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Negative Interest Rates: The Black Hole of The Financial System
A black swan event is a metaphor for an enormous problem that develops underneath the surface and then suddenly puts the whole financial system at risk. The financial crisis of 2008 was a black swan event, for example, that slowly developed in the US real estate market where excess had ruled in the years before.
Today, market conditions are ideal for a new black swan event to develop. An event like this takes people by surprise, because it matures under the radar in places where no one is looking. Today, for example, everyone is afraid of deflation. That means that everyone is also trying to prepare for deflation.
If everyone takes measures against deflation you get a mass migration to cash and government bonds, however, which are the assets that perform the best in a deflationary environment. Take a look at Japan: the yen had been on the rise for years up until the Japanese central bank took exceptionally aggressive monetary measures to fight the trend (at which they succeeded). Japanese investors historically also like its country’s government bonds, however, ever since deflation tormented the country in the ‘90s. At one point you got a 5% yield on a 10-year Japanese government bond, today you get 0.3% per year for the next 10 years.
Source: Trading Economics, Japan Treasury Department
A comparable drama can be found in Europe today. Even worse, the fear of deflation has grown so much over there that negative interest rates can be spotted in an increasing amount of countries and for increasingly longer maturities. In France, a 10-year bond will still get you 0.35%, while in Germany a government bond with the same maturity will barely yield 0.07%. It only seems like a matter of time before people will have to start paying to keep government bonds in their portfolio. Isn’t that crazy?
Negative interest rates are not exclusive to Europe as well. Last week the first government bond ever with a negative yield was issued in Australia. Not many market watchers saw this coming, which underlines the seriousness of the problem. Negative interest rates change the rules of the game in the financial system, namely. Those who want to save money, have to pay money. Those who create debt, receive additional reward. It is the world upside down, but that is in fact what is happening.
In a few countries in northern Europe a few large investors are already seeing negative interest rates on their mortgage financing. They are not getting a monthly paycheck for creating debt just yet, because at the moment this is still offset by the costs, but it only seems like a matter of time before this mechanism gets going and the larger public gets its hands on it. Because when local countries issue bonds, they often come with a yield that is lower than or equal to the ECB deposit rate, which also dropped below zero (-0.2%) in the meantime (see table below).
Source: FT, Citigroup
Who is going to save money then? Not a single soul, of course. People will start to create debt en masse, because it is the better and cheaper option. The resulting investments will rise in value, moreover, when an increasing amount of people take on debt in search for returns. Things cannot get a lot crazier than this.
If this is how the system ends up working, we fear that the effects will be irreversible. It is like a black hole that sucks in more and more matter – read: capital – and never lets go. This financial black hole story will also end with a sudden implosion, a flash of light and a big bang, just like in space, and those who do not own hard assets at that point in time could lose every bit of wealth they’ve ever accumulated. As Alan Greenspan, former chairman of the Fed and original promoter of monetary expansion, said once: “Or how you can lose your savings in a blink of an eye”.
The big issue is that we do not see any measure that can reverse this process. Governments are not moving a finger to turn things around; and why would they? They are on the side of the debt creators; the ones that are profiting enormously from this black hole. Central bankers are frustrated, however, because they do not have a lot of tools other than to make monetary demands more flexible, which has the wrong effect: it accelerates the wildfire of negative interest rates.
All of this can only end in financial drama, in our opinion, if no measures are being taken to stop it. Negative interest rates are only attracting more capital, not less, like a black hole in space continuously increasing in size and strength. The ending will be bloody, but that is something no one wants to acknowledge today because returns on government bonds are still the primary focus. We will not participate in this game, for which we cannot envision a happy ending. You are warned!
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"We will not participate in this game, for which we cannot envision a happy ending. You are warned!"
We are 'warned' but no one has a remedy or a safe harbor.
It only seems like a matter of time before people will have to start paying to keep government bonds in their portfolio. Isn’t that crazy?
Yes. Yes, that is crazy.Until lyin' and stealin' becomes less profitable than creatin' and producin', we'll just have more lyin' and stealin'. Accept dyin' young if this continues. There's nothing new under the sun.
Alas, like so much on ZH, this was a story that promised to say something new and interesting, and ends in an advertisement for a paid service. Better to post less than to post stuff like this.
proves our fiat is 'worth-less'
"From each according to his credit rating to each according to his lack thereof."
The Central Planners are determined to blow up the Pension Fund and Insurance Company industries by depriving the markets of natural rates of interest. Sadly, there's no money for the "beneficiaries" and no pay-outs are coming.
It will be hiarious to watch Obama - or maybe Hillary - come on TV to explain to a confused and angry public that they're not getting their money and that the whole financial services indutry was just a fraud and giant scam all along.
"Sorry folks - you got tricked fair and square - and now its time to move on" - now back to your regularly scheduled programming ...
Indices Pronosticos Corto Medio Largo http://www.aseperfi.com/inf/infINDICES.htm
Bad assumption #1: It is wrong to assume that thee 2008 crash was a black swan event. Black swans are rare unforeseen events (like the birth of a black swan). They are not things that lie beneath the surface. That would be a gopher.
Met het accepteren van de 'Logica van de 1' door de VN kan ook de geestelijk leider van Iran met pensioen.
http://www.volkskrant.nl/buitenland/iran-verbiedt-vrouwenblad-om-steun-a...
Om een gecontroleerde paradigma-wisseling naar het systeem 'Leven en Laten Leven' in de EU mogelijk te maken gaat het spinnen over de 3e SpinozaGolf niet meer via de ministers van de eurozone, maar via de ministers van Buitenlandse Zaken. Zeg maar het vroegere netwerk van TimmerendeFrans.
http://www.zerohedge.com/news/2015-03-21/united-diversity
Netwerk @GuusjA: "Valuta’s jojo’en heen en weer, omdat niemand weet welke MuntUnie als eerste de wiskundige definitie van de absolute waarheid als onderpand gaat krijgen. De ECB geeft zijn vriendjes de mogelijkheid om veel 'gratis geld' om te zetten in participaties in (rechts)personen die het fundament moeten worden voor het systeem 'Leven en Laten Leven'."
http://www.volkskrant.nl/buitenland/griekenland-schudt-onderhandelteam-o...
Jeroen Dijsselbloem, voorzitter van de Eurogroep, wil het onderhandelingsproces gaan stroomlijnen. Dus ...!?!??
Het is de vraag wie als eerste (informeel) wordt geïnformeerd over de blauwdruk van het systeem 'Leven en Laten Leven'?!
http://www.volkskrant.nl/buitenland/eu-parlement-bindt-strijd-aan-met-al...
Het EU-parlement lijkt het niet te worden, want die bindt liever de strijd aan met alcohol, dan dat ze de 'wiskundige definitie van de absolute waarheid' gaan verkondigen. In Nederland hopen de fractieleiders dat ze het volk nog kunnen boeien met geneuzel over 'de herziening van het belastingstelsel'. Zelfs werkgeversvoorman Hans de Boer ziet banengroei als voorwaarde voor belastingherziening!?!??
In de optiek van netwerk @SuperWil moet de MACHT niet 'streven naar meer onzinbanen', maar naar 'welzijn en vrijheid'. Het onderzoek van het Centraal Planbureau (CPB) dat 'Verhoging van de arbeidskorting voor lage inkomens met 1,5 miljard euro effectiever is voor banengroei dan een algemene verhoging van deze belastingbonus' miskent de evolutie naar een cultuur van waarheiddelen.
http://www.nu.nl/beurs/4038885/commerzbank-wil-14-miljard-ophalen-met-ve...
Eurogroep-voorzitter moet nu wel op de hoogte zijn dat met het verspreiden van het GELD=ZUURSTOF-paradigma in netwerk Juncker de actie van Commerzbank 'om 1,4 miljard euro op te halen met de verkoop van aandelen' eigenlijk handel met voorkennis van de 3e SpinozaGolf is. De Duitse overheid bezit 17 procent van de bank, dus je kunt dan wel ongeveer inschatten hoe 'de lijntjes' lopen.
Natuurlijk is het niet allemaal 'kommer en kwel', want met de invoering van het DAB-systeem kunnen landen zoals de Oekraïne snel de euro invoeren.
http://www.nu.nl/buitenland/4038874/oekraine-vijf-jaar-klaar-eu-lidmaats...
Interesting stories, but no relevance to negative interest rates.
Huh?
Dude..., you really need to work on your spelling...
Buy war bonds! They pay -1%, which is better than non-war bonds which pay -2%. We're always wanting a war somewhere, so be a patriot and help us out! :-)
Money only comes into existence through debt. They are simply lowering the cost to create money i.e. debt.
That depends on your definition of money. Paper historically is backed by money.
Those who have wealth generally loan it out with an expectation of getting more back than the original loan. Hence, positive interest rates paid for the use and risk on that money.
Negative interest means the only people loaning are those who can create the money they loan at no cost to themselves, rather than those who earn it through various or nefarious means.
Eliminating positive interest eliminates the motivation for those few who have saved up a few dollars to put it back into the economy by investing it. The end result requires no explanation.
Or, maybe it does. The end result is a hollowing out of the economy. Seems too simple to have to explain. But since we now have negative interest rates without public outcry, it's easy to assume that everyone has somehow become brain dead.
Does anyone care to bet that all the talk of interest rate increases in the US, instead, become negative rates?
"Oh, ill just pull my money out". No you won't, they'll make cash illegal.
"Oh, i'll buy gold". They'll just take it or throw you in jail.
We are really fucked. Might want to consider what's coming if they decide to take your guns.
U.S.A. Constitution: "Congress SHALL coin the money."
Time to trade video games for beans, silver for ammo, blow jobs for rent.
The years have passed since Americans faced “the Red threat,” relieved later to watch the Iron Curtain ripped away.
But what would the rulers and bankers have for us now? Why it’s the same threat as of old and there’re no better words to describe their goals than state control, Marxism…and if you will, Communism. The destroyer.
Zero and negative interest rates during periods of inflation destroy savers and investors so they can’t become capitalists. That is the central planners’ intent.
They chose Keynes for a reason. Keynes was not a builder; he was a destroyer, as they are. Keynesianism is Marxism except that the lender [the “rentier”] rather than the business owner is the villain.
What did Keynes mean when he said that "making capital freely available may be the most sensible way of getting rid of many of the objectionable features of capitalism,” that “the rentier would disappear…”? Henry Hazlitt explains: “The chief difference between Marxism and Keynesianism is that for the former the employer is the chief villain, and for the latter the lender,” i.e., the saver.
Keynes’ Communist-lite identity, like the other Fabian socialists’, is revealed by the Fabian crest - a wolf in sheep’s clothing.
Says G. Edward Griffin. “Whereas Communists wanted to establish socialism quickly through violence and revolution, the Fabians preferred to do it slowly through propaganda and legislation.”
When you are anti-capitalism, you open the door for communism. Marx’s idea was to take away what the capitalists build and to give it to others. Keynes’s idea was that you stop the “savers” from building their estates. You take that money from them and give it to the state .
It all brings together the Communists, the activists, the Marxists, and the Socialists – for they favor Statism, that the State will solve society’s problems. In short, the State takes over from the individual.
The individual, the saver, the home owner, the middle class family, the small businessman, all must be destroyed.
The gem of the Marxist idea was to take away individual wealth, to stop the growth of the individual and to transfer that wealth to the State and then they would be the State. They, the collectivists, would be there waiting for the plunder to flow in. That was the idea for the Federal Reserve System when its architect, Paul Warburg, arrived on these shores from Germany: this money is out there; this wealth is there for the taking. What’s the difference between that and Mussolini, or Marx, or Lenin, or for that matter, Keynes or Bernanke?
Their idea is to stop others from progressing so that they can TAKE IT for themselves. When Bernanke takes the savers’ money, who ends up with it? He does.
"The years have passed since Americans faced “the Red threat,”
Now it is the Green Threat, cash and savings.
Yes, why should a chosen few have the ability to print money?
tick tock motherfuckers...
What a moron this Henry Hazlitt is! In the modern banking era, the lender i.e. the banker lends from money he just creates, not from anybody's savings. There can't be anything sillier than to equate lender with saver in the modern banking era.
Creating money, in the manner you describe, is paid for by savers just as if you took it directly from them.
"It only seems like a matter of time before people will have to start paying to keep government bonds in their portfolio. Isn’t that crazy?"
No it isn't, at least not for monetarily sovereign governments since why should they pay interest on what they can and should create interest free? Should welfare be proportional to need or to how much spare cash one has lend to government?
If government is the name for your personal omnipotent servant, you can set any agenda for him/her. However in the real world where government is a body representing the collective will of a society, welfare privided by the government to the needy is dependent not only on the need but also on the ability and willingness of the collective to fulfil that need. Since government expenditure whether sourced through taxation or printing is only a proxy for value provided by the rest of the society towards collective, it should not exceed the rest of the society's ability and willingness for the same. If it does, it results in something called inflation meaning the society will be delivering the maximum value it is capable of and willing towards the collective for increasing number of monetary units
Certainly there are limits to welfare which is why it shouldn't be wasted on the rich as it currently is.
Good, now we have zero rates and central banks effectively buying up all the issues from now until the end of time we can see how your ethical money experiment pans out. If the government needs money just print it up. See how that works out.
The other 1/2 of ethical money creation is the allowance of genuine private monies for the payment of private debts ONLY with NONE of them privileged by government as is the case currently with the government subsidized private credit cartel.
Then the population could escape any "stealth inflation tax" by using a private money.
You mean government borrowing ever increasing quantities of money with only self-imposed limits and paying interest on that is somehow superior to government printing it with only self-imposed limits and not paying any interest?
fuck bernanke then
"It only seems like a matter of time before people will have to start paying to keep government bonds in their portfolio. Isn’t that crazy?"
No, it's just a sign of deflation. You aren't used to it as it hasn't happened in your experience. About the time you figure it out, things will change.
But keep worrying rather than adjusting, that will help.
Would it be beyond governments to demand we all borrow and spend?
Obamacare already demands we spend. Laws requiring borrowing might not be far behind. Perhaps some new 'service' like healthcare we all 'must' have. ...and BTW 'if you can't afford it we'll let you pay us later...sign here.'
Nobody would pay back a mandatory loan. Helicopter money would be more likely and that would make everyone feel giddy and excited like children at Christmas. Would also buy some votes.
TARP loans were mandetory for many that did not need them.
TARP was Kabuki
The real bailouts were in the trillions and hidden.
Nice title. Crap for thinking and writing.
Everyone is not afraid of deflation. Only the banksters and the fraudmeisters in government.
Inflation = Higher paychecks for the ruling class(banksters, pols) and the "useful idiot" class(lifelong welfare class).
Deflation = Higher standard of living(productivity increases passed thru to end buyers via lower prices) for the debt/tax slaves(formerly known as the middle class).
Nice thought, but it's not that kind of deflation - it's the sucking sound of peak credit and not the sound of machinery in ever more efficient industries. Chance would be a fine thing.
Wouldn't a truly negative interest rate policy involve paying me interest to take out a loan?
Yeah. But in reality, all you get is a reduction in the vigorish the bank mob charges you.
OM F'IN G! A black swan event is by definition unseen. 2008 was seen, predicted and profited from by thousands of investors that were paying attention.
My guess is that for every 100 prognosticators that discuss black swans, maybe 3 actually read the book.
If they did read it they choose not to accept the definition.
Jewish Settlers at play
Nobel Prize winners are running the place. If their formula we are working off of calls for negative rates, we will have negative rates.
"Today, for example, everyone is afraid of deflation."
Bullshit! If you have no debt, bring on deflation.
You mean no debt and a secure income, don't you? Because a deflating economy kills jobs.
And if you have no wealth left, deflation is irrelevant.
Negative rates seem to advantage going into debt, but not when rates become only more negative with time. In that case, any debt turns into a burden and has to be continually refinanced with even lower interest debt. But the prices of collateral are likely to collapse as accelerating NIRP leads to accelerating deflation, and that means that you simply can't refinance at some point, get forced to default, and lose the collateral. Negative interest rates are the equivalent of an Event Horizon, there is no escape back across that boundary once crossed, and all wealth is destroyed at the singularity.