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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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I’d like a Visa to that offers me 2% when I’m in the red. Hell, maxing out would be the smart thing to do and that’s exactly what governments will do.
They’ll just Start to take way more debt, include it as revenue which will allow them to take on more debt, do public construction works with it that they’ll write in the books as extra GDP and investments allowing them to take on more debt and soon you’ll hear about tax reductions to spur the economy because their source of money is never ending and generates income and the spending will speed up with every cycle.
And as spending increases, prices will catch up as supply can’t follow and than you’ll get your inflation nightmare.
Another 4 to 5 years from now.
+1000 and while you're testing that scenario throw in those creditor nations dumping dollars on a grand scale whilst amassing unspecified amounts of gold.
inchustin', but ain't dat cazy talk???
Given (even the official) CPI increases, and the fact that interest income is taxed,
NIRP has effectively been in existence for a while.
Isn't it the hard assets (free of any lien), that all of this is directed toward? I'm guessing some new law shall be passed or already has become law, that allows the destruction of the hard assets. After all, it is now their game, and they change the rules continuously. We already have an real estate tax appraisal increase of 33% every 5 years in Arkansas, whether it is needed or not, it is law, and there is nothing that can be done to stop that one. Unless you sell out of course.
http://thecabin.net/stories/072908/loc_0729080001.shtml
wwxx
Whom the Gods wish to destroy they first drive mad in greed and hubris providing them the very rope with which to hang themselves.
Money creation on steroids to inflate WS assets now comes back to bite the hand that fed it : The FED/ECB/TBTF financial combine which now BETRAYS the cardinal rule of capitalism : the time value of money, of risk and return coupling.
So far it has primarily been negative rates on reserve deposits to encourage lending and not consumer accounts. The threat is that will change soon, and it might require amending FDIC rules. But IMHO this is why the FRB wants to raise rates in June. It would prevent, or at least delay, NIRP from coming here. (There are other benefits as well - like slowing down speculation in commodities.)
It's NIRP or allow failures, banking and business. They would, apparently, rather takeover the whole darned economy than to allow the free market to work(7 yrs and counting). Communists think that way, of course.
Nicely condensed. And the amazing thing about it is that if you told them they were acting just like the Soviets, they wouldn't understand what you were talking about. Crony capitalists are deadset against creative destruction, preferring destructive destruction (of everyone other than them); it's that simple.
Negative interest rates will destroy capital investment.
Will?
It's a hostile takeover of the economy. Also, they are starting to ban cash to keep the sheep in the pen.
No more need to go through the capital budgeting exercise. Reduce your hurdle rate down to zero and ever project appears to be a winner on a NPV basis. The resulting unintended consequences of malinvestment falls on deaf ears with guys like Paul "one person's liability is another person's asset" Krugman.
Duh
All rates are based in risk types
Now there is no risk because CBs are buying with no end in sight
CBs will not be able to stop without monumental destruction of people's principal or lack there of
Without the implied backing of the income of the host nation, all Central Banks would shrivel up into Nothingness; the name of the whore that birthed them.
It'll be interesting when the big EU banks start haircutting the general population's bank accounts to cover their ass. They've gotten away with it in Cypress and Greece because they are small borderline countries. When they start going after the French and Spanish, things will go to hell fast.....
I’m amazed at how there is almost no reaction to negative interest rates or the state of the bond market in general.
If low interest rates resulted in asset bubbles, negative interest rates will result in super bubbles.
Low interest rates make it easier to blow bubbles. Negative rates pay people to blow bubbles. I guess the financial people at the top are used to paying people to blow.
need income to blow; at least, i thinks banks still require income? just askin.
That's not the black hole you are looking for.
http://www.worldcomplex.blogspot.ca/2011/01/captain-bernanke-and-black-h...