A New Level of Absurdity

The Boneheaded Logic of Negative Interest Rates.

By Bill Bonner, Chairman, Bonner & Partners:

About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments… who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future. Is that weird or what?

Into the Unknown

At least one reader didn’t think it was so odd. “You pay someone to store your boat or even to park your car,” he declared. “Why not pay someone to look out for your money?”

Ah… we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it… and using it as he sees fit. It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.

A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for.

When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books. If something goes wrong and you want your money back, you can just get in line behind the other creditors.

The future is always unknown. The bird in the bush could fly away. Or someone else could get him. So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.

A New Level of Absurdity

That’s why bonds pay income – to compensate you for that uncertainty. Inflation, defaults, depression, war, and revolution all raise bond yields because all increase the odds that you won’t get your money back.

That’s why countries with much uncertainty – such as Venezuela – have higher interest rates than countries, such as Switzerland, where the future is probably going to be a lot like the past.

The interest you earn on a bond is there to compensate you for the risk that you won’t get your money back. Or that the money you do get back when the bond matures will have less purchasing power than the money you used to buy the bond in the first place.

You never know. Maybe the company or government that issued the bond will go broke. Or maybe the Fed will cause hyperinflation. In that case, even if you get your money back, it won’t buy much. With interest rates at zero, lenders must believe that the future carries neither risk. The bird in the bush isn’t going anywhere; they’re sure of it.

As unlikely as that is, negative interest rates take the absurdity to a new level. A person who lends at a negative rate must believe that the future is more certain than the present. In other words, he believes there will always be MORE birds in the bush.

Boneheaded Logic

The logic of lowering rates below zero is so boneheaded that only a PhD could believe it.

Economic growth rates are falling toward zero. And at zero, it normally doesn’t make sense for the business community – as a whole – to borrow. The growth it expects will be less than the interest it will have to pay.

That’s a big problem… Because the Fed only has direct control over the roughly 20% of the overall money supply. This takes the form of cash in circulation and bank reserves. The other roughly 80% of the money supply comes from bank lending.

If people don’t borrow, money doesn’t appear. And if money doesn’t appear – or worse, if it disappears – people have less of it. They stop spending… the slowdown gets worse… prices fall… and pretty soon, you have a depression on your hands.

How to prevent it? If you believe the myth that the feds can create real demand for bank lending by dropping interest rates below zero, then you, too, might believe in NIRP.

It’s all relative, you see. It’s like standing on a train platform. The train next to you backs up… and you feel you’re moving ahead. Negative interest rates are like backing up. They give borrowers the illusion of forward motion… even if the economy is standing still. Or something like that. By Bill Bonner, Bonner & Partners

Now what that we have the Negative Wealth Effect? Read…  Here Come the Money Helicopters!

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  32 comments for “A New Level of Absurdity

  1. jest says:

    Great Article!

    • Randy says:

      Yes, that was a great article! Now, I’ll have to look up other stuff Bill Bonner has written. He has a knack for explaining economics so even I can understand it. I am totally interested in economics because it involves so much human foible. There’s the mathematical side and there’s the human side and when you throw them in a blender the concoction gets very interesting. The problem is I don’t understand the buzz words in economics well enough. This, I understand.

      • Wolf Richter says:

        To get Bill Bonner’s best, click on his name under the title. This will bring up all his articles on WS. I read all his articles and post what I think are his best pieces on our economy.

        He writes on many other topics, all good pieces, including on his chateau in France, etc. but they’re not really focused on the things WS focuses on.

        I totally love his sense of humor!

  2. CENTURION says:

    If there is negative interest rates, why am I being charged 8% to 14% on my credit cards?

    Why is my house mortgage still around 5%?

    Why don’t these banks reduce my outstanding credit card bills to 1%. I could use the extra money?

    Just WHO is getting negative %?

    • Vespa P200E says:

      Savers and the army of baby boomers will be socked with NIRP.

      In the mean time banksters will charge NIRP for the deposits only to turn around and peddle loans in teens – talk about juicy banksters margin thanks to global CB circle jerk!

    • Randy says:

      Holy mackrel. You’re only paying 8% on a credit card? Anyway, it seems the banks are getting money at ZIR and loaning it out in the form of credit card payments and earning 8% to 25% + fees and penalties. Now THAT’s good business! And, on top of the obvious genius of that transaction, the taxpayers subsidize it. My guess is Trump understands that transaction and would do something to “level the playing field” so the taxpayer/customers don’t get screwed so badly? While they’re subsidizing it?

  3. Petunia says:

    Interest is the price of money. If interest is less than zero, money has no time value. You need to exchange it for stuff as quickly as possible. The longer you hold it the less of it you have. They want to destroy what’s left of the savings of Americans, your 401K, your pension, your savings. They are forcing people to spend on stuff they don’t need. The problem later becomes that no one has any cash to buy the stuff you accumulated as a store of value.

    These people don’t have any idea what they are doing. It should be very clear by now. They think taking all the money will save the rich. HA!

  4. interesting says:

    “If people don’t borrow, money doesn’t appear. And if money doesn’t appear – or worse, if it disappears – people have less of it. They stop spending”

    damn, what a weird world we are in at this point.

    i don’t borrow because i don’t make enough to pay it back….i don’t spend because i don’t make enough to live the american lifestyle and still keep up with paying taxes (which BTW is my largest monthly expense) so at this point i’m just treading water and have been for decades.

    that’s what happens when incomes stop growing……forget about all this debt nonsense, INCOME is what i’m lacking.

    • polecat says:

      It”s like modern man has fallen into a kind of financial quantum foam, not knowing from one day to the next, what their money or assets are worth more, less, …….or both at the same time! It’s all very strange, no?

    • Petunia says:

      The entire financial crisis was about income not debt. If you have the income to cover the debt, the debt is insignificant. We are all suffering from an income crisis.

    • Kam says:


      You have no income because the TBTF banks and the government have created such a debt monster that fees and taxes are passed onto your shoulders to keep these dinosaurs eating.

      They seem immune to understanding that the greater the debt burden (the robbing of future growth) is a direct result of their policies.

      • Randy says:

        Certainly, stealing as much money as you can right now is better than stealing it later. Now, they’re robbing my grandchildren. So, when the time comes to explain to them, if ‘they’ have stopped global warming (and I bet they will) my grandchildren will be thanking them profusely and not complaining that it took all their money to do it. At least they saved Miami from drowning. (I hear the water level in Miami is already up to Brickell Ave.).

  5. alexaisback says:

    Knowing the zero interest means I have less left for retirement
    I am spending far less and saving far more.
    . Unfortunately zero interest has wiped out the retired persons relying on 4 % CDs ( and like product ) for income.
    They too spend far far less.
    In any event there appears no benefit from zero interest except malinvestment.
    The unintended consequences of stupidity ( zero interest ) continue. They will have the opposite effect that is hoped for ( forced spending ).

    • Vespa P200E says:

      Live for today! Spend on more stuff and borrow to hilt!

      Who cares about tomorrow or retirement as next up might be dropping FIAT currency from helicopters!

      Heck the Fed CANNOT pay the umpteen trillions of debts either. As for those pesky student loans – youngsters who squandered it away partying and buying iphone/ipad/mac pro will demand that it get wiped out too.

      And along with it basis of loan covenants and agreements will be thrown out! Anarchy – here we come!

      • Toddy says:

        Not anarchy. Just a debt forfeiture.

        This is something I don’t see much on this blog: an appreciation of how collective hallucination is going to become collective amnesia at some point.

        Once the whole kit starts tumbling, there won’t be s bailout to balance the books. There will be loan forfeiture.

        So go ahead and load up on debt. Buy yourself a mansion. You deserve it. And when TSHTF, relax. Just file for bankruptcy. It’s all good. Everybody does it.

        I would love to see a portrait of global sovereign debt, by country, in USD. I bet it would reveal, everyone is indebted to everyone. A reset would save currency values and banks wouldn’t need to get bailed out.

    • Kam says:


      In a free market, where market participants get to bid/ask on the price of money, zero and negative interest rates would never exist.

      It is government edict, by legislating control of interest rates to the Politburo (the Fed), that has created this fiasco.

  6. william says:

    My hunch is zero interest rates will lead to real estate bubbles, in places that don’t have them. Imagine an ‘interest-only’ mortgage, yet interest is negative. The bank pays you to take title and cover taxes, insurance, and maintenance.

    • Randy says:

      Dream on. It’s the consumer that has to foot the entire bill certainly not to benefit from it.

  7. Vespa P200E says:

    Alas is this the end of global CB experiments? QE and ZIRP didn’t quite work so what the heck let’s try NIRP!

    And here we go – solve the DEBT (and NPL, bad debt) prob by making it more appealing to GORGE on MORE DEBT (at lower rate!).

    Trouble is debt is either paid off or defaulted…

  8. There is one other aspect that is not touched upon here but is (somewhat) obvious during depressions: thrift is the workers’ weapon against the wealthy.

    The wealthy become so by borrowing their fortune (at negative interest rates!) and having others service and retire their debts. This is done by tricking ordinary folks into buying overpriced goods (with credit money) such as houses, cars, healthcare, college educations, stocks, bonds, gasoline, lead-free solder, canned cocoa, café au laits, Picassos, etc. (If the tycoons have to pay their own debts they are no longer tycoons.)

    The Great Depression was a titanic struggle between the rich and the rest, a struggle the rest nearly won. It was The Great Class War, a carry over from the First World (class) War and the prelude to the Second World (class) War.

    “I can hire half the working class to kill the other half,” said Jay Gould. It was tried …

    The Great Depression didn’t end until 1948 and the widespread penetration of television, where Milton Berle and Sid Caesar cajoled Americans into buying things they didn’t need with money they didn’t have to impress people they disliked.

    Now the TV era has ended with a whimper, the class war is emerging from the shadows … The little guy’s weapon is still thrift. The difference this time is the big business establishment has run out of both ideas and resources. The current gambits — NIRP and the ‘war on cash’ are the last scraping of the bottom of the barrel before the game is on … when tycoons must face their own creditors.

  9. Lars says:

    NIRP is telling us by its ‘body language’ that we are heading into ‘deflationary times’, and that the ‘government’ will be charging us to store our money, like we pay a storage place to store our stuff by renting a storage unit, and like the storage place, the government is charging us to keep our money ‘safe’ until we ask for it back.
    The aforesaid assumes that NIRP isn’t just greed on the part of bankers or government, and that the NIR corresponds to the rate of anticipated deflation. However, in the past did we get an amount of positive interest rate equal to the rate of anticipated inflation?

  10. Islander says:

    The global debt cycle has all the hallmarks of a ponzi scheme running out of fresh blood. But i see NIRP as nothing more than an extension of the previous policy to encourage more lending. There’s nothing special about nirp.

    Since interest rate gambits don’t work anymore, we will likely get more QE. After that hopefully there will be some infrastructure projects which create actual jobs and make our lives better. Ultimately what faces us is a horrible depression (private banking has destroyed healthy capital market function) or more stimulative government projects. There’s a good chance those can be successful.

    What a mess this has become! Reagan really opened a can of worms when papered over stagflation with govt deficit spending and banking privatization! Credit creation should be nationalized or at least heavily regulated like any other basic necessity we rely on like electricity or roads. Sorry Republicans: self regulation doesn’t work!

    • Mike Smith says:

      Islander, you are wrong. The 1978 supreme court decision that overturned states rights to regulate interest rates, banking, and usury is what enabled interstate banking & the rise of credit card companies. That is why practically every credit card bill back in the 80’s, and many today came from either Sioux Falls, SD or Wilmington, DE. True, easy credit cards help drive the economy in the 80’s under Reagan, and the banking act that followed the supreme court decision destroyed the S&L’s and B&L’s, state chartered banks are mostly extinct now. But the next 2-pieces of legislation really created the modern global banking system. Graham-Leach-Blilly in 1999 passed by republicans in congress & signed by Clinton. It repealed the Glass-Steagall Act of 1934. This was followed by the bankruptcy reform act in 2004 the eliminated the 7yr limit on credit reporting, and judgement collection. You don’t hear much about that one. But the bankruptcy laws prior to 2004 put a measure of responsiblity on the banks NOT to loan to people they KNEW couldnt pay back the loan–cause they only had 7yrs to recover deficiency judgements, credit card debt could be completely wiped out, and credit reporting could NOT go back further than 7yrs. That is all changed now, banks have 14yrs to collect deficiencies. Student loans can NO longer be wiped out with banko. The banks hold ALL the cards, control the gov’ts, corps, and economy. And we are mere debt slaves.

      • Randy says:

        I never knew about the bankruptcy reform act of 2004. No wonder my bankruptcy is STILL on the books after 8 forking years!

  11. Dan Romig says:

    A New Level of Absurdity is an apt description of both NIRP and the U.S. debt/deficits. Is there a correlation?

    Here are some numbers to crunch:
    Current national debt = just over $19T
    Current GDP = just over $18T
    2016 Nat. deficit = $474B
    Projected 2017 deficit = $503B
    Current GDP growth = 2%
    Current deficit/GDP = $2.63%

    This is not sustainable to say the least! The only thing that’s saving us from an economic disaster are the low interest rates. Hell, we add more to the national debt, by deficit spending, than the GDP grows by. The CBO has warned us that the national debt will be larger than the GDP for AT LEAST another decade.

    So where does that leave the Fed? In a position to try and brainwash us that NIRP is good for us and it will help us. To a degree, this is true. Remember, on 2 January 2007, the 1 year T-Note was 5%. It closed yesterday at 0.55%. Five percent of nineteen trillion is $950 billion. This would make next years deficit three times as large!

    I’d like to thank the Republicans and Democrats for economically and ethically bankrupting this once great nation.

    • Vespa P200E says:

      For the record – Repub was in power when 1 yr t bill was yielding 5% in Jan 2007 and ObaMao has been at helm helping out his bankster pals entertaining them at WH since Jan 2009.

      Ahem – but Dems will continue to blame GW 8 yrs into ObaMao’s failed policies.

    • Randy says:

      THAT’s the REAL reason interest rates CAN’t go back up. Thank you! Never understood that part of the equation.

  12. ERG says:

    To keep the costs of servicing the debt under control, the CBs have to come up with increasingly desperate ways of squashing the costs of borrowing to the government. In the process they have destroyed the markets and any sane degree of price discovery.

    Who to blame? How about US – the voters!

    The voters carry a large part of the blame for voting the way they have for the last 60 years! They have literally bought in to the idea that you can get something for nothing. You can only get something for nothing TODAY. When TOMORROW comes, you have to pay up!

    “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” – Thomas Sowell

    The society that collectively buys in to the idea that there is a such a thing as a free lunch is doomed.

    • Randy says:

      That’s EXACTLY right! Obama didn’t destroy this country, the pacifistic citizens did. Obama is the natural product of our moral decay. Schools became indoctrination centers and we did nothing. The government (at all levels) became totally corrupt and we did nothing. ‘Anything goes’ morals have not been challanged. States rights, abolished with our blessing. The list goes on and on. At least, we didn’t have to exert ourselves watching the store all these years. Now, our children can pay for our sloth.

  13. dc.sunsets says:

    They want people to borrow and spend to keep the tops spinning.

    People are sated. They’re tapped out. Borrowing to spend is fast becoming a fashion attractive only to congenital imbeciles.

    NIRP is just one more path to (paper) wealth destruction. All roads lead to a collapse in value of the IOU’s in the Bond Ocean. All roads lead to “evaporation.” All roads lead to a reversal in this decades-long period of absolutely maniacal trust.

  14. randombypasser says:

    All the taken measures are biggest ever wealth transfer from people to financial forces. It’s a game changer, a restoration of power long lost after class fights and birth of labor unions.
    Long years people thought maybe we will be nuked to stone age, but no, we will be just stripped off of our wealth and purchasing power, that’s enough to get us back in order and back to visible serfdom.
    And i believe many thinkers much wiser than me have keep saying this many years now, got to believe it now, i think, i think i do believe, at last.

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