Modern Finance: I’ll be gone, you’ll be gone
In his book Other People’s Money: The Real Business of Finance, author John Kay quotes Lord Keynes’s idiom, “Madmen in authority, who hear voices in the air, are generally distilling their frenzy from some academic scribbler of a few years back.” The men and women with authority over monetary matters are indeed mad. Mad enough to see interest rates, not as pricing the present versus the future, after all, the idea that a dollar today is worth more than a dollar in the future is axiomatic.
No, the Fed’s crystal ball sees lenders paying for the privilege of going without the present use of their money so the largest debtor in history can continue to operate. In the just released “2016 Supervisory Scenarios for Annual Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule” the Fed, in its Severe Adverse Scenario, foresees,
As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario. For the purposes of this scenario, it is assumed that the adjustment to negative short-term interest rates proceeds with no additional financial market disruptions. The 10-year Treasury yield drops to about ¼ percent in the first quarter of 2016…
Really, rates going negative would mean “no additional financial market disruptions?” In a world with somewhere between $700 trillion and $1.2 quadrillion in derivatives exposure nothing out of the ordinary would happen? Some will pooh pooh the big numbers because on a net basis the exposure isn’t even close to 1000 times 1.2 trillion. But, as Zero Hedge explains, “net immediately becomes gross when just one counterparty in the collateral chains fails – case in point, the Lehman and AIG failures and the resulting scramble to bailout the entire world which cost trillions in taxpayer funds.”
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