"Everything Changes At Zero" - Investors "Obligated" To Fight The Fed

Tyler Durden's picture

Submitted by Tim Price via SovereignMan.com,

For the benefit of non-subscribers, there are two versions of the Financial Times newspaper. One of them is the hard copy edition, still printed on pink paper, an exact digital replica of which is available on the paper’s website to subscribers. The second is the website itself, at www.ft.com. The difference between the two is subtle, but crucial.

In the formal, hard copy edition, ‘reader response’ is strictly edited and controlled. Occasionally a despatch critical of one of the paper’s columnists (normally and deservedly Martin Wolf) will make its way through enemy lines, but as the ‘edition of record’, hostility to and criticism of the newspaper’s editorial staff is, as you might expect, strictly rationed.

On the website, however, the gloves come off.

Last week the FT published an article, ‘Central banks: negative thinking’, co-authored by Robin Wigglesworth, Leo Lewis and Dan McCrum, that was atypically sceptical of the received wisdom on QE (i.e., that it works). The article began, as is probably compulsory these days, in Japan:

“Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting..


“The Japanese can be conservative at the best of times, and few think these are the best of times.”


But as the authors rightly point out, Japan is not the only country affected by negative interest rates, a policy that John Stepek, the editor of MoneyWeek, has nicely called “the weaponisation of compound interest”.

As Messrs Wigglesworth, Lewis and McCrum rightly observe,

“With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.”

What is alarming is that central banks are brandishing these new tools without any viable evidence or theory that they will even work. This itself presupposes that central banks have any idea of what “work” might even mean in this brave new context. It is as if the central bankers of the world have all been given hammers, and they have been sent out into the world to hit all the nails therein. But we don’t distribute hammers as a matter of course to babies, for obvious reasons.

The financial world is growing increasingly crazy-looking. 10 year bonds issued by the government of Japan – the developed world government that comes closest, by any objective measure, to being deemed ‘insolvent’ – now offer a yield below zero. Come again? According to JP Morgan, there is now more than $5 trillion of sovereign debt offering a yield below zero. ‘Risk-free rate’?

As the authors fairly point out,

“..some investors and analysts say the most insidious aspect of negative interest rates is what it signals: that central banks are at their wits’ end over how to invigorate growth and dispel the spectre of deflation. The concern is that the US is poised to join in.”

That seems ever more plausible, if grotesque. The analyst and financial historian Russell Napier, in a recent interview, concurred:

“So [with negative rates] there are business models that don’t make any sense. Elsewhere, the more the rate on deposits comes to negative, the more risk there is that people start asking for bank notes…that’s a bank run if we ever get to that stage, but even with negative rates where they are it’s destroying the returns for banks.


“When you’ve built over hundreds of years a system that runs on positive nominal rates and you suddenly deliver negative nominal rates, then you are creating lots of problems for lots of existing business models and it’s going to cause havoc and I think it is causing havoc…


“Can [negative rates] come to the United States? ..the answer is probably yes. Once again, it really depends on how quickly the politicians get in gear. Central banks I think are crying out for help from the politicians in terms of getting some form of reflation going…so I would forecast that America probably will get to negative nominal rates.


“I do think that what’s going on in the world with European banks and in the high yield market in the United States and the potential defaults in the emerging markets, I do think that’s negative for US economic activity; I do think inflation will continue to come down in the US; I do think the US will report deflation, so probably the United States has to go the same place as most other places have gone to.


“The most important thing that your listeners need to remember is that just because central banking has played out doesn’t mean to say that the [political] authorities have played out. So they’ll be back with some sort of political machinations to try and produce this higher level of nominal GDP growth…and eventually they’ll succeed but, crucially, it needs a crisis to galvanize the political process…”

FT readers growing increasingly concerned at the absurdity of current monetary policy occasionally get a polite hearing in the Letters page, like a demented elderly relative who is reluctantly granted an audience out of pity. But on the less heavily intermediated website, they give it all with both barrels.

Here, for example, are some of the reader responses to ‘Central banks: negative thinking’:

“If all depreciate their currency with this latest coordinated gimmick, none does, as matters remain as they were before. So that excuse for this nonsense (negative rates) is invalid”;


It’s rather odd how, when QE is intended (or so they say) to stimulate demand, they give the money to a relative handful of people with plenty of it already”;


“NIRP is supposed to make us spend the money that we carefully saved for future needs. This madness will bankrupt us all – in old age (if not sooner). The 2008 crisis taught us: Never. Trust. Banks. The years since then have taught us: Never. Trust. Central. Banks. Either”;


There is no way on God’s earth that a free market would ever result in negative interest rates. If anyone had asked you ten years ago if you’d stand for this – you’d have said ‘no’. The fact that this seems almost normal to many people is an indication of just how insidious these moronic policies are. We are like frogs in a pot being boiled alive one degree at a time. Time to get out of the pot before we’re all too drowsy to notice”;


“Central banks will also need to explain just how they think that taking money from savers with low rates – lower than inflation – is going to give governments more taxes or businesses more customers. All it does is reduce private consumption and lower prices i.e. what they claim to be trying to stop”;


“Economists rather than face reality, come up with new solutions such as negative interest rates rather than face the fact that their theories were plain wrong. At the heart of the problem is that a small group of academics or anyone for that matter can forecast the economic future better than a marketplace. In fact they are worse, market participants know they can be wrong so act more cautiously ( unless of course they know they will be bailed out ) hedging, spreading risk, using futures if you produce commodities etc.


“Central Banks, by falsifying interest rates, herd markets in a direction determined by the Central Bank. From day one these ideas were implemented, they were doomed for failure. Central Bankers do not believe in the business cycle which if left to run their course, and too much leverage employed, are normal and healthy. But for an economist that means their profession loses influence; they won’t let that happen”;


NIRP is madness. The only possible positive objective may be to weaken the currency, which in itself is a self-defeating move, leading to currency wars. Switzerland adopted NIRP for this purpose. BOJ followed suit, for lack of any other alternative, and is failing miserably. The only winners of NIRP are governments and borrowers. Credit demand remains strong only with risky borrowers, including governments. Well financed borrowers borrow to buy back shares or engage in M&A not to expand the economy, but to retrench. All others are losers of NIRP, including financial institutions, all investors and household. NIRP is not a zero-sum game, but a minus-sum game. One does not have to be very bright to understand this equation, including myself.”


“The FT appears to be finally seeing some chinks in the armour of the QE policies it advocates with such enthusiasm”;


“What is it that central bankers and economists do not see?


For any human being making economic decisions, everything changes at 0%. The decision making for savers, consumers, SMEs, etc. grinds to a standstill. If you are prudent and don’t want to speculate on buying various financial assets, 0% kills any reason you may have had to take any positive action. If all you can expect to get from your efforts is to still have the same as when you started, why bother? We as humans need a positive “Narrative” to get out of bed in the morning, work, take risk, etc. Risk free interest at 0% translates into a clear statement that there is no future to discount cash flows over or to believe in. If an individual cannot imagine a positive result from his/her actions, he/she prefers to do nothing. Prolonged periods of 0% rates and no positive (inflation) price movement will lead to reduced economic activity. Not exactly the stated purpose of the QE experiment. QE will go to the history books as one of the greatest mistakes in history.”

This is only a snapshot. At the time of writing, there were 175 comments from readers. There will doubtless be more, unless the FT decides to close down the conversation.

Faced with a terrible threat, we can do nothing, or we can do something. One logical response is to agitate for greater public awareness of the threat. Writing as a fiduciary investor, another is to try and identify defensive investment choices that will go some way to putting capital to productive work without incurring entirely unacceptable levels of risk.

In an environment of heightened financial repression and the growing likelihood of the imposition of negative nominal interest rates, we think those investment choices should include objectively creditworthy debt; high quality and unconstrained equities offering an explicit margin of safety; uncorrelated systematic trend-following funds, and hard assets, notably gold.

It used to be said, ‘Don’t fight the Fed’. Now as investors, if we want to protect our capital, we are all obligated to fight the Fed, and its international cousins, with whatever we have.

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Ghost of Porky's picture

If you print it, they will come.

y3maxx's picture

MIC, Wall Street, Saudi Arabia, Turkey and Israel are pro peace.

Au_Ag_CuPbCu's picture

I want a negative interest-only home loan...where do I sign up?

venturen's picture

beware what you wish for....

hungrydweller's picture

Man, I am so waiting for that too.  I am going to refi at 0% to the max possible on a house I own outright.  I am going to put every penny of it into phizz.

Arnold's picture

Raise the rate, Granma.

Do it for the savers.

The house of cards will tumble, you know that, we know that.

The speculators have had their day.

KnuckleDragger-X's picture

As far as I'm concerned about the CB's is "nuke them from orbit, it's the only way to be sure" covers the situation......

RockySpears's picture

They are indeed Aliens on this world.

FreedomGuy's picture

This is what happens when you give academics with sketchy theories power. Because of ego and tradition they will never say they are wrong.

Soul Glow's picture

Check this out, tungsten is the hot new metal jewelry!


msmith9962's picture

It's just tungsten plated.

delbutler's picture

"Well, that's great man, just fucking great. What the hell we gonna do now, huh ?? What are we gonna do ?????"

Budnacho's picture

"I don't know....maybe build a fire.....sing some songs"

ah-ooog-ah's picture

We'd better get back inside,  it'll be dark soon, and they mostly come at night. Mostly.

NoOneRides4Free's picture

Why would anyone ever buy a bond that pays zero percent interest? I'd keep it in an insured bank account.

But you do have to consider the risk of being forced to participate in a Bank Buyin should that bank fail.

Then I'll keep my money under the matress. 

Sudden Debt's picture

When you need collateral to back a monsterous derivative play.

Vlad the Inhaler's picture

Because you're hoping that the value of the bond holds up better than the value of the shitty paper in your wallet.

Sudden Debt's picture

NIRP is the creator of deflation.

It's all they can try now.

But with NIRP they'll also try to expand their balance sheets and there lies the second danger. When their balance sheets expand, and deflation hits stocks lower, they'll esentially bankrupt themselves.

And where does the income of NIRP goes to? To the governments who just see it as a tax.

And a NIRP of 4% has the same effect as a 20% tax increase. It's just another name for taxes.

And why do they need another name for taxes? Because they've crossed that tipping point where ever 1% in tax increases create a 1% economic contraction.

So will the new name shange all the rules of the game? Not at all!! So the world won't be able to handle 2 years of NIRP before going into a full scale terrible depressiony caused by Central banks.

LawsofPhysics's picture

Unless your currency creation has REAL COLLATERAL REQUIREMENTS, ZIRP and NIRP are in fact the theft of LABOR!

Execute the fucking bankers/financiers already!  In the modern monetary system they are in fact nothing but useless middlemen between the computer/printer and the producer/consumer in the real economy!!!!

Fuck em, if they want to commit suicide, let them!!!!

Sudden Debt's picture


First they gave away trillions to their buddies.

Now they use deflation to increase their wealth yet again.

And deflation only in assets, not in essentials, there the costs keep going up. But deflation in the employer world forces wages lower and the people's costs keep going up.

It's a hughe wealth transfer yet again as due to deflation the elite will be able to convert their free money for twice the amount of assets.

People are being raped right now. And nobody has a clue how all wealth is flowing to the happy very very few.


Latitude25's picture

The goal is to destroy national currencies with a panic and then offer a global solution

ForWhomTheTollBuilds's picture

Alasdair Macleod thinks that negative interest rates in the USD will lead immediately to something like hyperinflation.  Since all commodities are "priced in USD" its not just holding gold that makes sense, its holding any real thing like oil, lumber, copper.   


Whereas when non-USD currencies go negative interest, you just buy USD treasuries to protect yourself if you are institutional money.


I think its an interesting idea, as good as any other Ive heard about how things will fall apart quickly if the USD ever goes substantially negative

Arnold's picture

Honorable Krugman, it is time for Seppuku.

LawsofPhysics's picture

In the absence of real collateral requirements, at zero percent, everyone should be allowed to print their own currency!!!!!!!!

bankonzhongguo's picture

Lest anyone forget, this is exactly HOW you have a society suddenly think it a good idea to send "intellectuals" to gulags, concentration camps and re-education work centers - just in the same way Hitler, Stalin and Pol Pot found such easy fertile ground to otherwise remove their problems from society.

When the smartest guys in the room become so detached from the reality they are supposed to be protecting that the medicine is worse than the disease, then it will become inevitable - maybe all these disenfranchised entitled lied-to Millennials - and the masses will turn their backs on reason and lash out directly at that small minority that brings so much rot and ruin to peoples' dignity.

Again, the ship will not turn around until someone important and rich gets it in a memorable way.

The Age of Abundance is a Lie.

jakesdad's picture

while I fully acknowledge the insanity of doing it I'm skeptical whether this could be done in practice is us b/c:

1.  I don't think you could do it w/o a cash ban
2.  yeah, they're working on that but how do you solve the illegal* problem?  I have a hard time believing the same "they"s pushing this want to kill the day labor market & even if those "they"s do the companies who employ them damn sure don't & they brib..., er, "donate to" politicians too
3.  even IF an obama, hrc or even sanders completely rolled over & (illegally) gave them all debit cards (cdertainly plausible) they'd either have to start collecting taxes on them (not to mention legal/citizen baby sitters, lawn mowing teens, etc) which would cause massive price distortions/decreased spending (that 6%s gotta come from one and/or other) OR they'd have to exempt them which would cause the mother of all torch/pitchfork-wielding mobs
4.  criminals spend $ too - to the extent you talk about victimless crimes shutting them down is just economic harm for no social benefit.  keeping would be hijackers out of 767 sims is definitely a win!  shutting down the neighborhood pot dealer whe doesn't even own a gun AT BEST costs a landlord a reliable tennant (though it can net a police force a house) & a bunch of local businesses an otherwise good customer.

I don't doubt fed is crazy/desperate enough to try itm just that the tangible barriers to entry may be higher in us than other countries who've jumped into this pool.

*or "undocumented" or whatever euphemism unknots your undergarments 

honestann's picture

Someone who enjoys ultra-short-term "movements", I have one for you to try.  One week from today is "leap day" in "leap year".  And so, promote a mass "leap out of the pot" day/week.


One specific action to take:  empty all bank, stock, retirement accounts!

Jump outta their pot before the banksters fleece and boil you to death.

And given the current 80:1 silver:gold ratio... convert all fiat to silver!

Tonto says... hi, ho, silver... and away!

Aussie Battler's picture

My last post is fitting on this article:


Rise up!


SirBarksAlot's picture

Take the facts to your next city council meeting.  Just tell them that you're concerned about the real economic figures and take some with you, as examples.

Lots of towns now are issuing their own currencies, to be used exclusively in their neighborhoods.  It started with the Ithaca Hour.

Another option is to diversify your town's holdings.

I got through to my city council, so it's not impossible.

gcjohns1971's picture

NIRP Underscores then need for collateral.   It FORCES economic calculation to be focused on the return OF capital rather than the return ON capital.


Being that the central monetary premise of the Keynesians is that Governments, not market exchange, is the wellspring of money, conventional economists believe in the counterfactual, that currency backed by nothing but a government edict can survive collateral examination.

There are hundreds of historical examples that are unanimous...it can't.

To the extent we've backed monetary expansion with nothing but unredeemable debt for decades, there is no collateral.   To the extent they've supressed historical currencies that could serve as impartial numeraire, they've actually made collateral IMPOSSIBLE.

There's nothing but vapor in those T-bills.   And as soon as that is truly known the guns they would otherwise depend on to impose that fiat paper will evaporate.

jarana's picture

FT  reader  response is priceless.

To honor him  or  her, I will refer to him or her as "the NIRPpless fellow citizen" and I will only pronounce such name in the pressence of a banker, allways spitting as a symbol of my commitment.


TulsaTime's picture

HA HA HA, it is to laugh. These are not 'tools', they are schemes for more ways to shovel more value directly to the pockets of the kleptokrats.

r0mulus's picture

Great article. Completely agree.

QE is fascism. NIRP is a sign that your economy needs to crash.

It didn't have to be done this way. They took from all and gave to the banksters.