Negative interest rates are profoundly idiotic. Who would ever pay money to lose money?
Europe has been mired in them for a while now. Germany’s 30-year bonds with negative interest rates didn’t sell well, but that’s just one of many.
UBS Group AG is going to charge some people 0.6% on deposits. A bank in Denmark is selling mortgage-backed notes that have a negative coupon.
Then there is Switzerland, where negative rates extend to half a century.
In all, about $17 trillion in bonds and notes will lose buyers money while locking up their wealth.
That’s roughly the size of the U.S.’s GDP just five years ago.
As disconcerting and absurd as this is, negative interest rates are turning up everywhere, so something is clearly making them attractive.
So, what is going on? Think about it for a minute and they make perfect sense.
I’ve brought this up many times before: Savings and credit are really just a way to manipulate wealth in the fourth dimension — time.
Savings, including bonds that lock up your wealth so it can be used elsewhere and returned after a set amount of time, fundamentally take your wealth from the present and move it into your future.
The inverse is true for credit and debt. They take future money and put it in play today with the promise that it’ll be paid back.
Those two statements are at the core of modern finance. If we stopped there, it makes perfect sense for interest rates to NEVER go negative.
So what changed? Massive and unprecedented economic intervention.
Following a decade of policies that almost exclusively benefited the already rich, there is a huge glut of savings out there in a very small number of hands.
We’re in an era that has exceeded the Gilded Age for wealth disparity. At the same time, there simply isn’t the demand for borrowing for capital-intensive projects like railroads, factories, electrical grids, municipal water supplies, bridges, and everything else that was built a century ago.
We barely even do any basic maintenance on them anymore, as shown in the trillions in backlogged repairs in the U.S. alone.
Instead, we have companies like Facebook, with 33,600 employees in late 2018 and $55.8 billion in yearly revenue.
That’s $1.6 million of revenue per employee per year. The robber barons would be green with envy.
Facebook simply needs fewer workers and less capital to make money on an incredible scale, and so it has to borrow far less. The same goes for many companies out there that have driven overall economic and market growth for the last several decades.
The lack of demand from credit-worthy borrowers, the wealth accumulation solely at the top, the long-term expansion of potential borrowers with meager prospects for paying lenders back — it all adds up to massive stashes of wealth with nowhere to go.
Toss on central bank policies that drove rates through the floor and artificially kept them there for a decade and here we are. Negative interest rates now make sense.
It makes sense for banks to charge depositors. They don’t need to fight each other for more of them anymore now that they can’t turn around and lend money in profitable and meaningful ways.
Big banks can similarly charge bond buyers to store their wealth in something — anything really — that seems stable because many banks are not really stable at all.
Why shouldn’t governments and banks charge people to hold their wealth when it is being thrown at them?
As long as lending demand is low, wealth with few worthwhile places to park it is plentiful, and central bank intervention is sky-high, negative rates make perfect sense.
Don’t get me wrong, though. Negative interest rates are an abomination that shouldn’t normally exist. But the new normal is a bizarre perversion of the old one.
Focusing on negative rates is just focusing on a symptom instead of the cause. One that has slowly built into a seemingly unsolvable problem.
No wonder gold has done so well, and will continue to for the foreseeable future.
But don’t get too hung up on negative interest rates themselves. They’ll correct themselves. It is what happens to cause that correction that we need to worry about.
