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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.

 …click on the above link to read the rest of the article…

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!

 …click on the above link to read the rest of the article…

More on the puzzle of negative interest rates

More on the puzzle of negative interest rates

Interest rates on many bonds have plunged into negative territory. But why on earth would anyone be willing to save $1000 only to get $999 in the future? Saving up for a rainy day has always gone hand in hand with a positive interest rate, not a negative one.

In my last post I showed how negative real return on saving could emerge. I invoked a certain type of a economy – a dystopic island where castaways like Robinson Crusoe live. The island’s few meagre opportunities to invest have dried up. Technological advancement has halted. To prepare for his retirement Robinson Crusoe stores coconuts, but the constant assault from rodents and insects meant that he’d end up with less resources than he started with.

Crusoe and other castaways his age can also prepare for old age by lending resources to the island’s younger generation. But if the young are dying out, then the much larger cohort of older islanders will have to offer the few remaining young a lower – even negative – interest rate to coax them to borrow.

A tale of two interest rates

Our world is certainly experiencing many problems. But it doesn’t seem to correspond to the grim reality of a decaying Robinson Crusoe world. Sure, we are getting older and having fewer kids. But it’s hard to argue that technological advancement has ground to a halt or that projects are so non-productive that we are content to earn 0%.

For evidence, take a look at a chart of the rate of return on U.S. business capital:

 …click on the above link to read the rest of the article…

History Being Made: Negative Rates, Fake Markets, & The Imminent “Daily Liquidity” Crisis

History Being Made: Negative Rates, Fake Markets, & The Imminent “Daily Liquidity” Crisis

Transformational  Markets: History Being Made​​

No-Bond World And The Risk Of A Daily Liquidity Crisis

Rates hit new lows this month. Symbolically, the 50-year swap rate in Europe dived into negative territory. Bonds as an asset class are in extinction, a major shift in modern finance as we know it, inadvertently turning ‘balanced portfolios’ into ‘long-equity portfolios’. The ‘nocebo effect’ of enduring negative interest rates is such that negative rates are deflationary, hence self-defeating. Meanwhile, they have potent unintended consequences for systemic risk, which spreads around, leading the market into an historical trap. A ‘Daily Liquidity Crisis’ may result. All the while as markets get off the sugar rush of Trump rate cuts, and Europe has his banking sector at risk of implosion.

History Being Made

It must be a great thing to witness history being made during the span of your career, to find yourself in a market where so much happens for the first time in the history of finance, and close to everything else is at an extreme over the past decade. Nothing much is left around us which is trading regularly, or around historical averages.

In no particular order: the whole of the US interest rate curve dropped below 2% in mid-August, for the first time in history. The whole of the German interest rate curve dropped below zero. The Swiss, Swedish, Japanese curves are also negative for their entirety or whereabouts. The 10yr Swiss government bond yields a mind-blowing -1.2%, a sure bet to make no less than 12% in capital losses by maturity. Peripheral Europe joined in: the 10yr Portugal government bond is close to 0% yield now, about to dive in negative land too.

 …click on the above link to read the rest of the article…

How Negative Interest Rates Screw Up the Economy

How Negative Interest Rates Screw Up the Economy

Now they’re clamoring for this NIRP absurdity in the US. How will this end?

Now there is talk everywhere that the United States too will descend into negative interest rates. And there are people on Wall Street and in the media that are hyping this absurd condition where government bonds and perhaps even corporate bonds, and eventually even junk bonds have negative yields. All of that NIRP absurdity is already the case in Europe and Japan.

There is now about $17 trillion – trillion with a T – in negative yielding debt in the world, government and corporate debt combined.

This started out as a short-term emergency experiment. And now this short-term emergency experiment has become the new normal. And now more short-term emergency experiments need to be added to it, because, you know, the first batches weren’t big enough and haven’t worked, or have stopped working, or more realistically, have screwed things up so badly that nothing works anymore.

So how will this end?

The ECB rumor mill over the past two weeks hyped the possibility of a shock-and-awe stimulus package, on top of the shock-and-awe stimulus packages the ECB has already implemented, namely negative interest rates, liquidity facilities, and QE.

The entire German government bond market, even 30-year bonds have negative yields. And the German economy shrank in the last quarter. That gives Germany two out of the last four quarters where its economy shrank – despite negative interest rates from the ECB and despite the negative yields on its government bonds, and despite the negative yields among many corporate bonds.

In other words, the German economy, the fourth largest in the world, is hitting the skids despite or because of negative yields. And now the ECB wants to flex its muscles to get yields to become even more negative.

 …click on the above link to read the rest of the article…

12 Reasons Why Negative Rates Will Devastate The World

12 Reasons Why Negative Rates Will Devastate The World

It has been a thesis over 20 years in the making, but with every passing day, SocGen’s Albert Edwards – who first coined the term “Ice Age” to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity – is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.

Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan’s great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a “Japanification” of every major bond market…

… Edwards said that what bond markets are telling us is “that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high.”

Needless to say that’s not good, not least of all because we now live in a world in which the bond universe with negative yields continued to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion…

… rising  significantly above the previous mid-2016 record high of around $12.2tr. The expansion of the universe of negatively yielding bonds as a percentage of total is shown below: as of the last week, this proportion increased further to around 30.0%, above the mid-2016 record high of 25.8%.

 …click on the above link to read the rest of the article…

IMF Recommends “DEEP” Negative Interest Rates as the Next Tool

IMF Recommends “DEEP” Negative Interest Rates as the Next Tool 

The IMF has continued to assume that the zero-bound on interest rates can be a serious obstacle for fighting recessions on the part of the central banks. The IMF maintains that the zero-bound is not a law of nature; it is a policy choice. The latest in the IMF papers argue that tools are available to allow central banks to create deep negative rates whenever needed to reverse recessions. They claim that maintaining the power of monetary policy in the future to end recessions within a short time will require deep negative interest rates.

It is really quite astonishing how these people with NO REAL-WORLD EXPERIENCE keep trying to maintain the Marxist-Keynesian theory when more than 10 years of negative interest rates have failed.  This is the same theory that dominated medicine for so long. They assumed there was a toxin in the blood, so the cure was to bleed you. If you died, they assumed the reason was that they did not bleed you sooner.

These idiots fail to comprehend that negative interest rates have wiped out pensions. The instruction manual for life was to save for your retirement to be able to live off the interest of your savings. The problem was, those days were based on 8% interest rates. Moving negative will not force people to spend, it merely bankrupts the people.

Nothing Is Guaranteed

Nothing Is Guaranteed

There are no guarantees, no matter how monumental the hubris and confidence.

The American lifestyle and economy depend on a vast number of implicit guarantees— systemic forms of entitlement that we implicitly feel are our birthright.

Chief among these implicit entitlements is the Federal Reserve can always “save the day”: the Fed has the tools to escape either an inflationary spiral or a deflationary collapse.

But there are no guarantees this is actually true. In either an inflationary spiral or deflationary collapse of self-reinforcing defaults, the Fed’s “save” would destroy the economy, which is now so fragile that any increase in interest rates (to rescue us from an inflationary spiral) would destroy our completely debt-dependent economy: were mortgage rates to climb back to historical averages, the housing bubble would immediately implode.Hello negative wealth effect, as every homeowner watches their temporary (and illusory) “wealth” dissipate before their eyes.

The Fed’s “fix” to deflationary defaults is equally destructive: bailing out too big to fail lenders will spark a political revolt that could topple the Fed itself, as the populace has finally connected the dots between the Fed bailing out the banks and financiers and the astounding rise in income and wealth inequality.

Other than the phantom “wealth” of real estate and stock bubbles, the vast majority of the ‘wealth” generated by the Fed’s actions of the past 20 years has flowed to the top 0.1%. This will become self-evident once the phantom gains of speculative bubbles vanish.

The Fed’s other “trick” to halt a deflationary collapse is negative interest rates, in effect taxing savers and those holding cash and rewarding those who borrow.Negative interest rates destroy every institution that depends on relatively low-risk interest income via bonds: pension funds, insurance companies, etc.

 …click on the above link to read the rest of the article…

Can the EU Survive the Next Financial Crisis?

Can the EU Survive the Next Financial Crisis?

Despite the ECB’s subsidy of the Eurozone’s banking system, it remains in a sleepwalking state similar to the non-financial, non-crony-capitalist zombified economy. Gone are the heady days of investment banking. There is now a legacy of derivatives and regulators’ fines. Technology has made the over-extended branch network, typical of a European retail bank, a costly white elephant. The market for emptying bank buildings in the towns and villages throughout Europe must be dire, a source of under-provisioned losses. On top of this, the ECB’s interest rate policy has led to lending margins becoming paper-thin. 

A negative deposit rate of 0.4% at the ECB has led to negative wholesale (Euribor) money market rates along the yield curve to at least 12 months. This has allowed French banks, for example, to fund Italian government bond positions, stripping out 33 basis points on a “riskless” one-year bond. It’s the peak of collapsed lending margins when even the hare-brained can see the risk is greater than the reward, whatever the regulator says. The entire yield curve is considerably lower than Italian risk implies it should be, given its existing debt obligations, with 10-year Italian government bonds yielding only 2.55%. That’s less than equivalent US Treasuries, the global risk-free standard.

Government bond yields have been and remain considerably reduced through the ECB’s interest rate suppression and its bond-buying programs. The expansion of Eurozone government debt since the Lehman crisis has been about 50% to €9.69 trillion. This expansion, representing €3.1 trillion, compares with the expansion of the Eurosystem’s own balance sheet of €2.8 trillion since 2009. In other words, the expansion of Eurozone government debt has been nearly matched by the ECB’s monetary creation.

 …click on the above link to read the rest of the article…

Over $10 Trillion In Debt Now Has A Negative Yield

Over $10 Trillion In Debt Now Has A Negative Yield

NIRP is back.

On Friday, when Germany reported disastrous mfg and service PMI prints, the 10Y German Bund finally threw in the towel, with the yield sliding back under zero for the first time in three years. When that happened, and when the 3M-10Y yield curve inverted in the US right around that time, just over $400 billion in global debt changed the sign on its yield from positive to negative.

As a result, the total notional of global negative yielding debt soared on Friday, rising above $10 trillion for the first time Since September 2017, and which according to Bloomberg has intensified “the conundrum for investors hungry for returns while fretting the brewing economic slowdown.”

Paradoxically, the amount of negative-yielding debt has nearly doubled in just six months, and confirms that the global asset bubble is back because as Gary Kirk, a founding partner at London-based TwentyFour Asset Management, said “money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing.”

“This obviously tempts those investors holding cash to move along the maturity curve — or down the rating curve — to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”

Despite the Fed’s renewed herding of investors into the riskiest assets, Kirk is so far “resisting the temptation” to snap up longer-dated credit obligations that will be the first to default when the next recession hits, and prefers duration bets in interest-rate markets.

Others won’t be so lucky: as we noted last Friday, the ‘reverse rotation’, or flood into fixed income instruments, is accelerating and fund flows confirmed the fresh panic for yield just as the specter of QE4 returns as investors in the latest week parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to EPFR data.

 …click on the above link to read the rest of the article…

The Super Wealthy Are Already Preparing For NIRP and Worse

The Super Wealthy Are Already Preparing For NIRP and Worse

The Global Elite are preparing for Negative Interest Rate Policy (NIRP) and Wealth Grabs.

How do I know?

They’re moving their money into physical cash.

Physical cash represents one of the rare loopholes in our current financial system. When money is in actual physical cash it can’t be charged interest by a bank engaged in NIRP. It’s also much easier to hide from the Political Class intent of imposing wealth taxes and other capital grabs.

With that in mind, consider that the number of $100 bills in circulation has DOUBLED since 2008. In fact, there are now MORE $100 bills that $1 bills in the financial system.

The number of outstanding U.S. $100 bills has doubled since the financial crisis, with more than 12 billion of them across the world, according to the latest data from the Federal Reserve. C-notes have passed $1 bills in circulation, Deutsche Bank chief international economist Torsten Slok said in a note to clients this week.

Source: CNBC

Let’s be blunt here, the folks who have a lot of money to hide are usually the ones with the best connections to the elites.

As a result, they typically know what is coming down the pike before the rest of us. Which is why it’s critical to pay attention to what these people DO rather than just say.

Consider the following:

  • The IMF has already called for a wealth tax of 10% on NET WEALTH.
  • More than one Presidential candidate for the 2020 US Presidential Race has already openly called for a wealth tax in the US.
  • Polls suggest that the majority of Americans support a wealth tax.

And if you think this will stop with the super wealthy, you’re mistaken. You could tax 100% of the wealth of the top 1% and it would finance the US deficit for less than six months.

Which means…

 …click on the above link to read the rest of the article…

NIRP, Cash Bans and Wealth Taxes Are Coming to the US

NIRP, Cash Bans and Wealth Taxes Are Coming to the US

If you’re looking for a template for what’s coming to the US during the next crisis, Europe is the place to start.

Europe has already imposed cash grabs via Negative Interest Rate Policy (NIRP). That’s where banks CHARGE you for the right to keep your money.

Europe is also where ATMs and banks have limited cash withdrawals, so people who try to avoid paying the interest caused by NIRP face obstacle after obstacle as they try to get their money out.

Europe is also where regulators seized over 50% of deposits over a certain amount in order to prop up a failing bank. It’s called a “Bail-In” but it was abject theft.

If you think these things aren’t coming to the US, you’re mistaken. As I detail out in my best-selling book The Everything Bubble: The Endgame For Central Bank Policy the political elite have already been looking into ways to implement ALL of these strategies.

And if you think this will only be targeted at the very wealthy, consider that the IMF has already proposed a 10% wealth tax on NET wealth for everyone.

Swedish Central Bank Makes U-Turn on Cash as NIRP is Ending

Swedish Central Bank Makes U-Turn on Cash as NIRP is Ending

Cash is less of a threat to central bank policies when interest rates rise above zero.

Sweden’s Riksbank has become the first central bank in the 21st century to take concrete measures to ensure that cash does not disappear as a means of payment from the financial system. To that end, the Riksbank proposes, in a document published on its website, to make it mandatory for all banks and financial institutions to offer cash services.

The pronouncement comes in response to a recent policy suggestion by the Riksbank Committee that only the country’s six major banks should be obligated to continue offering cash services.

That prompted a backlash from Sweden’s competition watchdog, which argued that the plan would distort competition as it would affect only a few of the nation’s banks. In response, the Riksbank has opted to apply the rule to “all banks and other credit institutions that offer payment accounts.”

There was also a difference of opinion between the Riksbank Committee and the central bank’s senior management on the issue of deposit facilities. While the Committee recommended that banks should only be obligated to provide deposit facilities to businesses, the Riksbank believes it is important for banks to also offer deposit services to individual citizens:

“This is a service that consumers can reasonably expect of credit institutions. There must also be symmetry between withdrawal and deposit facilities. In the Riksbank’s view, there is otherwise a risk that the possibilities for individuals to make deposits will decrease even further in the future. For most consumers, it would also be difficult to understand why they can withdraw cash from an account but not make deposits.”

…click on the above link to read the rest of the article…

NIRP Did It: I’m in Awe of How Central-Bank Policies Blind Investors to Risks

NIRP Did It: I’m in Awe of How Central-Bank Policies Blind Investors to Risks

“Reverse-Yankee” Junk Bond Issuance Hits Record.

It’s paradise for US companies looking for cheap money. They range from sparkly investment-grade companies, such as Apple with its pristine balance sheet, to “junk” rated companies, such as Netflix with its cash-burn machine. They have all been doing it: Selling euro-denominated bonds in Europe.

The momentum for these “reverse Yankees” took off when the ECB’s Negative Interest Rate Policy and QE – which includes the purchase of euro bonds issued by European entities of US companies – pushed yields of many government bonds and some corporate bonds into the negative.

By now, yields in the land of NIRP have bounced off the ludicrous lows late last year, as the ECB has been tapering its bond purchases and has started waffling about rate hikes. Investors that bought the bonds at those low yields last year are now sitting on nice losses.

But that hasn’t stopped the momentum of reverse Yankees, especially those with a “junk” credit rating.

Bonds issued in euros in Europe by junk-rated US companies hit an all-time record in the first half of 2018, “taking advantage of decidedly cheaper financing costs in that market,” according to LCD of S&P Global Market Intelligence.

In the first half, US companies sold €8.2 billion of these junk-rated reverse-Yankee bonds, a new record (chart via LCD):

These bonds are hot for European investors who are wheezing under the iron fist of NIRP that dishes out guaranteed losses even before inflation on less risky bonds. Anything looks better than bonds with negative yields.

And here is why it makes sense for US companies to chase this money: It’s still ultra-cheap particularly for lower-rated companies. The chart below shows just how much sense it makes for the companies – though investors are going to have their day of reckoning.

…click on the above link to read the rest of the article…

Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

The ECB’s Negative Interest Rate Policy has been the funniest monetary joke ever.

The distortions in the European bond markets are actually quite hilarious, when you think about them, and it’s hard to keep a straight face.

“Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets,” Bloomberg wrote this morning, also trying hard to keep a straight face. As Italian bonds took a hit, “bond yields climbed to the highest levels in almost three years, while the premium to cover a default in the nation’s debt was the stiffest since October,” it said. “Investors fret the anti-establishment parties’ proposal to issue short-term credit notes – so-called ‘mini-BOTs’ – will lead to increased borrowing in what is already one of Europe’s most indebted economies.”

This comes on top of a proposal by the new coalition last week that the ECB should forgive and forget €250 billion in Italian bonds that it had foolishly bought.

The proposals by a government for a debt write-off, and the issuance of short-term credit notes as a sort of alternate currency are hallmarks of a looming default and should cause Italian yields to spike into the stratosphere, or at least into the double digits.

And so Italian government bonds fell, and the yield spiked today, adding to the prior four days of spiking. But wait…

Five trading days ago, the Italian two-year yield was still negative -0.12%. In other words, investors were still paying the Italian government – whose new players are contemplating a form of default – for the privilege of lending it money. And now, the two-year yield has spiked to a positive but still minuscule 0.247% at the moment. By comparison, the US Treasury two-year yield is 2.57% over 10 times higher!

…click on the above link to read the rest of the article…

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