“If you have to pay in cash, something is wrong.”
By Bill Bonner, Chairman, Bonner & Partners:
NORMANDY, France – “Now, I think I’ve seen everything” is an expression that – like “this is the end of history” and “I’ll never leave you” – usually turns out to be premature.
But it is what we found ourselves saying yesterday. Not out loud. We just moved our lips in mute amazement. On Tuesday, the Italian government sold a 2-year note yielding MINUS 0.023%. We don’t know what is more preposterous: that the Italians were able to borrow money at a negative nominal interest rate or that the press reported this transaction with a straight face.
The Fed’s Big Pivot
It should have provoked howls of laughter, withering scorn, and unvarnished derision. But here at the Diary, we will not point the finger and chuckle. We will not invoke our usual tone of sarcasm. We will not damn the whole thing to Hell with loud and blustery cussing. Instead, we’ll take the high road; we just want to know what it means. But before we get to that, let us pick up the news. Here’s the latest, from Bloomberg:
Federal Reserve officials pivoted toward a December interest-rate increase, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday in Washington, preparing investors for the first rate rise since 2006.
“Pivot” has become the latest fad verb. It seems to mean “move” or “go toward.” You can use it in practically any setting. Investors pivoted toward higher prices yesterday, with a 198-point increase in the Dow. You might tell your husband that you’re pivoting toward buying a new Tesla. And we pivoted back to France last night… after a few days in Ireland. It is a gray day in Normandy this morning. But the leaves have pivoted to such glorious shades of orange that the effect is a profound and melancholy splendor.
A beautiful melancholy – a leaf-covered path in Normandy
But let us pivot back to our subject for today…
An Odd World
A negative nominal interest rate – meaning a negative rate before you account for inflation – implies an odd world… maybe even a world that cannot really exist.
To lend at less than zero suggests you believe the present value of money is less than its future value – in other words, deflation. And you must assume that the risk of default or inflation is near zero.
This allows the Italians to go out and build roads or pay pensions with money that cost them less than nothing.
How long this will last, we don’t know. But as long as rates remain below zero (and they could go lower!) money is not just free… it’s a cost not to borrow!
Imagine you are buying a house. (Now, you can see the mischief afoot!) If lenders are willing to grant a loan at a negative nominal interest rate that’s secured by nothing more than the full faith and credit of the Italian government, then lenders should surely be willing to extend credit to you against the value of your house.
That would leave you with a curious mortgage – one that pays you interest. At the Italian rate, a $1-million house would come with an extra income of about $19.16 a month.
This raises profound metaphysical issues. If a mortgage carries negative interest, it implies that the house (an equal capital value) also has negative value.
After all, you have to pay someone to live in it. And if houses are worth less than nothing, we have to wonder what a car is worth… or a diamond ring… or a luxury cruise?
Does that mean that money has no value? Or even negative value?
After all, you can no longer give it to someone in exchange for a positive interest payment. Now you must pay him to store it for you, as though it were furniture that won’t fit in your house. You don’t like it anymore. But you don’t have the heart to throw it away.
And if money has no value, what happens when you hire, say, a gardener to pull out weeds? Should you pay him? Or should he pay you? How many hours should he have to work for you before you consent to take his money?
The whole thing is so contrary to nature we gasp when we think of it. We are flummoxed. But you are a smart person, dear reader: Maybe you can figure it out for us.
The Strange Case of Sweden
This is all prelude to taking up the strange case of Sweden. All we know about Sweden is what we learned by watching the movie The Girl with the Dragon Tattoo. And all we learned from that was that Swedes tend to be murderers, sadists, lesbians, and pock-marked wimps. Maybe that accounts for the torturous financial system the Swedes are creating.
Reports Business Insider:
Sweden is shaping up to be the first country to plunge its citizens into a fascinating – and terrifying – economic experiment: negative interest rates in a cashless society.
The Swedish central bank, the Sveriges Riksbank, on Wednesday held its benchmark interest rate at -0.35%, the level it has been at since July.
Though retail banks have yet to pass that negative rate on to Swedish consumers, they face increased pressure to do so as long as the rates remain where they are. That’s a problem, because Sweden is the closest country on the planet to becoming an all-electronic cashless society.
Remember, Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATMs from rural areas, annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”
A resistance is forming, and some people are protesting the impending extinction of cash. Björn Eriksson, former head of Sweden’s national police and now head of Säkerhetsbranschen, a lobbying group for the security industry, told The Local, “I’ve heard of people keeping cash in their microwaves because banks won’t accept it.”
Alert readers will recognize this negative interest story as one we have been following. We believe it won’t be long before we have negative rates in the U.S., too.
The feds will pivot to even stricter controls on cash to gain more control over the economy and practically unlimited power to tax and spend – without congressional approval.
Sweden is ahead of the U.S. feds on this one. We can only hope it goes far ahead, fast, and blows itself up before the U.S. pivots down that path, too. By Bill Bonner, Bonner & Partners
Businesses are now catching the drift. Read… Chilling Thing Hershey Just Said About American Consumers
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From my perspective, this makes a lot of sense.
The main cause of our modern crisis, which apparently reaches back even to the 90s and was merely alleviated by private sector debt creation, is that money as wages has not circulated back to the worker. The 99% have been losing buying power, and so we have a problem of low demand. You can’t get rich by selling things to people anymore, because a prior generation of folks got rich by not passing on automation/tech’s gains to workers; the only avenue left in these last 20 years is financial engineering and speculation.
Negative interest rates are a way to increase the circulation of money. If these are used to bid up asset prices, i.e. the rich use it as a weapon to chase more ownership — then its a bad thing, but not really much worse than what has already been happening for 20 years. Maybe it accelerates it. But if the money is distributed outward to the 99%, we alleviate the problem. (Hint hint: basic income!) The real cost of money should be 0%, it should be debt-free money created by the public sector and distributed out in the service of public purpose. The same way the wartime economies were run in Britain and the United States, which was the last time we committed unconditionally to meeting our own society’s needs.
And I don’t believe in the time value of money. That’s another economics textbook monstrosity. For heaven’s sake, even the traditional understanding of supply and demand has been abolished by Steve Keen: see http://www.debtdeflation.com/blogs/2011/08/12/behavioral-finance-lecture-01-debunking-demand-and-supply-analysis/ .
“The 99% have been losing buying power, and so we have a problem of low demand.”
The 99% would have all the “buying power” they needed IF the very natural deflationary tendencies of a free economy weren’t blocked by banks and government. Instead, these institutions block real change (i.e.; growth – the two are synonymous) to protect their interests. Yes, the real growth and economic dynamism that benefits the masses comes with lots of volatility and disruption (see the period 1870 to 1900), but it is the ONLY way that the benefits of improved productivity actually flow to the middle class. Today these benefits are siphoned off by the banks and bureaucrats – the nexus of which is the Federal Reserve. What a coincidence!
My wife and I are getting 2.5% right now at our local credit union. We have nothing, NOTHING in stocks and/or bonds. The day it drops to 0% is the day I go buy more property and ammo. We pay everything by cash or debit in our house except for online purchases. This is insanity. Our money will not circulate until we choose the time, place, and purchase. I don’t trust this economy as far as I can throw it.
Maybe I’ll use my money to build a new still and make tax free moonshine…to sell for cash. If they legalize pot I’ll grow tax free bud…and sell for cash. Screw them all.
This is the most honest comment about the economy as it relates to us mofos scratching out a living on the edge. Interesting that no one EVER talks about the underground economy. The UE is flourishing with millions of people working “under the table” for cash or barter.
Agreed! The underground economy has always survived government control. If pieces of paper are taken out of circulation, the people will always find something else of value as a medium of exchange. Whether that be gold, silver, food, water, ammunition, guns, or salt, transactions will still happen.
quantum money mechanics????
It sounds rather like they are taking a giant step towards some sort of bureaucratic command economy whose real purpose I doubt not will be to maximize the wealth of the upper classes while making sure the proles have just enough to live on. It is rather as if you were to treat the masses as livestock through pretty much absolute totalitarian control of the economy and thus society as a whole. But even if they abolish their money, I suspect people will start trading in Bit Coins or similar clandestine net currency. I doubt very much if the politically correct tyranny of the Swedish government will be able to suppress free enterprise among the people. A flourishing black market will develop which will eventually wallow up the official economy. You guys should check out what is happening in North Korea. The underground market economy there has largely replaced the old command economy. the party no longer tries to suppress it but instead enriches themselves from it. Serious transactions are only made using real money, especially U.S. dollars or Chinese renminbi, not the virtually worthless national currency.
Politicians in Europe have only one thing in mind: maximizing support among the voting classes, where those without much money carry a lot more weight than those that have too much. Very difficult to stop public expenditure rising when half or more of the voting population obtain most of their income, directly or indirectly, from the public sector.
I think you vastly underestimate the power of national governments and international resolve to squash underground economies.
Crushing the “Underground” economy, beyond a certain point, on a global scale .
will produce a global revolt, the likes of which has never been seen.
The 1 thing china fears, strongly motivated, social unrest.
As it knows it can not control it, once it gains momentum.
Again it seems, china understands something, the west does not.
From James Madison:
“Where an excess of power prevails (i.e. central banks), property of no sort (cash wages that one has worked for, earned and saved) is duly respected. No man (or woman) is safe in his opinions, his persons, his facilities, or his possessions.”
“The rights of persons, and the rights of property, are the objects, for the protection of which Government (The USA) was instituted.”
Could the USA follow Sweden and transfer fiat currency away from a physical realm into an electric one only? Could the USA confiscate some of that fiat currency if it held and not spent? Well, the two party system has shredded the Bill of Rights, and the citizens keep voting for “the lesser of two evils”, so yes they can. If they do, and you voted for a Democrat or Republican; look in the mirror and see who caused it!
I stopped voting for the lesser of two evils at the last presidential election. I voted third party as a dissent, not because I thought they would win. I stood on line and didn’t vote for either of them, I wanted them to know I voted against them. I didn’t stay home and let them get away with saying that I didn’t care.
Vote them all out while you still can.
Stop call them negative interest rates and just say they are stealing the money.
Most bonds land up in pension funds and insurance companies. Negative interest rates are a way to steal even more of the money of working people and savers. They take the pension money and buy an investment that costs the pension fund equity. The same thing happens with all the annuity insurance contracts. Both have to be fully invested most of the time and the parasites are just taking advantage. Imagine that you were forced to lend to someone and then be paid back a lesser amount than the original loan. This is what is happening with negative interest rates, and the average person doesn’t understand it.
When finance people say “innovation”, the result is often times simply new English words that obfuscate some criminal act.
The average person does not want to understand things because he/she too would like a free lunch.
Money is nothing but a meter of energy. All your money eventually ends up in energy consumption, present, past, or future. If the global energy consumption falls – and technological improvements do not catch up giving us a more efficient use of energy – then the Money at disposal must follow through and lose its value at the same pace: negative interest rates.
If you agree or don’t agree, please write me:
nc.passatempo@gmail.com
1. “To lend at less than zero suggests you believe the present value of money is less than its future value – in other words, deflation.”
Actually, lending at less than Zero only works if hard currency is eliminated. If you have $10,000 in cash and you lend it out at negative rates, then you are a fool. Because now or later you would still have $10,000 in cash if you didn’t lend it out.
What negative rates mean, is that Central Banks will buy government debt (at any price) because, at least in the short run, Central Banks and Governments are not constrained by the market.
2. To one of the comments above, “negative rates increase money circulation.” I would say negative rates reduce circulation as people’s propensity is to swap electronic money for hard currency when they are penalized for putting their money in the bank- and the bank uses that money. That is, with negative rates you are earning interest by storing hard currency under your mattress.
3. Underground economies have always existed but they are growing more and more as governments and Central Banks rob common people’s purchasing power through current taxation and future and foreseeable taxation to pay off exponential government debt. It is one thing to borrow long term money on long term value producing assets, but is quite another to borrow money for current consumption. Many people instinctively know this, and they don’t need a PhD. in economics to know when there is nothing left in their paycheck.
4. So the growing underground economies are a direct result of government and Central Bank policy of killing the market/time value of money by putting their thumb on the scale in money markets. And the more they go down the road of favoring their crony friends, both public and private, the closer they come to hanging themselves on a lamp post. I wonder if any single one of these social criminals has a clue of what they have done.
K
Did any of the French aristocrats even a few years before the Revolution ever imagine that they would soon be executed before a mob screaming for their blood? When you get really arrogant, you get really stupid. If you are a wealthy and of the upper class, you can get away with quite a bit using your position….. up to a certain point. But those who indulge in such villainy rarely notice that point as it goes sailing by. Thus the many edifying examples in history of privileged fools meeting their well deserved fate.
This entire scenario, naturally, has been aptly described in a work of fiction written quite a long long time ago. The essential problem was pinpointed and a reasonable solution proposed. Let me refer you to a short story from science fiction, penned only a year or two after DARPA first invented computers. I refer, of course, to Frederick Pahl’s “The Midas Plague”. You can still find it online. Its a good read ….
This just gets sillier as time goes by. Bad money drives out good. Anyone still stuck in stocks or bonds or banks of any nature for all net wealth are going to be hammered. I’ve stopped listening except for checking in here and a few other places that I trust. Drove down Route7 through Youngstown this morning and the place is a ghost town. Mile after mile of empty stores, factories etc. The only new construction I saw was on a small Dunkin Donuts store, and some road construction. Plenty of Dollar General, Family Dollar, etc. even a grocery store was boarded up. Shopped yesterday at a CVS pharmacy but didn’t buy much: even their own shop girl was shopping the dollar stores. Prices were 3x more for the same stuff. A nod to Night Train for his kind comments the other day.