankrupt).
When the next 2008/2009 hits, it will no longer be return ON capital, but rather, return OF capital. Supposedly the governments are the safest bet.
1. Thank you dude 2. Holy fuck if that's not the writing on the wall then what the fuck will it take? This fucker's going down 3. Sorry for saying Fuck so much. 4. But not really. Fuck.
People will continue saving less and less, making them more vulnerable to market shifts, and as a result more dependent upon the gubmint for a safety net. Our road to slavery is paved with negative rates.
So I guess we all going to be working for the government in the future. No one will produce anything and we'll all die of starvation but we will be good at pointing the finger at someone else. LOL
Insane game that they all go along with. Keep it going until told not to. Not to will never happen.
Yield and inflation rate no longer matter. Churning of massive face amounts to generate fees and trading profits. CDS's and IRS's (the real casino) in massive notional amounts lurk to leverage slight movements of the dying corpse that continues to bloat evr larger with phony money supply infusion.
Great system!!!
But oh! Professor Blind Cynic, the money market ceases to function without "risk free" collateral. The world would gridlock.
Ah yes, the "collateral"
Because of the perceived risk. They would rather buy a bond that they know will be worth less than to buy corporate debt or equity they know will be worth even more less than the gov't bond.
"Inflation, bad. Deflation, good"
Buy some Debt Deflation Bonds.
-TPTB
It is not due to perceived risk. It is with the assumption that the rates will continue to go lower and they'll be able to sell these at a profit. It is a ponzi not an investment that they even begin to think about redeeming.
Edit: See escapekey below.
Because you have to buy something, and that something has to be pledgeable in that it is seen as something that wil hold its value relative to other assets, say euro denominated bonds. Insurance companies and large institutions have all the risk they want from the corporates, HY, and equity markets.
Some people are buying it because they believe the bonds value will continue to increase, especially when the euro and the EU disintegrate.
Ask J Rickards, he knows he was there. LOL
Possibly their central bank is the only purchaser? Like the fed purchasing a T-bill?
You Don't "Starve The Beast" - The Beast Starves YOU.
It's a Simple Explanation http://wp.me/p2kmGE-23i
Really.
Is there a limit on this?
How can even mainstream financial commentators not be screaming at how ridiculous negative yields are. I don’t understand how they can look themselves in the mirror. I guess they have lost all independent thought at this point. Deep down I guess I already knew that. Here are my thoughts on the subject.
http://www.debtcrash.report/entry/i-bought-what
financial commentators not be screaming at how ridiculous
Anyone that runs is a financial commentator......anyone that doesn't run is a well trained financial commentator.
I like it and I think we'll see it soon enough. I thought it was so pathetic to see Jim Cramer loose his shit on national television. If I, or someone I work with was that unstable in an emegency we would be fired on the spot.
Good to see you on here Capt. I've been pushing your stuff.
Thanks. I just try and provide a different viewpoint that is completely unbiased.
Ask J Rickards, he was there, LOL
how is this not an impilcit admission that banks are insolvent? what argument can be made for accepting a contracted LOSS on your money except fear of greater loss w/alternatives? or to put it in use case terms how is this saying anything other than: "I feel more confident that the government will give me back 95% of my $ in a decade than I do that my non-interest bearing checking account w/1st tbtf bank of rosieland will give me back anything..."?
Call Now!!!
*limit -.055 per caller
Somewhere around the place where the bonds lose more in negative interest than they gain from the drop in rates. Someone should do a study on that.
it works, because the expectation is that some greater fool will pay an even higher price for the bond down the road. it's literally a ponzi scheme.
esteemed EscapeKey, I disagree. we are talking about sovereign bonds, here. de facto, they are not meant to be repaid
nope. you can't compare corporate and private debt to sovereign debt so easily. in fact, modern megacorporations are near-immortal, too, and can do the same, nearly forever
so at the end, it always comes back to private debt versus commercial and sovereign debt
a distinction that was not lost on ancient Babylonians, Egyptians, Greeks, and do on. that's why they regularly cancelled all private debt, not commercial/securitized and sovereign debt
sorry, but imho the very acute and real situation of unsecured private debt is making all look and cry "Ponzi Scheme" at nearly everything. and there is little in recorded history to substantiate this
"The nice thing about private, unsecured debt," my neighbor's son says, "is you never have to pay it back."
This 'thinking' is now very prevalent in Merika, esp the Yutes.
this "thinking" is a reaction. and something that happened very often, in history
sub-prime was bad enough because the collateral was just floating on the biggest RE bubble evah
but US Student Debt is imho the probable future killer of an entire paradigm
Societal Pension and Social Security debt is worse than Student Debt.
ah, ghordius - our paths have met again.
while my comment was somewhat tongue-in-cheek, surely the assumption that no public debt shall ever repaid runs somewhat counter to all governments doing exactly so most clearly post-WW2.
furthermore, do you have some links or books in regards to the differentiation of debt types? mauldin and rogoff/reinhart make the public/private sector distinction, but not expanded further upon types of private sector debt...
+1 in fact a lot of the WW2 war debt was being repaid at fast pace, particularly by the US in the 50's
but that was before the same country tested how many medium wars it would be capable to maintain at the same time
and in theory, it was, as per agreements in 1946, "as good as gold", which makes debt look more fiercely "to be repaid"
(the British Empire took 75 years for paying back the Napoleonic War debt)
I have to find some links on that differentiation. not much of a web-person, myself. most of what I write here is from memory. old memories
but the best example of how a private debt crisis was resolved in antiquity is very well visible in Solon's Athenian Constitution
people were collateral, hence slaves had eventually to be bought back from foreign countries at the state's expenses and returned to their status as citizens
The Ponzi will collapse when it hits the US, when the combination of Negative Yield plus QE4, 5 or 6 are in place.
And when the AIIB offers better alternatives.
The collapse of the Fed plus BOJ will be a sight to behold.
"as long as the stupid Blue & Yellow keeps flying and the EuroCorps keep goosetepping around Brussels..."
I'm sure the Russian military planners are quaking in their boots about that EuroCorps. must be the goosestepping. Or is it the "Ode to Joy"?
we could shut down Brussels, tear down that flag and still keep that monetary alliance
watch the CHF. not in the EUR, was pegged to it, and is still a happy little currency because it found... shelter during a storm
watch the USD, note it's mighty tides. would you have thought it would be the hardest currency in April 2015, last year?
would anybody here have thought it would reclaimed some 20% of global reserve status?
I was sitting and pondering today -
What happens if the EMZ falls apart and thereafter the EU.
How would the media spin it, how would people react, and who would be least bankrupt?
the reasoning behind the trade union would not cease, as well as the interests behind it. and the same applies to the monetary union
so it's mostly... fantasy, I fear. btw, nothing wrong with fantasy as a genre. at your age I was a Tolkien expert. later I found out that reality is even more interesting
although it looks quite promising, think I'll wait for a full negative point or two on the 30 year.
new game,
Insane, more like.
DavidC
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
Abuse/Complaints: abuse [ at ] zerohedge.com
Standard Disclaimer: Better get you last couple of spams in under your current alias.
Swiss Miss.
Voodoo?
Coldest place for your ice cubes in hell.
How does one "rate" a Swiss bond? I"m thinking it should be -AAA.
So it should now be called a fixed confiscatory government security instead of fixed income government security.
Sort of related...
7,000 ounces of gold stolen from mine.
http://www.mcewenmining.com/Media-Events/News-Releases/News-Releases-Det...
"stolen"
We found it....it was just sitting there.
Yes "stolen". From the article.
AKA: Armed Robbery.
I'm sure no one could stage that. Ever.
Their telling you if your stupid enough to keep it our banks then you'll have to pay us.
Cool. Where can I get some of that self servicing debt?
Hey Doc, will you give me a dollar? No? Well, will you loan me ten and I can pay you back nine?
Thanks! You're the best.
:)
pods
accept the new reality. you never know how long it lasts
but also remember that the CHF is currently being held for safety reasons. the same SNB that is holding it down "softly" is also prepared to buy near-endless quantities of it if those holders stop being afraid
which leads to... FX Reserves. eventually. it always leads to Foreign Currency Reserves
and if things get more serious... either a new monetary conference or... gold. the Ultimate Arbiter. The Sovereign's Escape Door
I just don't understand this stuff. What is the point of paying someone to store your money? Surely to fuck you'd be better off buying gold and silver for a pure bet it may go up. What is going on in this fucked up world?
new normal- people are stupid
There's your first mistake, it's not money they are storing.
we are living in the matrix. All things are fakes, it's a world of simulationfakes
we don't have a government - it's a banksters and corporations, we don't have money - it's paper and debt, we don't have tv and news - it's a lies and propaganda. You don't even have a home - usa are bankrupt...
"What is the point of paying someone to store your money?"
in the 19th Century, it was common, and it was for... security. of course, money equated gold, which was the real currency of that age
but do try to imagine how to store a billion bucks... cheaply. if you come to a good solution... there are plenty of megacorps and other customers that would have business with you
CBs are going frantic trying to get people to spend what little money they have to stimulate growth since all the CB money only goes into pockets of Big Peeples.
They are trying to force savers out into the fire of high risk assets as bankers dump the risky stuff onto them.
That's why the Western central banks have kept a lid on the gold price for the last few years. They do not want people to put their money into currencies that have a 5'000 year track record. It makes absolutely no sense but markets can remain irrational for longer then you can remain solvent, I think that was a comment made by J.M. Keynes.
if chf is safety, just hold the currency, buying a bond at neg rates has no advantage that I see over cash in the mattress.
the CHF is being held for safety by people (excluding corps, in this comment) that could not care less about it's rates. the same kind of people that hold a few hundred kilograms of gold without looking at prices
as ugly as it sounds: it's those who have debt that have to force every asset to generate revenue... or give it up for others who do
Take a trip to the bank and see how you make out trying to withdraw your 300 million debt bucks. Ain't-gonna-happen.
you just need a bank check. good at any member fdic bank. make it payable to cash if you like. good at the CB printing press. but you'll have to file out a suspishish activty form.
Especially around haircut time...*cough*Cyprus*cough*
I'm with the Romulan Yellen on this one.
Wouldn't a sane person just stuff their mattress with the money - why would spend it on shit yielding bonds? Less paper? WTF
Because their are democrats whos job it is to know where you keep your money, then once it's stolen, you wish you would have paid someone to keep it and give it back at a later date, sometimes much later.
Time to go overdrawn on my bank account and hope for a bail in!
new definition for "fucked up"
"central banking will solve all our problems", they said... "all of them"
Trickle down
Insanity
These banksters don't want to deal with the work of holding your account.
The traditional bank's function is not profitable enough so their going to charge ya.
They make more in boosting stock prices/trading and in the market.
So they push everyone into assets.
My limited understanding is that the Swiss (and the Danes) are doing this to prevent flows of "hot money" into their systems.
Then I look at US yields and wonder why the fuck the world isn't jumping into US Treasuries. Then I think some more and maybe realize something is really fucked up here. I'm going with that last thought.
When's the Exit, we must be getting close.
Must be the people looking to lock in the 50% gift of Stock prices since the crash.
Kinda says that they think that the rest of the fiat fractional reserve (or really negative reserve) currencies are worthless.
So, if the world was fair, then the bankers should be lending me money and paying me to take it. Somehow I think that deal is only available to the good friends and criminal coconspirators.
The juice is in price appreciation due to willing central bank buyers. The bond specs don't care what the interest rate is. The very notion that the negative interest rate bond could happen basically proves Fekete's thesis, that out of control bond speculation is the result of central bank buying. It's also highly destructive and deflationary. It's like a black hole that sucks in capital and destroys it.
That's some scary shit.
The more negative yields are, the more negative they need to become to have a profit.
About time to head into Wells Fargo or JPM and ask for a million dollar loan. I promise to pay them back $900,000 in 10 years!
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date.[1] Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly).
In this case the issuer get s your money and pays you nothing and when you cash it in you get less than you borrowed. NICE.
Bond Valuation Calculator:
http://www.aaii.com/computerized-investing/article/determining-bond-price-volatility
Look at Figure 1 and Table 1
People holding high quality, long term bonds are not stupid.
They will double their money when the interest rate on long bonds go to zero.
What their money will be worth, in terms of purchasing power, is another question.
at zero rate, it will have more purchasing power. mildly negative real interest rate over long periods is basic devaluation. tooo negative is a drain on liquidity as the prices pull cash from accounts. and when there is little liquidity prices move quickly, in either direction. if its a higher demanded security the price will go up. if its a lower demanded security (or thinner mkt) it will gap down. air pockets ahoy
unbelievable
it is only someone else money one would "invest" with a garanteed loss
whose money are they "investing" ?
Don't you get the funny feeling that this whole chicken-shit banking system won't even be here in ten years?
What is the problem with just buying Swiss Franc? How stupid can one be to accept a negative yield for a given credit.
If you are buying CHF 1000 notes by the pallet load, the costs of vaulting and insurance exceed the negative interest rates for corporations and oligarchs on either electronic CHF deposits or sovereign debt.
Swiss banks have had negative effective yields since forever, particularly after one factors the fees that local banks charge.
Hence, the large cash economy and CHF 1000 banknotes, which we all make use of. At the individual level the hegative rates are a non-issue (as long as one ignores the long term solvency of their pension plans and insurance companies).
---
https://www.postfinance.ch/en/priv/prod/interest.html
Scroll down to the savings account rates for a wonderful inverted yield picture:
Balances Interest CHF
With credit of up to CHF 500,000 0.100%
With credit above CHF 500,000 0.010%
+1 long live the CHF 1'000 note! too bad the old one is not valid anymore. it had a huge ant on it, a fitting avatar for such a banknote
but don't worry, we in the eurozone have a (not as big, but still) huge cash-based economy, too. it's just that we don't show it as much as the Swiss do
Welcome to the negative universe. You have gone to the other side of the Twighlight Zone.
Is this like betting on a horse....
and it you are lucky enough to win to get less money back?
I don't get it. Do they not have safes or mattresses there?
We have many safes and many mattresses.
The problem with the mattresses is that the frames which support them break very easily (under normal use).
The safes, on the other hand, are very durable and top quality (with prices to match).
Unlike what passes for a "safe" in the USSA.
in 2 years -2%
Thats only the beginning!
Some pension funds have begun to store money in cash but rates need to be sufficiently low for it to make sense because storing cash is costly. Until that point is reached rates can go down. Interestingly 10 year fixed-mortage rates in Switzerland have begun to rise since February from around 1% to 1.9%. I wonder if banks are trying to offset the cost they incur from the SNB by charging a bit more to the consumer....
How exactly does a negative yield work? Zero Coupon and when Bond matures the investor gets less than Par????
Like SamJam - why not cash?
Everything is now officially upside down!
The simpletons guide as to why people might bid for a 10 year with negative yield;
https://www.thefinancialist.com/europe-the-land-that-yield-forgot/
And for those who don't care. Japanese artist Kusama merges in with some yellow and black dot forms;
http://www.bossa.mx/wp-content/uploads/2012/08/kusama9.jpg
once we get to double-digit negative rates, i expect the economy to begin to suffer.
The Swiss should stick to the cheese game and leave the fucking up to the real pro's here in the U-S-of friggin' A. America for the win, am I right??
So, if I buy a negative yielding coupon bond, do I have to take the coupons in, along with my yearly payment to the issuer?
Everyone should be rated AAA+ at negative rates.
Everything is awsome.
"Awesome"
debt conflaguration stemming from europe as blk swan? 'they'll go down, but we wont'--is this the dominant opinion?
at least europe will be cheap to vacation in again....wheres my backpack?
the only reason a bank COULD ever justify buying negative yield ISSUED bonds is because they are getting investors we call 'depositors' with even MORE negative yield, so ----
this is a system where morons keep their money IN banks that steal and the banks make money by the spread from the government that is 'stealing' from the banks.
how long until private individuals simply buy safes for their houses and keep their money in cash in their own house. ??? the negative yield spread between -.75% and 0 is 750 dollars for every 100k in the bank. a good home safe + installation costs 4k.
so if you have 500k you want to keep in cash---you may as well just buy a safe and keep your cash in your house no?
problem is if you want to USE the 500k. cash paper note transactions are prohibited. so the banking system are the gate owners for USING THE MONEY, which means you have to keep your money in the bank at some point if you want to do anything other than leave it in a safe box.
this game won't end. and despite my disdain for bitcoin---the underlying demand for a debit system that is free from 'the banks' become greater EVERY DAY.
on one hand the joke is on bitcoiners as the value of bitcoin will insta-crash if there is a stock market crash or bank panic. then again-----------that might just be the best buying opportunity for bitcoin in years. the banks will inevitably attempt to reflate the system, or if they never 'let it crash' you can rest assured the demand for a debit system alternative to the present banking system will skyrocket. i'm not sure bitcoin will be the system to win the throne of future money debit system but it has plenty of inertia.
hard to predict the political future of bicoin. i hope it crashes and then comes back. if it crashes and doesn't come back, it's because things are even more desperate than we can imagine.
if bitcoin went to 50 bucks, i think it would be a worthwhile long term bet. especially if that occurred after the western governmetns made it illegal.
in a war time scenario where it was illegal to provide dollar euro exchange for bitcoin--------that would mean it would then become the black market currency of choice. the governmetn would be too busy solving other problems to go directly after the bitcoin users-----they could go after the miners. but by that point, the mining operations might themselves become decentralized again from their presently overly centralized and vulnerable--confiscateable---state.
Time to start putting ads in craigslist "will trade gold or silver for land, cars, ect."
Negative interest rates, because money now, is worth less than money tomorrow?
Becouse it is safer to spend money than to keep it at normal bank. Banks have much higher chances of bancrupcy than swiss central bank.
They are admiting - we are not a safe place to keep money. Risk costs.
Reply to Moratar:
My motto or creed has always been: "Before I (or anyone in my family ever spends money), the one question to ask oneself is NOT 'Do I really WANT it?', but rather 'Do I truly NEED it?'" That motto has served us well, stopping us from buying the "fad of the moment", but allowing us to buy things we will actually use for more than a few months. (Plus it has saved us a great feal of money - happily for me - which I have invested over many years.) My family and friends still refer to me as the family "Scrooge" or miser, but it is now used as aterm of affection and humor.
I agree with you that normal banks one-by-one will begin to go into bankruptcy, BUT that the central banks will soon follow. But I do NOT agree that it is better to spend it on things that you do not truly want or need.
Assuming the goal of any investor is to either PRESERVE or preferably INCREASE his wealth (i.e., REAL future "purchasing power"), then is not a person's money equally at risk regardless of whether it is in a normal bank or in a central bank (as a bond)? Would it not be only a difference in the timing of the loss of one's money?
I am betting that BOTH normal banks AND central banks will soon fail (with 3--5 years), so have placed most of my wealth into gold, silver, land (especially farm land with good, natural, above-grond water supplies) and small, local businesses such as one-factory bakeries and other small food producers, etc. When the SHTF, they will probably survive while the mega-corporations will be killed off by their debt. People will still need to eat and drink (water) and at least such local businesses (via my and others' investments in them) no longer have any debt and will hopefullly survive.
BUT: As last resorts I will have my gold, silver, my own land for me and others to farm; and my many FIREARMS with plenty of ammunition already in storage (as a longtime-time hunter and competitive target shooter). I am NOT by any means a "survivalist" (whom I think are a "little nuts", to put it mildly), but I intend for me, my family, my neighbors and my friends to survive whatever is coming.
John-Henry Hill
semi-retired physician-researcher and medical programmer
So that is why the GOFO rates are not issued any longer. LOL and now paper is turning negative. LOL Then the banks will stop issuing interest rates adn its everyones guess
Maybe we will all turn negative. We'll know when we see red people walking around.
This system is so screwed up but hey I wish I could take out a negative interest loan, its just not here yet
I need another drink. Where did that Harry Potter video go?
Reply to TurnOffTheWater:
You said, "... I wish I could take out a negative interest loan ..."
Great line !!!! ;-) ;-) It had me laughing for 5 minutes!
Oddly enough, it reminded me of something very serious that JOHN ADAMS (an ardent Federalist) wrote long ago: "“I have never had but one opinion concerning BANKING. They [banks] are like party spirit, the delusion of the many for the interest of a few.” - John Adams (second President of U.S.A.) in letter to John Taylor of Caroline; Quincy, Massachusetts, March 12, 1819 as cited in “The Life and Works of John Adams”, 10 volumes, (Charles Francis Adams, Editor); Boston, 1850-1856, X, Page 375
Thanks for the humor! It has made my day more pleasant already!
John-Henry Hill
semi-retired physician-researcher and medical programmer
Question to Bluskyes:
1.) Please read my post (a QUESTION) posted soon after your post.
2.) You stated here, "Negative interest rates, because money now, is worth less than money tomorrow?"
But HOW can anyone be certain if deflation OR inflation is in our future? Especially with most central banks "printing" new money at unprecedented rates! Judging simply from the cost of groceries, where HAMBURGER meat at my local supermarket has increased in price from $1.59 per pound in 2007 to over $4.50 per pund today, I am betting that INFLATION has just begun to rear its ugly head and will in the next few years lead to hyper-inflation.
Thanks!!!!
John-Henry Hill, M.D.
semii-retired physician-reseacher and medical programmer
The question mark was meant to express my confusion. I understand that in a normal positive interest rate situation - money today, is worth more than money tomorrow.
1) Whether it be a function of inflation ie a dollar in 1980 buys more goods, and services than a dollar in 1990 - due to inflation of the money supply.
2) Or because out of any given number of loans, a number of borrowers will be unable to repay. Ie I am competing with another consumer for your goods, and services and I can pay $10 cash today, and the other can give you an IOU, and promise to pay you $10 cash on Tuesday - then my offer is the most attractiv
I feel that this should somehow be reversed in a negative interest rate situation, but do not understand how, and am trying to reason/figure it out.
The force of inflation should now be even greater, since actual free money is now being created out of the negative interest rate payments.
So with example 1 above, Inflation is now even stronger, and people should scramble to borrow large sums, with long amoritizations, stick the principle into a safe, and spend the rest. However, who is going to do the lending? I see this freezing the whole system.
I am having trouble conceptualizing example 2 in a negative rate situation. Because you are not going to lend at negative rates, and the other consumer isn't going to borrow from you at positive rates, when he can borrow from the bank and get paid. What happens? You still sell to me for $10 cash today, rather than trying to match the bank, and extend credit to the other consumer, and expect $9 cash on Tuesday.
All it takes is a few Swiss bankers and a couple fros and you've got a bomb on your hands.
SERIOUS QUESTION:
Excuse my admitted ignorance (as I am a physician-researcher turned medical prgrammer), but WHY would anyone individual person buy government bonds that pay ZERO or NEGATIVE interest rates?????
I can understand why another central bank (such as the Federal Reserve) might buy bonds of another nation at ZERU or NEGATIVE interest rates in order to inject U.S. dollars into that nations economy in times of economic difficulties - just like the Federal Reserve bailed-out for Trillions of U.S. dollars in so-called "currency swaps" with many nations' central banks between 2009 and the present - currently with the Ukraine Central Bank, which is the only reason the Ukraine currency has not collasped. By statute, the FED could keep those "bail-outs" secret ("off-the-books") via "currency swaps" and hidden from the public and Congress because the FED considers them to be immediate "exchanges of equal value" --- like changing a $1 Dollar bill for 4 querters. (It was only when Ron Paul's former Congessiional researched the issue did Ron Paul actually ask a greatly embarrassed Ben Bernanke about these "currency swaps" during hearings that the issue came to public attention.)
But WHY would anyone inestor (individual person or company), whose goal is supposedly to PRESERVE or preferably INCREASE his real wealth (e.g., future "purchasing power") ever consider buying government bonds that pay ZERO or NEGATIVE interest rates?????
Thank you to anyone who responds with a serious answer.
John-Henry Hill, M.D.
semi-retired physician-researcher and programmer
Because the alternative options are even worse.
Yes, a Swiss Government Bond as an asset is pretty solid....so solid that it is as good as gold (even better, you don't have to pay for insurance or storage). Also, it is an asset that can be sold, pledged or hypothecated easier than gold and many other things.
But for a government bond to go negative on an interest rate?
I say we ask the Russian head of their Central Bank WTF is going on.