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The World Has Gone Mad and the System Is Broken
The World Has Gone Mad and the System Is Broken
I say these things because:
- Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish. Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations.
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ECB “Whistleblowers” Emerge: Former Central Bankers Cry Out Against Draghi’s Monetary Insanity
ECB “Whistleblowers” Emerge: Former Central Bankers Cry Out Against Draghi’s Monetary Insanity
It’s not just disgruntled CIA officials that have decided the best way to stage a coup is by way of “whistleblowing” – former central bankers are using a similar approach when it comes to the root cause of all of society’s ills: failed central bank policies, and nowhere more so than at the European Central Bank.
On Friday, a group of former senior European central bankers published a memo attacking the unhinged monetary policy of the European Central Bank, which they claim is “based on the wrong diagnosis” and risks ending its independence. Their criticism is in response to a package of massive easing measures announced by the ECB last month, including “open-ended QE” that triggered unprecedented opposition within the top echelons of the central bank, and set up a “resistance” faction within the ECB itself spearheaded by Germany, France and the Netherlands, as it has now emerged that all along Mario Draghi was the central banker of Europe’s insolvent periphery, even as his NIRP policies crushed Europe’s legacy banking system.
The rare public attack on the ECB – in the eyes of the FT – underlined how Christine Lagarde could have a fight on her hands after she takes over from Mario Draghi as president of the bank at the end of this month, when – not if – she decides to loosen monetary policy even more in the face of the eurozone’s mounting economic slowdown.
Commenting on the unprecedented mutiny against the former Goldmanite Mario Draghi, whom the extremely confused socialist elements – desperate for acceptance by some, any echo chamber – have called “legendary” even though it is his policies that have crushed Europe’s working classes, One River CIO Eric Peters said…
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We Finally Understand How Destructive Negative Interest Rates Actually Are
We Finally Understand How Destructive Negative Interest Rates Actually Are
We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.
We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.
Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.
When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.
However, the problems created by negative interest rates do not stop there. In 2008, an influential article describing the economic malaise in Japan after the financial crash of the early 1990s found that instead of calling-in or refusing to refinance existing debts, large Japanese banks kept loans flowing to otherwise insolvent borrowers.
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The Disaster of Negative Interest Rates
The Disaster of Negative Interest Rates
The dollar strengthened against the euro in August, merely in anticipation of the European Central Bank slashing its key interest rate further into negative territory. Investors were fleeing into the dollar, prompting President Trump to tweet on Aug. 30:
The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage… And the Fed does NOTHING!
When the ECB cut its key rate as anticipated, from a negative 0.4% to a negative 0.5%, the president tweeted on Sept. 11:
The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.
And on Sept. 12 he tweeted:
European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!
However, negative interest rates have not been shown to stimulate the economies that have tried them, and they would wreak havoc on the U.S. economy, for reasons unique to the U.S. dollar. The ECB has not gone to negative interest rates to gain an export advantage. It is to keep the European Union from falling apart, something that could happen if the United Kingdom does indeed pull out and Italy follows suit, as it has threatened to do. If what Trump wants is cheap borrowing rates for the U.S. federal government, there is a safer and easier way to get them.
The Real Reason the ECB Has Gone to Negative Interest Rates
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Negative Interest Rates are the Price We Pay for De-Civilization
Negative Interest Rates are the Price We Pay for De-Civilization
Do central bankers really think negative interest rates are rational?
“Calculation Error,” which Bloomberg terminals sometimes display1, is an apt metaphor for the current state of central bank policy. Both Europe and Asia are now awash in $13 trillion worth of negative-yielding sovereign and corporate bonds, and Alan Greenspan suggests negative interest rates soon will arrive in the US. Despite claims by both Mr. Trump and Fed Chair Jerome Powell concerning the health of the American economy, the Fed’s Open Market Committee moved closer to negative territory today — with another quarter-point cut in the Fed Funds rate, below even a measly 2%.
Negative interest rates are just the latest front in the post-2008 era of “extraordinary” monetary policy. They represent a Hail Mary pass from central bankers to stimulate more borrowing and more debt, though there is far more global debt today than in 2007. Stimulus is the assumed goal of all economic policy, both fiscal and monetary. Demand-side stimulus is the mania bequeathed to us by Keynes, or more accurately by his followers. It is the absurd idea, that an economy prospers by consuming and borrowing instead of producing and saving. Negative interest rates turn everything we know about economics upside down.
Under what scenario would anyone lend $1,000 to receive $900 in return at some point in the future? Only when the alternative is to receive $800 back instead, due to the predicted interventions of central banks and governments. Only then would locking in a set rate of capital loss make sense. By “capital loss” I mean just that; when there is no positive interest paid, the principal itself must be consumed. There is no “market” for negative rates.
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The Importance Of A Resilient Life
The Importance Of A Resilient Life
In the end, it will mean all the difference
My business partner Adam and I recently met with a successful business owner whose career began on Wall Street. The kind of guy who should be rooting for the system, because it has treated him well.
Instead, he was quite nervous about the sustainability of the status quo. “Starting in August,” he said, “Maybe it was the Amazon catching fire, maybe it was the negative interest rates – I don’t know for certain what the trigger was – but something has snapped.”
I agree. Because I feel it, too.
As do so many others. And not just those who regularly read PeakProsperity.com. Increasingly, even ‘mainstream’ voices are stating to report a profound sense that something really isn’t right. That — from the economy to geopolitics to the natural world — things are swiftly worsening.
Public perception is beginning to shift from complacency to fear. Countries are fast rejecting globalization in favor of nationalization. The holes in our ecosystem — vanishing birds, insects, amphibians and fish stocks — are becoming frighteningly obvious. The threats to life as we’re accustomed to it are becoming more visible while accelerating in both magnitude and frequency.
I expounded on the danger of this in my recent report It’s the Pace of Change That Kills You. Negative developments can spark their own vicious cycle. The more components of a system that fail, the more at risk the remaining components become.
That report was published just two weeks ago. Since then the world’s largest oil refinery was attacked by hostile forces and knocked out of commission, throwing the future integrity of the global oil market into question. Scientists just announced that North America has lost 29% of its total bird population (a drop of -3 billion) in the past half century.
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How Is Negative Interest Possible?
HOW IS NEGATIVE INTEREST POSSIBLE?
Germany has recently joined Switzerland in the dubious All Negative Club. The interest rate on every government bond, from short to 30 years, is now negative. Many would say “congratulations”, in the belief that this proves their credit risk is … well … umm … negative(?) And anyways, it will let them borrow more to spend on consumption which will stimulate … umm… well… all of the wasteful consumption for which governments are rightly infamous.
While those who are about to borrow may find cause to cheer (as opposed to those who have already borrowed, at higher rates, who are now disadvantaged by this move), the savers are harmed. How can anyone save in an environment where savings has a cost?
John Maynard Keynes called for the “euthanasia of the rentier”. Congratulations, Germany, we say in all sarcastic seriousness. You have gone even beyond Keynes vicious idea. Your rate is now negative!
The Preference of the Savers
Instead of writing more on the destructiveness of this, we want to tackle a different question today. How is this possible? What are the mechanics? Why don’t savers rebel?
We wrote about the Crime of ’33 a few months ago, and it’s worth re-reading before going on. 1933 is when President Roosevelt made the dollar irredeemable. Prior to that, if you didn’t like the interest rate, you could sell the bond and hold gold coins instead. The gold coin has no default risk. And, back then—in the gold standard–it had no price risk.
Today one can own gold, to avoid default risk. This is a big part of why gold is now $1,500. But one takes price risk. And price volatility to be is considered a feature, not a bug, by the gold bugs!
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Negative Interest Rates Threaten the Financial System
Negative Interest Rates Threaten the Financial System
Markets may need to be rebuilt on a new set of assumptions, but we don’t know what those should be or how they would work.
Jim Bianco is the President and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He may have a stake in the areas he writes about.
Former Federal Reserve Chairman Alan Greenspan recently said he wouldn’t be surprised if yields on U.S. bonds turned negative and if they do, it wouldn’t be “that big a of a deal.” That seems to be a sentiment widely held in central banking circles these days, but it’s wrong. Negative interest rates represent a threat to the financial system.
To understand why, let’s start with the existing fractional reserve banking system, which is more than a century old. For every dollar that goes into a bank, some set amount (usually about 10%) must go into a reserve account to be overseen by the central bank. The rest is either lent out or used to buy securities.
In other words, the fractional reserve banking system is leveraged to interest rates. This works when rates are positive. Loans are made and securities bought because they will generate income for the bank. In a negative rate environment, the bank must pay to hold loans and securities. In other words, banks would be punished for providing credit, which is the lifeblood of an economy. As German bankers recently explained to the European Central Bank:
We already have a devastating interest rate situation today, the end of which is unforeseeable,” Peter Schneider, who represents public-sector savings banks in the southern German state of Baden-Wuerttemberg, said on Wednesday. “If the ECB aggravates this course, that would hit not only the entire financial sector hard, but especially savers.
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Lagarde Praises Negative Rates, Study Shows They Reduce Lending
Lagarde Praises Negative Rates, Study Shows They Reduce Lending
Incoming IMF chief Christine Lagarde says negative rates have helped Europe more than they’ve hurt. I disagree.
The nearly always wrong Christine Lagarde is wrong once again.
Today she claims Negative Rates Have Helped Europe More Than They’ve Hurt.
The next head of the European Central Bank, Christine Lagarde, appears to be as much of a fan of negative interest rates as the current chief, Mario Draghi.
European banks have complained about the impact on profitability, but even there the current managing director of the International Monetary Fund defended the move.
“On the one hand, banks may decide to pass the negative deposit rate on to depositors, lowering the interest rates the latter get on their savings,” she wrote. “On the other hand, the same depositors are also consumers, workers, and borrowers. As such they benefit from stronger economic momentum, lower unemployment and lower borrowing costs. All things considered, in the absence of the unconventional monetary policy adopted by the ECB – including the introduction of negative interest rates – euro area citizens would be, overall, worse off.”
Negative Rates Actually Cut Lending
Research shows Negative Rates Actually Cut Lending.
Central banks’ negative interest rates were supposed to increase spending, stop deflation and stimulate the economy. They may have done the exact opposite.
According to research from the University of Bath, central banks charging commercial banks to hold excess cash reserves have actually decreased lending. That’s because the additional costs reduce banks’ profit margins, leading to a drop in loan growth.
“This is a good example of unintended consequences,” said Dr. Ru Xie of the university’s School of Management, one of the study’s authors. “Negative interest rate policy has backfired, particularly in an environment where banks are already struggling with profitability.”
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“Money For Nothing And Growth For Free”: Dutch Considering €50BN Growth Fund Financed With Negative Rate Debt
“Money For Nothing And Growth For Free”: Dutch Considering €50BN Growth Fund Financed With Negative Rate Debt
- The Dutch coalition government is reportedly considering a EUR 50 bn investment fund to support economic growth, to be financed by borrowing at negative rates
- Many details are yet to be determined, but the Netherlands should have sufficient fiscal space to finance additional investment spending on this scale in the years ahead
- This represents a notable shift from the debt-averse political consensus in the Netherlands and it could increase pressure on Germany to use fiscal policy to support growth.
News leaked last week that the Dutch coalition government is considering setting up a fund for investing in economic growth. Details are scarce, but media reports suggest a fund of up to €50 bn that would most likely be announced along with the rest of the Dutch budget in mid-September. It could be financed by borrowing from the market and spent on growth-friendly initiatives in areas such as infrastructure, innovation and education. Policy makers appear keen to capitalize on negative rates along the entire Dutch state yield curve.
Despite potential new borrowing, Dutch state debt levels would still be modest compared to other European countries and below the 60% Maastricht debt limit. The degree to which the fund actually results in additional investment and whether this will help growth, will depend on the governance around it.
From an international perspective, the idea of a government investment fund could impact the debate about the role of fiscal policy in supporting growth, in particular the special role of investment (in contrast to spending on (re-)current items). With limited space for additional ECB stimulus, the central bank has called on countries with available fiscal space to use their budget to support growth. The central bank’s policies have also made negative yields possible, giving governments an opportunity to finance such policies.
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Negative Interest Rates Are Extremely Toxic
Negative Interest Rates Are Extremely Toxic
Jim Bianco, President of Bianco Research, cautions against evermore unconventional monetary policy interventions. He fears that the global slowdown is going to get worse and he spots opportunities in long-term bonds and gold.
The global economy is on the brink: Europe is headed for recession, Japan as well and China’s growth rate is the slowest in almost thirty years. Only the economy in the United States seems to hold up. But for how long?
Mr. Bianco, the summer is basically over and we are heading into the final stretch of the year. What’s ahead for the financial markets in the coming months?
There are two issues at play: First, the trade and currency wars where the situation reminds me somewhat of «This Is Spinal Tap». It’s a cult satire movie from the eighties about a rock band and they coined the phrase «up to eleven» because that’s how high their amplifier went. So the expression «turning it up to eleven» refers to the act of taking something to an extreme. I’m saying this because I think Trump is “going to eleven” on trade: He’s going to turn it up so high that there is going to have to be a deal. That’s the way he wants to do this. He will just make it intolerable so everybody has to sit down and cut a deal.
What’s the other issue?
The inverted yield curve. The three-month/ten-year curve has been inverted since May and this is the market’s way of saying the Federal Funds Rate is too high and must come down. It is interesting how hard everyone is standing on their head to dismiss the yield curve and tell me why it’s different this time.
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The Mechanics of Absurdity
The Mechanics of Absurdity
Over the past few decades, the central banks, including the Federal Reserve (Fed), have relied increasingly on interest rates to help modify economic growth. Interest rate management is their tool of choice because it can be effective and because central banks regulate the supply of money, which directly effects the cost to borrow it. Lower interest rates incentivize borrowers to take on debt and consume while dis-incentivizing savings.
Regrettably, a growing consequence of favoring lower than normal interest rates for prolonged periods is that consumers, companies, and nations grow increasingly indebted as a percentage of their respective income. In many cases, consumption is pulled from the future to the present day. Accordingly, less consumption is needed in the future and a larger portion of income and wealth must be devoted to servicing the accumulated debt as opposed to productive ventures which would otherwise generate income to help pay off the debt.
Today, interest rates are at historically low levels around the globe. Interest rates are negative in Japan and throughout much of Europe. In this article, we expound on the themes laid out in Negative is the New Subprime, to discuss the mechanics of negative-yielding debt as well as the current mindset of investors that invest in negative-yielding debt.
Is invest the right word in describing an asset that when held to maturity guarantees a loss of capital?
Negative Yield Mechanics
Negative yields are not only bestowed upon sovereign debt, as investment grade and even some junk-rated debt in Europe now carry negative yields. Even stranger, Market Watch just wrote about a Danish bank offering consumers’ negative interest rate mortgages (LINK).
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Dead Meat in Jackson Hole
Dead Meat in Jackson Hole
The Pointlessness of Negative Yields
If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.
Not only is the stock of negative-yielding debt at a new record high of almost $17 trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT]
Capital markets, as we have always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk of default over a contracted duration. The acceptance of negative yield is an abstraction that violates the form and function that capital markets are built on. In fact, negative interest rates undermine the foundational business model of banking in general.
How can banks lend money if they’re not compensated for the risk that some loans will go bad? And if banks can only lend money at a loss, why lend money at all? If there is no profit motive, what is the point?
There is currently about $17 trillion in combined government and corporate negative yielding debt in existence. The European Central Bank and the Bank of Japan, with policies of mass money debasement that far exceed those of the Federal Reserve, are the primary culprits. Their fake money and fake interest rates have produced fake capital markets.
In effect, Negative Interest Rate Policy (NIRP) destroys a commercial banks ability to build capital and offset losses. In other words, NIRP destroys commercial banks. By extension, NIRP via central banks leads to the implied nationalization of commercial banks.
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BofA: Central Banks Are Creating Bubbles Instead Of Helping The Economy; The Result Will Be A Disaster
BofA: Central Banks Are Creating Bubbles Instead Of Helping The Economy; The Result Will Be A Disaster
In recent weeks we have seen a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend “to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.” This continued yesterday when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the “Japanese experience”, where negative rates dragged down inflation expectations even more, is ground for NIRP caution.
Then, in an even more bizarre interview with the FT, St Louis Fed president James Bullard made an even more stunning admission – that the Fed no longer has any idea what is going on. To wit:
“Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing… We just have to stop thinking that next year things are going to be normal.”
There was more. In a series of questions aimed at the Fed in this post-Jackson Hole powerless reality, we brought you some rhetorical fireworks from the head of FX at Deutsche Bank, Alan Ruskin, who lashed out at the central bank with 20 questions, technically statements, that 10 years ago would have branded him a tinfoil-wearing conspiracy theorist (we know, because we asked just these questions back in 2009), among which:
- “Will the Fed/ECB buy equities/ETFs? How far are central banks willing to distort underlying value, or is distorting value intrinsic to Central Banking as per the Austrian critique?”
- “How much are Central Banks going to be complicit in a collapse in fiscal standards, by buying public sector assets? Will a passive Central bank simply accommodate and facilitate fiscal actions related to MMT?”
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