Why Negative Rates Can't Stop the Coming Depression

Tyler Durden's picture

Submitted by Bill Bonner via InternationalMan.com,

Are you ready to pay to save?


Agora founder Bill Bonner explains why “negative interest rates” are spreading around the world…and could soon come to the U.S.


Like Doug Casey, Bill believes the worst is yet to come.


Bill says the coming financial collapse will be worse than the market crashes in 1987, 2000, and 2008. But this time, he says, it will affect everything from your portfolio...to your bank account...to the cash in your wallet.

About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments…who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future.

Is that weird or what?

Into the Unknown

At least one reader didn’t think it was so odd. “You pay someone to store your boat or even to park your car,” he declared. “Why not pay someone to look out for your money?”

Ah…we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it…and using it as he sees fit.

It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.

A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for.

When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books.

If something goes wrong and you want your money back, you can just get in line behind the other creditors.

The future is always unknown. The bird in the bush could fly away. Or someone else could get him.

So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.

A New Level of Absurdity

That’s why bonds pay income – to compensate you for that uncertainty.

Inflation, defaults, depression, war, and revolution all raise bond yields because all increase the odds that you won’t get your money back.

That’s why countries with much uncertainty – such as Venezuela – have higher interest rates than countries, such as Switzerland, where the future is probably going to be a lot like the past.

Venezuelan 10-year government bonds yield 11%. The Swiss 10-year government bond yields negative 0.3%.

The interest you earn on a bond is there to compensate you for the risk that you won’t get your money back. Or that the money you do get back when the bond matures will have less purchasing power than the money you used to buy the bond in the first place.

You never know. Maybe the company or government that issued the bond will go broke. Or maybe the Fed will cause hyperinflation. In that case, even if you get your money back, it won’t buy much.

With interest rates at zero, lenders must believe that the future carries neither risk. The bird in the bush isn’t going anywhere; they’re sure of it.

As unlikely as that is, negative interest rates take the absurdity to a new level.

A person who lends at a negative rate must believe that the future is more certain than the present.

In other words, he believes there will always be MORE birds in the bush.

Boneheaded Logic

The logic of lowering rates below zero is so boneheaded that only a PhD could believe it.

Economic growth rates are falling toward zero. And at zero, it normally doesn’t make sense for the business community – as a whole – to borrow. The growth it expects will be less than the interest it will have to pay.

That’s a big problem…

Because the Fed only has direct control over the roughly 20% of the overall money supply. This takes the form of cash in circulation and bank reserves. The other roughly 80% of the money supply comes from bank lending.

If people don’t borrow, money doesn’t appear. And if money doesn’t appear – or worse, if it disappears – people have less of it. They stop spending…the slowdown gets worse…prices fall…and pretty soon, you have a depression on your hands.

How to prevent it?

If you believe the myth that the feds can create real demand for bank lending by dropping interest below economic growth rates, then you, too, might believe in NIRP.

It’s all relative, you see. It’s like standing on a train platform. The train next to you backs up…and you feel you’re moving ahead.

Negative interest rates are like backing up. They give borrowers the illusion of forward motion…even if the economy is standing still.

Or something like that.

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I am more equal than others's picture



Spend your money or else

I'll try "or else" because spending money you don't have has worked well for the individual and goverments.

DownWithYogaPants's picture

Not arguing with what Bill Boner said but after I read his articles I always wonder what I learned.  Nothing pops into my mind.

chicaboomboom's picture
chicaboomboom (not verified) DownWithYogaPants Mar 11, 2016 7:38 PM

Folks, America is not gonna get better. This is why >>> http://wp.me/p4OZ4v-3z

BuddyEffed's picture

The author gets this so right "Economic growth rates are falling toward zero. And at zero, it normally doesn’t make sense for the business community – as a whole – to borrow. The growth it expects will be less than the interest it will have to pay."

See this comment for detailed reasons and rationale : http://www.zerohedge.com/news/2016-03-03/bill-gross-previews-financial-a...

Stuck on Zero's picture

Negative rates are simply a tax. Just like inflation.

Squid-puppets a-go-go's picture

neg rates are the direct destruction of capital, nothing less.

great way to fix a problem of too much debt, eh?

hansg's picture

The greatest is lie is "people stop spending". Are we talking about all those people without savings accounts whatsoever? The people who spend just to eat, to have a roof over their head? Are they going to "stop wasting money on food because next month it will be cheaper"?

If inflation is a transfer of wealth from the poor to the rich, then deflation must be the opposite. No wonder the rich hate it so much they would rather destroy the world than allow their 'value' to be diminished in any way...

cougar_w's picture

Well businesses are dead walking about now anyway. The growth fantasy (ie. "there never was anything of the kind") is revealed to have been a fiction. We didn't grow, we just found a temporary form of free energy and got fat on it. We're a fat species; our lard butts cover the planet now, we spill over into other seats on the plane, we waddle around knocking over furniture and crushing to death smaller things we can't even see under our fat feet -- which we also have not seen in a long time.

We're fat fat fat. We're toxic, polluted, and our internal registers are so fucked up we're verging on societal dissociation insanity. We think we're fine -- hell we think we're the pinnacle of all things from before the beginning of time -- but we're so stupid, doped up and inbred we can't see that we're bleeding at the joints.

It's not working, folks. Just not working and it's not going forward much further either. All the hopes for somehow this turning around -- that's nonope. Down to simple physics now, gravity wins the next round and we go down.

Mountain of lard coming in fast from 75,000 feet altitude. No brakes. No wings. No parachute no fucking anything and we'll be a mighty fine looking crater.

autofixer's picture

All I can say is: "wow!"

RafterManFMJ's picture

Personally, I think you're much too optimistic.

Majestic12's picture

"Can't Stop the Coming Depression"

Another idiot article trying to troll a "consensus"…

As if there is anybody at the corner of Wall St. and Fed, having a "goal" to "Stop the Coming Depression".

The insider crooks will clean up on the way down, and on the way back up …just like last time.

And they will laugh at everyone here that takes this article seriously.

How about an article "Why Its Fucking Gulliotine Time!"?

rksplash's picture

What will they sell. Eventually the master must throw a bone to the slave otherwise the mill stops. Do you really think the master is willing to share? History teaches us that all empires breach that tipping point. Take a look at Europe now. The slaves are sleeping outside with their children. Ring any bells? WW2 maybe? Our educational institutions don't talk about it much. Very expensive process teaching our children what happens when state and corporate powers merge. Maybe thay are errogant to the point where we they see it as a waste of time. "They will never understand anyway".

BarkingCat's picture

Lots of rich become poor during depressions.

It will be even worse this time. The rich are leveraged far beyond what they were in the past.

That leverage offers them exponential exposure..to the poor house.

The assholes that control funny money will clean up really good.

FringeImaginigs's picture

No, the Bonner got it wrong. It's not whether there is growth of not, it's whether there are any profits. An economy can be growing at 0% and still create value, still create profits. And as long as profits are there to be earned then borrowing can occur. Part of the profits go to pay the interest. Nothing fundamentally wrong with a zero growth economy. In fact from about year 0 to year 1700 growth was essentially zero, living standards didn't increase but there clearly was a well developed banking sector. making commerical loans at rates of 20%, discounting bills at 30% and providing trade credits and war loans at 40%. The real basis for the creation of some of the great banking houses. 

conraddobler's picture

In an economy where rates are below zero you're just screaming that cash is king.

No one buys anything because to buy something you have to spend cash or digital whatever.   It's a trap you can't work your way out of.

Grandma can't spend shit cause her money is literally COSTING her every month so they keep dialing back consumption.  Low rates promote execive borrowing which just saps present consumption once the debt bloat switches to maintence mode instead of excessive consumption.  

We're drowning in debt they keep lowering the rates starving anything of yield sending grandma into the casino for yield when they get wiped out they have nothing to spend.

When rates are negative you have completely turned the idea of capitalism on it's head where stored capital is whipped with a lash to get back out there and DO SOMETHING but there is nothing to do so it sits and everything dies.

High rates on the other hand would wipe most people out which would be good it would promote savings and clear balance sheets and it's never going to happen.

rbg81's picture

The real reason why rates are going negative is the sheer amount of Government debt.  Governments like the US and Japan owe so much, that any interest at all will eventually be a budget buster.  The only way to keep the Entitlement State going is to somehow make $$ on debt.  Hence NIRP.

NIRP is also behind the push to ban physical cash.  Cash is too good an escape route.  It also has the advantage of being unhackable.

Lets  call NIRP what it really is:  A Weath Tax!!

EndOfDayExit's picture

Very true. The real wealth tax is most certainly politically unfeasible, but one can have NIRP instead without requiring any votes at all.

rbg81's picture

Yes, that is the beauty of it.  It absolves the politicians of all responsibility.  They can blame it on the amorphous "banking and financial sector", which the layman will not even try to comprehend.

averagemong's picture

yeah, the theory is put out there that lowering interest rates stimulates economic activity, however this theory never gets questions. What we see in practice is that lowering rates causes people to try and save more

Berspankme's picture

They only care if it's good for the banks. They don't care about main street

LetThemEatRand's picture

And the bankers know that many retirees will keep their cash in the banks rather than gamble it in the markets.  The people who do gamble in the markets will lose, and the winnings will go to ... the banks.  It's a win-win for the banks.  

BarkingCat's picture

Until people pull their money out and store it in a form of cash at home.

Of course this is why they want to eliminate physical currency.

The building is burning, let's lock the exits.

conraddobler's picture

Maybe the banks should read "How to Win Friends and Influence People"?

BarkingCat's picture

They are already fucking you. 

Why would they want to take you to a movie and dinner now?

MFL8240's picture

They were never intended to help, they were designed for further theft from the central banks to impoverish and steal from the public.

buzzardsluck's picture

The coming depression??  When the fuck did we leave the last one?

MajorFall's picture

One also has to have money and nowadays people  dont..

Irishcyclist's picture

More and more, lenders are loaning money to the government because they're terrified in investing in anything other than government paper.

By investing in government paper, the investor can be assured of a return whereas an investor investing in a company may never get a return.

The investor knows that come hell or high water, the government will move might and mane to ensure that what it borrows it will repay. The investor knows that the goverment collects taxes and these taxes will ensure repayment. The flight to security is taking precedence these days.

Even negative interest rates won't dissuade investors lending to governments. Security, surety of being repaid, is the name of the game in these times.


I'm not saying that I agree with the sentiments of NIRP and investing in that environment.


BarkingCat's picture

Maybe that is what they think, however history is full of government defaults.

100 years ago Argentina was viewed as equivalent to the US.

Look at them now.

In another 100 years the situation might reverse.....maybe in less than 10 US could be worse off than Argentina today.

Doppelganger71's picture

Only thing that needs to come to the U.S. is a strong laxative......................

hongdo's picture

It's easy to explain.  You deposit you money in a savings account (loan the money to the bank).  The bank is free to do what ever it wants with the money.  In dollar amounts, most of what the bank does is invest in derivatives (gamble that a certain financial parameter will go up or down in the future).  If the bank loses the gamble then it must payoff the counter party.  If they don't have enough assets set aside to pay, then they use your deposit (loan) to make the payment since the derivitives have a seniority claim to your deposit (loan).  I guess you get a nice thank you note. 

All they want to do now is have you pay them for you to insure them.  This is how they "look out for your money" - it's the law.


moonmac's picture

Stimulus is great until it ends then great depression begins.

cougar_w's picture

I don't think anyone knows yet what negative rates means. It's the "dark matter" of the financial world; just waaaaay out there.

moonmac's picture
After ZIRP and QE's we now see the destructive consequences of Presidential Affirmative Action.‎
luna_man's picture



Hey!  Hold on boy's...We're going backwards!...Whew, it's the train next to us that's moving.


Thanks, Bill...been there, done that

BarkingCat's picture

you ever do that in your car?

You just pull into a parking space and still have your foot on the brakes when the car next to you starts backing out. It is a freaky feeling...You step on the brakesbrakes even harder but the damn thing is still moving.

It only lasts a couple of seconds but sure gets the heart pumping.


45North1's picture

Tough pill to swallow being coerced into paying rent to use the Government approved tender..


Huh Reeeally's picture

NIRP will certainly encourage people to spend money, just not how the phd'uhs envision. People will pay down debt, buy gold, bitcoin and anything tangible that can be flipped. More cash will be stored at home, watch for sales of home safes to grow as they did in Japan. Helicopter money will hopefully encourage most people to pay down debt and prepare for the inevitable implosion.

We'll spend our money by pulling it out of the banking system, and as the banks collapse the push for cashless or digital money will be intense.

It's all going according to plan.

yardstick's picture

So, if there's a revolution- and the sidelines have bought property - the banks will support any faction that supports land-reform .!

SweetDoug's picture

More and more you hear terms like 'the world is upside down' or 2 + 2 = 5 ? 4.

NIRP is another example.

Truly, we are going insane.

I blame the cultural marxists, the filthy-leftist-liberal-progressives.


SweetDoug's picture

More and more you hear terms like 'the world is upside down' or 2 + 2 = 5 ? 4.

NIRP is another example.

Truly, we are going insane.

I blame the cultural marxists, the filthy-leftist-liberal-progressives.


Umh's picture

Control freaks are their own worst problem.

gregga777's picture

Home many Americans have to be dependent on Food Stamps before the privileged and protected parasites grudgingly admit that the United States of America is mired in Great Depression 2.0? Obviously, 50,000,000 Americans dependent on Food Stamps aren't enough. So how many will it take before they admit what the American People already know? 75,000,000? 100,000,000? 125,000,000? 150,000,000? How about when all of the privileged and protected elites have been overthrown and the survivors are begging for food inside of a concentration camp? Will that be sufficient to open their eyes to reality?

dimwitted economist's picture

There is NO REALITY..

Except what each person SEES..

I see what I Want to SEE

and i don't see what i DON"T Want to see..

Aireannpure's picture

Risk is measured by an interest rate. How can anything have negative risk? Very Clinton-ess.



Jafo's picture

People aren't stupid.  Don't belive the line that they are.  People will do what is in their best interest.  If I have to pay to have my money in a bank and I have debt that is costing me 8% PA (or more) then it is a no brainer that I will pay off the debt.  I get 8% plus the interest charge I am avoiding.  Of course, this is a classic example of "deleaveraging" and if I am not alone in doing this this will cause a dramatic collapse in the money supply but I am sure this occurred to the PhD's that advised the government on this scheme, didn't it?

BarkingCat's picture

I have a HELOC that is Prime minus .41%.

I hope they go with negative interest rates. I will max that fucker out and have Citibank pay me.

Phyz Stacker's picture

There is no reversing our course.  All we can do is prepare our children of the dangers ahead.  I am preparing them with PM's, Alcohol, Firearmes and Tobacco.  Keep Stacking Bitchezzz.

Phyz Stacker's picture

Not necessarily in that order.

gregga777's picture

Generally to compensate one for risk to principal a lender requires a REAL positive interest rate commensurate with that risk. The real interest rate being the difference between to coupon rate and general price inflation. That trillions in Euro, Yen, Swiss Franc, Norwegian Krone, and other government's bonds now have negative rates must mean that there is going to be significant deflation in the very near future. That is, a government bond yielding -0.5% in an environment of -5% deflation will give a very attractive return of 4.5% annually. The only catch is that these same sovereign governments are so indebted that they are already insolvent in an inflationary environment and will be even more insolvent in a deflationary environment. That is the only reason that central banks worldwide are trying to create inflation: they know for a fact that their respective government is insolvent and can only maintain the fiction of solvency by inflating away a portion of their debt annually. By the "rule of 70" (0.70 to be accurate) 2% annual inflation results in a doubling of prices in 35 years (0.70/.02 = 35). But, a 2% deflation rate annually doubles the real value of debts in 35 years. Just imagine the real debt of the United States doubling in 35 years, to more than 200% of 2016's GDP, without adding even one more penny of new debt. It's bad enough to be an unwilling creditor to the government (I.e., Social Security). It's an entirely insane proposition to be a willing lender to that government.