Eric Sprott: The Financial System’s Death Knell?

Tyler Durden's picture

From Eric Sprott And David Baker  (previously more on the topic from Zero Hedge: Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP)


NIRP: The Financial System’s Death Knell?

On July 18th, 2012, the German government sold US$5.13 billion worth of 2-year bonds at an average yield of -0.06%. Please note the negative symbol in front of that yield number. What this means is that the German government was able to borrow money for less than nothing. When those specific bonds expire in two years’ time, the German government will pay back the original $5.13 billion minus 0.06%. Expressed another way, investors knowingly and willingly bid the German government $5.13 billion in exchange for bonds that will pay no interest and are guaranteed to lose them money on expiration.1 Welcome to the new status quo.

Germany is not alone. Over the past six months, the countries of Netherlands, Switzerland and France have also issued short-term government debt at negative yields. Like Germany, they’ve been able to do this because European bond investors are so shell shocked that they’d rather park money in a bond that’s guaranteed to only lose a miniscule amount rather than risk losing more in a PIIGS bond that actually pays some interest. In addition, many investors view German, French and Dutch bonds to be cheap options on the break-up of the Eurozone. If the EU currency union collapses, euro-denominated bonds issued by those specific countries may be paid back in re-issued deutschmarks, francs or guilders, which will be far more valuable than the euros that were spent to buy the bonds in the first place… or at least that’s the idea. As a result of this thinking, the bond market auctions for these select countries have seen overwhelming demand, making NIRP (Negative Interest Rate Policy) the new ZIRP (Zero Interest Rate Policy).

The NIRP acronym is misleading, however, because unlike ZIRP, NIRP isn’t actually an official “policy” per se, but rather a symptom of a broken financial system increasingly starved for good ‘collateral’. Aside from those speculating on a Eurozone currency collapse, a large portion of the bond investors participating in NIRP bond auctions are the banks. As the euro crisis has dragged on, banks in perceived “strong” countries like Germany and Switzerland have seen record inflows of deposits from banks in peripheral EU countries, like Spain. As most of these “strong country” banks have been hesitant to lend those deposits out (for obvious reasons), they are forced to park them in short-term government bonds. Moreover, new rules imposed by various regulators such as Basel III have forced all banks to hold a larger percentage of their balance sheet in government bonds, regardless of their country of domicile. The result has been a mad dash into the bond auctions of select “safe” countries just as the pool of available AAA-bonds has been drastically reduced. Banks are piling into NIRP bond auctions today because they have nowhere else to go. This is why nobody seems to be alarmed by the recent ubiquity of NIRP bond auctions – they are merely thought to be a short term phenomenon that will pass in time… just like zero-percent interest rates were supposed to be when they were widely introduced four years ago (sigh).

NIRP is different than ZIRP, however. NIRP causes outright financial destruction. Economies can hardly survive extended periods of ZIRP rates, let alone survive a long-term NIRP environment. It just doesn’t work. Institutional investors like pension plans and life insurance companies cannot earn enough “spread” to function properly. And many aren’t allowed to buy different asset classes that might produce a better “spread”, even if they wanted to. They are stuck holding the AAA government debt issuers – positive-yield, or not.

Negative rates also punish the individual investor. Try going online and using one of the banks’ retirement savings simulators and plugging in a negative expected return – you’ll break the program. The same also goes for the investment advisory business. When so-called safe-haven bonds start to consistently produce a negative return, try charging advisory fees to clients while recommending a 50% allocation to negative-yielding government debt. Advisors can try it for a while, but investors won’t put up with it for long.

The recent emergence of NIRP auctions are a signal that the relationship between governments, banks and investors has broken down. While the market still presumes that NIRP is a short-term phenomenon confined primarily to Europe, the dearth of AAA-assets coupled with banks’ captive bond purchasing suggests it may be structurally enforced for a long time to come. There’s even the potential for NIRP to emerge in the US bond market. As Bloomberg reports, the gap between US bank deposits and loans hit a record $1.77 trillion at the end of July 2012, representing an expansion of 15% since May.2 “Banks have already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion purchased in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.”3 The current 2-year US Treasury bill is yielding a paltry 0.29%. If something exciting happens in Europe, what’s to stop the bond market’s typical knee-jerk move into US Treasuries from pushing that yield down past zero? Not much. We could be there before the end of the year, especially if the banks continue to gorge on ongoing US Treasury auctions in the meantime.

The question now is how well the financial system can cope in a relentless low-to-no yield environment for bonds. The last four years of low rates have already wreaked much damage to ‘spread’-dependent industries. One need only look at the insurers: In its latest Q2 report, after reporting an 88% drop in Q2 year-over-year earnings, Sun Life Financial stated that if current interest rates persist its profits for the period from 2013 to 2015 could be hurt by up to CAD$500 million.4 Manulife recently reported a Q2 loss of CAD$300 million, which was mainly attributed to a CAD$677 million charge it took to revalue long-term investment assumptions to account for falling bond yields.5

The pension plans are also deteriorating: According to recent reports from BNY Mellon and Mercer, the funded status of US corporate pension plans hit a record low in July 2012. Benefits Canada writes, “The average funded status dropped 2.9 percentage points to 68.7%… while the latest figures from Mercer show that the aggregate deficit in pension plans sponsored by S&P 1500 companies grew US$146 billion during July, to a record high of US$689 billion.”6 That’s a one-month increase of 27%.7 In the pension business, lower yields on long-term AAA bonds results in higher plan liabilities, plain and simple. As Reuters reporter Jim Saft writes, “To give an idea of exactly how powerful the effect of falling rates is on pension liabilities, consider that, according to Mercer, though US shares rose 1.4 percent in July, the 30-55 basis point fall in discount rates drove an increase in liability of between 3 and 11 percent. In a single month.”8

It’s even worse for the public pensions. According to the Washington Post, new pension accounting rules imposed by bond-rating firm Moody’s are expected to “triple the gap between what states and municipalities report they have in their funds and what they have promised to pay out retirees.”9 If implemented, that new public pension gap will balloon to $2.2 trillion. Michael Fletcher from the Washington Post writes, “Among other things, the new accounting rules from Moody’s and the Governmental Accounting Standards Board (GASB) limit the rate of return on future investments that pension funds can assume for accounting purposes. Most government pension funds assume a 7 percent to 8 percent return, which critics say overstates future investment income.”10 With the US 10-year bond now paying less than 2% a year, assuming a 7-8% return isn’t an overstatement, it’s a fantasy. Chart 1 shows how the last four years of low-to-no rates has impacted the average Canadian pension plan. Extend that trend another four years and we might as well redefine the entire purpose of pensions altogether.


a. Solvency position is equal to assets divided by liabilities.
Source: Mercer (Canada) Limited. Last observation: May 2012.

Banks are also suffering from NIRP and ZIRP, as evidenced by the performance of Wall Street’s five biggest banks thus far in 2012. Bloomberg writes, “JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion in 2008. The firms blamed the decline on low interest rates and a drop in trading and deal-making.”11 (Emphasis ours.) Banks make money on the spread between the interest they charge on loans and the interest they pay on our deposits (this is called the net-interest margin). Chart 2 shows the impact low rates have had on the net-interest margin for the Big 6 Canadian banks, and how tightly correlated their profits are to bond yields themselves. The average net-interest margin for the Big 6 was 2.55% in fiscal Q2 2012, while the average yield on the Canadian 5-year Treasury bond was 1.54%. According to our calculations, for every 100 basis point decline in the 5-year Treasury yield, the Banks’ net-interest margin will fall roughly 20 basis points. All else equal, a 1% drop in 5-year bond yields will result in a -15.6% impact on the banks’ net income. Like the insurers, the persistence of low bond yields hurts their profit margins… and the more deposits the banks take on, the more they are inadvertently forced to participate in short-term bond auctions – thereby supporting the very market causing the margin compression in the first place. It’s a vicious catch-22.


Source: Bloomberg, Big 6 Canadian Banks’ Financial Reports.

From a government perspective – especially governments like Germany who currently issue short-term debt for less than nothing, the current abundance of NIRP and ZIRP bond auctions represent a sweet irony. Here we are, on the interminable verge of collapse in Europe, and at a time when Western governments have never been more indebted, and bond investors are lining up to pay for the pleasure of owning their bond paper! It’s actually quite ridiculous. But no matter how much pain the current low-to-no yield environment causes the rest of the financial industry, governments will not do anything to change their current set-up. No government is incentivized to proactively raise their bond auction yields for the sake of savers, and barring the surprise emergence of major inflation, no central bank would ever raise interest rates and risk curtailing their expensive efforts to foster growth through money-printing. The banks’ continuing need for safe “collateral” means they’ll buy government bonds at virtually any price, leaving the governments with a “captive” buyer for their bonds. It’s almost perfect for the governments… and as it now stands, unless the banking system diversifies into different forms of AAA-collateral (like gold), or until we experience a default or major inflation – both clearly negative events, investors will be forced to survive with a AAA-bond market that pays absolutely nothing, just like Japanese investors have suffered through for the past twenty years.

Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.

Although it’s been a quiet summer for “hard assets” like gold and silver, this low-to-no rate environment should prove to be beneficial for them over time. The tide is definitely turning in their favour. Various bond commentators have recently come out in support of hard assets, including PIMCO’s Bill Gross, who opined in his August month-end letter that, “Unfair as it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.”12 NIRP and ZIRP are critical components of that solution, and are here to stay until something unpredictable disrupts the current relationship between the banks and government bond auctions. In our view, the factors that have led to the emergence of NIRP bond auctions are the same factors that will drive demand for physical gold in the coming months: savers have nowhere to go for a “safe” return. It’s only a matter of time before they realize they’ve overlooked a unique financial asset that would perfectly suit their needs. When they do, we would strongly advise them to take delivery.

a. Solvency position is equal to assets divided by liabilities.
Source: Mercer (Canada) Limited. Last observation: May 2012. 

1 Bartha, Emese and Chaturvedi, Neelabh (July 18, 2012) “Negative Yield on German 2-Year Note”. Wall Street Journal. Retrieved on August 8, 2012 from:
2 Eddings, Cordell and Kruger, Daniel (August 20, 2012) “Banks Use $1.77 Trillion to Double Treasury Purchases”. Bloomberg. Retrieved on August 20, 2012 from:
4 Perkins, Tara (August 8, 2012) “Sun Life hammered by markets, low rates”. The Globe and Mail. Retrieved on August 10, 2012 from:
5 Reuters (August 10, 2012) “Manulife takes loss, to revisit profit target”. Reuters. Retrieved on August 12, 2012 from:
6 Benefits Canada (August 3, 2012) “U.S. pensions hit all-time funding low”. Benefits Canada. Retrieved August 5, 2012 from:
7 Mercer (August 3, 2012) “US Corporate Pension Plans’ Funding Deficit Reaches All-Time High”. Mercer. Retrieved on August 21, 2012 from:
8 Saft, Jim (August 14, 2012) “Negative rates and pension pain”. Reuters. Retrieved August 14, 2012 from:
9 Fletcher, Michael (August 16, 2012) “New rules expose bigger funding gaps for public pensions”. The Washington Post. Retrieved on August 16, 2012 from:
10 Ibid.
11 Eddings, Cordell and Kruger, Daniel (August 20, 2012) “Banks Use $1.77 Trillion to Double Treasury Purchases”. Bloomberg. Retrieved on August 20, 2012 from:

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spinone's picture

As long as OPEC only takes dollars for oil, no worries.

Careless Whisper's picture

The Careless Whisper News Update & Threadjacking


HIDDEN IN PLAIN VIEW: Senior ATF'er Who Oversaw Fast 'N Furious Gun Running Op Was On JPMorgan Payroll While At ATF

No One Is Defaulting On Their Car Loans,0,4649735.story




markar's picture

Jesus, is there any fraud, theft, or scandal that doesn't have JPM's fingerprints on it?

Bay of Pigs's picture

No, they are the biggest crooks to ever walk the Earth.

JPM's derivatives book dwarfs everything else in the market. It's a fucking Clown Show.

Al Gorerhythm's picture

The mutual funds, superannuation accounts, segregated customer accounts and other retirement and savings funds held at banks, are being used to  backdoor your savings to the government and their partners in crime, under the guise of "investing" the money in "Investment Grade Bonds". 

This is as weird as it gets; investment managers knowingly booking a loss for their usually captured clients. They're not even taking the risk in speculation! They are knowingly taking a loss and they are knowingly making bets with client funds for the purpose of transfering the funds "legitimately"  as a loss.This was a known outcome and it is just incredulousness that keeps people from admitting to the utter pevasiveness of the scam.

EDIT: And here's how your money is spent

TruthInSunshine's picture

The more The Bernank robs savings, the more aggregate demand is destroyed.

The Bernank will be amenable to report economic expansion as a result of inflation rather than increasing productivity, activity or demand/consumption (i.e. purchasing).


If real private sector consumption falls by 10% over the next 5 years but real inflation runs at 20% during the same period, The Bernank's okay with that.

It's all a numbers racket.

DoChenRollingBearing's picture

Antal Fekete has written on what would likely happen if gold goes into backwardation.


Would NIRP be the equivalent of money going into backwardation?  Or the opposite?  Real question...

The Big Ching-aso's picture



Hate 2 break it 2 Sprott but this knell has been dead 4 quite awhile now.  Think A Weekend at Bennie's.

A L I E N's picture

Speaking of silver man Sprott, are the rumors true that london has defaulted on two large silver deliveries?

CrazyCooter's picture

DCR, I have been thinking for a while that an actual NIRP policy, if it is established directly by banks (not indirectly through inflation) would simply blow the system up. As soon as this happens, people will just pull their cash, stuff it in a safe deposit box, and enforce the asymptope of ZERO on interest rates. This would collapse the banking system in short order.

I do not think NIRP can be an official policy, at least in out right monthly bank statements. It is happening in Europe because of capital looking for a house to stay in that doesn't have a pimp running it ... different situation entirely ...

I will now RTFA ...



new game's picture


neg int rate option

not a policy

but an option chosen by situation.

whether prudent or not, these fuckin tools do it because, well they are tools...

just don't look good no matter how  much you smoke.

wish think hopium, then disgust/rebellion, then outright hate/death.

logical disorder to come...

Debt-Is-Not-Money's picture

NIRO fiddled while the world burns!

Element's picture

However ... MMT/Keynesianism says bond market auctions are irrelevant and out-moded, as the local sovereign big-banana and printer-in-chief can issue and buy any bonds, any time, at any rates, for any reason, or none at all, and roll it again - with zero constraints.

wot? ... no! .... no, they really believe this is how it'll work, long-term!

eh? ... sectioned? ... well maybe ... but you'll need a lot of wards, as Washington and the US Federal Reserve is full of them.

_underscore's picture

Yes, that funny thought occured to me too. Since you're getting less fiat back, than the 'spot' price (i.e. the same amount denominally, although less ambient inflation) expected then, it would seem that you're giving up any 'gain' for the certainty of getting most of (whatever the NIRP element is)  your capital back. That's quite a sobering thought - you're paying for the safe-keeping of fiat, rather than looking to get a return.

In a normal world, the usual contango would be expected (like when I used to deposit fiat & a get a real-ish return, even accounting for inflation) - all this seems to me to be incredibly bullish for PMs, because it can't be debased or at risk (as the above might imply) of counterparty default.


blunderdog's picture

Technically, "money" is (and has ALWAYS been) in backwardation.  A dollar today has always been worth more thana dollar tomorrow.


BigJim's picture

 ...EDIT: And here's how your money is spent

Ah, monarchy... such a dignified expression of humanitys' 'need' to be governed

TheSilverJournal's picture

Why get we just become uber successful by continuing to encourage consumptions and discourage productions to the max? These leaders just don't get it, the more we demand, the more that will magically appear.


SwingForce's picture

The FDIC has 0.0000003% available, get in line early like you did for your iphone at best buy.


DoChenRollingBearing's picture

Driving home this evening I found that my bank's ATM was not working...  Now every time that happens I wonder..., has it started?

LMAOLORI's picture



But they have the full faith and credit of the U.S. Government ROFLMAO



"Per the Q4 2011 FDIC Chief Financial Officer's report to the Board, published on March 30, 2012, the FDIC's Deposit Insurance Fund had a balance of $11.8 billion dollars"


Bank deposits in the United States at the same time are estimated to be between $8 TRILLION and $10 TRILLION. Let's be conservative and say the number is $8TTT.

11,800,000,000 divided by 8,000,000,000,000 equals 0.001475, which I will round UP to 0.0015.

That is read as "fifteen hundredths of one percent". It isn't one percent, it is fifteen hundredths of one percent. That is how much the FDIC is carrying to back all of those little signs on the teller windows that say "Each Depositor insured to at least $250,000. Backed by the full faith and credit of the United States government."

But hey! It could be worse! Back in 2009 the FDIC was completely insolvent - IN THE HOLE. So what they did was to force all of the banks to pay three years worth of premiums upfront in one year, in order to replenish the fund.

Now, let's review some other statistics as of June 30, 2011:

JP Morgan: 
Total Assets $1.8 TTT 
Total Derivatives Exposure: $78 TTT

Total Assets: $1.2 TTT 
Total Derivatives Exposure: $56 TTT

Bank of America: 
Total Assets: $1.4 TTT 
Total Derivatives Exposure: $53 TTT

Top 25 commercial banks: 
Total Assets: $8.3 TTT 
Total Derivatives exposure: $249 TTT

in full


Low Interest Rates Have Impoverished Savers While Enriching Large Corporations

How Safe is My FDIC-Insured Bank Account?


Imminent Crucible's picture

Silve thru 30, yes. And the point & figure chart plots "bullish price objective $58."

$58 silver might be an indicator that things are getting out of hand. Ben Bernanke: "Trust us. We do know what we're doing."

Ray1968's picture

Woot... Time for a CME margin hike!

pashley1411's picture

Well, I went back and checked closely, and I see no mention of JPM at the crucifixtion.

Oops, where did the 30 silver coins come from?

LMAOLORI's picture




"pashley1411 Oops, where did the 30 silver coins come from?"  (hahahaha priceless)


Answer - The Fed


Did Fed telegraph QE3 at last meeting?

Angus McHugepenis's picture

It's almost to the point where you would welcome their finger prints all over you, instead of the giant mastadon cock up your (our) asses.

bentaxle's picture

Yep, which is the odd one out? CIA, FBI, JPM, NSA?

NoClueSneaker's picture

Jupp, those with GoldmanSux fingerprints on ....

greyghost's picture

careless......welcome to the new home of the present...your car! nuff said

bigdumbnugly's picture

that looks like it might be changing soon.

nope-1004's picture

Anyone know what news caused PM's to spike in the after market?


Al Gorerhythm's picture

Greece is going to be saved, I (dis)believe

SwingForce's picture

I don't agree or disagree with the word "saved". I disagree with who you are calling Greece. Not its citizens, certainly, none are being consulted as how to rebuild their economy. "Greece" means Bankster LEECHES empowered by treasonous politicians, who have sold the Country to the Devil 2 years ago. There's no trickle down to the citizens or the economy- it ALL goes to the BONDHOLDERZ ( aka the crooks who hold the debt that will never be defaulted on by the OTHER banksterz).

The old version of Greece has long ago sold the naming rights to their country to Goldman, and that's who's doing the old left pocket pays the right pocket scheme of "bailouts". Ha. 

guidoamm's picture


It is true the people are not consulted because it is true that it is not the people that are meant to be saved.

Nonetheless, as evidenced by any news story you care to read reporting interviews with people on the ground living through this economic disaster, even if they were asked, Greeks, like Italians, Spaniards or Portuguese or any other people, are still asking for the government to provide jobs.

This of course, is the result of decades of deliberate manipulation of the academic curriculum whereby government presents itself as the protector and the solution to crisis thus ensuring its own expansion at the expense of society. Hence the depletion of savings on the promise that government has your back in healthcare and retirement.

Most people are conditioned to believe that government is the solution to improve their life. Even if asked, people would require government appropriate funds to "create" jobs.



BigJim's picture

Drop in USDX, I reckon... pure inverse dollar thang, baby

spinone's picture

OPEC will accept Chinese protection and ditch the US? Bullshit.

rich_wicks's picture

Why would OPEC want to allign themselves with the United States?

So the US can drop bombs on them, and stab their former allies in the back?

The US has overthrown the Iranian Democracy, it helped start the 8 year war between Iran and Iraq, it keeps funding Israel a nation of visciously racist nuclear armed lunatics, and the only thing the US government gives them for all this trouble is a bunch of money based on a debt that is soon going to be 16 trillion dollars when the US government makes less than 2.56 trillion dollars a year to support that entire debt.

BigJim's picture

The Arab OPEC countries' people may have no love for 'King Dollar' - but that is why we, the US, support their unpopular governments. In fact, the more unpopular (within reason) they are, the better for us; that way they need us more.

It's a mutual benefit thing - they keep the oil flowing for dollars, and we keep their elites in power.

rich_wicks's picture

A good part of the reason their governments are so unpopular is that they have aligned themselves with the United States and Israel.

You did identify mutual benefit and what is going on.

What you fail to see is that OPEC countries can very easily keep the oil flowing and get something other than dollars for doing it.

Almost Solvent's picture

OPEC countries can very easily keep the oil flowing and get something other than dollars for doing it.

And find out very quickly that those US military bases are all over there for a reason. Regime change will come very quickly for those OPEC countries that stop accepting $$$ for oil.

Harbanger's picture
US Oil Imports by Country

Most of the imported US oil comes from Canada and Mexico.  I expect that trend to continue.

dick cheneys ghost's picture

Who nose?


The Saudi's probably love exchanging their oil for paper

oddjob's picture

Sucks being the last to know. Get over it.

cranky-old-geezer's picture



They have much better understanding of what's about to happen to USD than you do.