How Negative Interest Rates Screw Up the Economy

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

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

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.

And there are folks who want to prescribe the same kind of killer application to help out the US economy – which is growing just fine.

Since the ECB’s shock-and-awe package started to appear in the rumor mill at the beginning of August, the European bank stock index – it includes banks in all EU countries, not just those that use the euro – well, since that shock-and-awe rumor appeared, the stock index for those banks has dropped 11%.

Negative interest rates are terrible for banks. They destroy the business model for banks. They make future bank collapses more likely because banks cannot build capital to absorb losses. But banks are a crucial factor in a modern economy. It’s like an electric utility. You can somehow survive without electricity, but a modern economy cannot thrive without electricity. Same thing for the role commercial banking plays.

So that 11% drop of the bank-stock index wasn’t from some bubble high, but from a hellishly low level. The index is now down 78% from the peak in 2007. And it’s back where it had first been in 1990. So that was, let’s see, nearly three decades ago.

European banks are sick, sick, sick. And with negative yields, they’re getting the exact opposite of what they need. No wonder that bank stocks reacted skittishly to the threat of more deeply negative interest rates.

In Japan, same thing. Japan used QE to bring down interest rates long before the term QE was even used. And Japan has had near-zero or below zero interest rates for 20 years. But the bank index has fallen 8% since August 1, when the renewed stimulus rumors started, and closed on Friday at a new multi-year low. And the index is down 73% from where it had been in 2006.

I didn’t even want to look at the bank index going back to Japan’s bubble years in the 1980s. Because that would have been masochism. But I did look. The TOPIX Banks Index peaked at 1,500 in 1989, and now it’s at 129. Let that sink in for a moment: It has plunged by 91% over those 30 years.

So zero-percent interest rates and worse, negative interest rates, are terrible for banks for the long term. And because they’re bad for banks, by extension, they’re also bad for the real economy that relies on banks to provide the financial infrastructure so that the economy can function.

Commercial banks need to take deposits and extend loans. That’s their primary function. This credit intermediation, as it’s called, is like a financial utility. One bank can be allowed to fail. But the banking system overall cannot be allowed to fail. That would be like the lights going out. So, there needs to be special regulations, just like there are regulations on electric utilities.

And banks need to make money with their primary business. The profit motive needs to make them aggressive on lending, and the fear of loss needs to make them prudent. Those two forces are supposed to balance each other out over time, with banks swinging too far in one direction and then too far in the other direction as part of the normal business cycle.

And this generally works, with some hiccups, as long as banks can do this profitably – meaning they make enough money and set aside enough capital during good times to be able to eat the losses during bad times without collapsing.

In this basic activity, banks make money via the difference between the interest rates they charge on loans to their customers and their cost of funding those loans. This cost of funding is mostly a function of the interest the bank pays on its deposits, on the bonds it has issued, and the like.

If interest rates go negative, the spread the bank needs in order to make a profit gets thinner. But risks get larger because prices of the assets used as collateral have been inflated by these low interest rates. At first this is OK, but over a longer period, this equation runs into serious trouble.

Negative interest rates drive banks to chase yield to make some kind of profit. So they do things that are way too risky and come with inadequate returns. For example, to get some return, banks buy Collateralized Loan Obligations backed by corporate junk-rated leveraged loans. In other words, they load up on speculative financial risks. And as this drags on, banks get more precarious and unstable.

This is not a secret. The ECB and the Bank of Japan and even the Swiss National Bank have admitted that negative interest rates weaken banks. The ECB has even been talking about a strategy to “mitigate” the destructive effects its policies have on the banks.

So that’s the issue with negative interest rates and banks. They crush banks.

In terms of the real economy, negative interest rates have an even more profoundly destructive impact: They distort or eliminate the single-most important factor in economic decision making – the pricing of risk.

Risk is priced via the cost of capital. If capital is invested in a risky enterprise, investors demand a larger return to compensate them for the risk. And the cost of capital for the risky company is higher. If capital is invested in a low-risk activity, the return for the investor and the cost of capital for the company should both be lower. And the market decides how that pans out.

But if central banks push interest rates below zero, this essential function of an economy doesn’t function anymore. Now risk cannot be priced anymore. The perfect example of this: Certain junk bonds in Europe are now trading with a negative yield. This shows that the risk-pricing system in Europe is kaput.

When risks cannot be priced correctly anymore, there are a host of consequences – all of them bad over the longer term for the real economy. It means malinvestment and bad decision making; it means overproduction and overcapacity. It means asset bubbles that load the entire financial system up with huge risks because these assets are used as collateral, and their value has been inflated by negative yields.

So you get these strange combinations – for example, of massive housing bubbles in cities like Berlin and Munich and other places, while at the same time Germany has one foot in a recession.

And as a remedy to this situation caused in part by negative interest rates, the ECB wants to do a new shock-and-awe package, on top of the ones it has already done, driving interest rates even deeper into the negative.

The longer negative interest rates persist, the more screwed up an economic system becomes. And the more deep-seated the dysfunction is, the harder it is for this economic system to emerge from this screwed-up condition without some kind of major reset.

And a major reset is of course precisely what every central bank fears the most.

How will this end? No one knows because no one has ever done this before. But we have some idea: So far, the outcomes are already bad, and now, because the outcomes are already bad, they’re wanting to drive interest rates even lower to deal with the bad outcomes that these low interest rates have already caused.

When you start thinking about it long enough, cooking up negative interest rates is like making hugely important economic decisions purposefully in the worst possible way, in order to disable the proper functioning of the economy. And when the economy stops functioning properly, these folks are surprised and then cook up even more deeply negative interest rates to solve the problem these negative interest rates have already caused.

It’s like watching some cheap slapstick farce, and you want to laugh at all this idiocy going on in Europe and Japan. But this isn’t a farce. It’s central bank policy making in all its glorious worst.

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  191 comments for “How Negative Interest Rates Screw Up the Economy

  1. Lemko says:

    NIRP in US will never happen… Wall Street will never let it happen, too much lobby power, too much money at stake. I am not a fan of certain things institutions do, but if Americans turn their banks into European banks, the country is fucked

    • ZeroBrain says:

      Isn’t the country screwed anyways? I have a hard time believing the USA became the world leader with today’s culture/value system/institutions, but I’m too young to really know how dramatic the changes are. I guess there are degrees of fucked and NIRP banks wouldn’t help.

      • kevin says:

        You still don’t get it, do you?
        USA is the LEAST screwed country in the world right now.

        EU, especially France, the PIIGS and UK is in far worse shape compared to US. The Middle East is fractured. Most of Africa has barely enough to eat. Many Asian countries are either sweatshops utilizing cheap or child labor, or like Shanghai and Hong Kong – financialized serfdoms with soul-crushing systems meant to dull the human spirit and curtail human freedoms.

        Even the industrial powerhouse that is Japan is essentially still a Shogunate masquerading as a democracy, with a deeply paternalistic system of slavery, where many workers are commonly worked to their deaths (i.e. Karoshi).

        So, you tell me USA is not still the best of the worst lot?
        Its all about relative comparisons, not absolutes.

        I’m not an American, but give me a better and more innovative and dynamic economy than the USA, with democratic freedoms largely intact and a modicum of rule of law, and I’ll invest there in a heartbeat.

        • John Taylor says:

          Most people here are upset with the trend more than anything.
          People like me grew up in a time of prosperity where construction workers bought houses and even grocery clerks had a decent place to live and a pension.

          Today the cost of living is very high, the working world is very insecure, and the relative wages and benefits are much lower. The situation isn’t as dire as most places, but there is definitely a two-tier economy that the headline numbers don’t show.

          Many in my generation are caught between a line of older people who don’t understand why we can’t afford our own places and continually end up back with our parents, and a large number of first generation immigrants who don’t understand why anyone complains about extended family living as to them it’s the norm. Basically were losers on one side and spoiled complainers on the other. The simple feeling of rejection can make people lash out in different ways.

          The whole world is ripe for change and I think most people will emerge better off once it passes through.

        • Pinto says:

          Could not agree more USA is the LEAST scr… country !

          I’m 48, I was born in Portugal now formerly know as a “District 12” of EUssr (11th and 12th country to join Europe with Spain, Hunger games anyone?)

          Studied programming from 15y to 17y that’s when I started to work, took my degree while working at the same time.

          I’ve always been an interested observer, so I know first place what happened:
          1) More big governments jobs, much more.
          2) More welfare receivers, much more.
          3) More taxes, much more taxes!

          At this time once government spending gets up past 40% it’s game over. Communist state is inevitable. The plebs want their free sh..t, and the elites are perfectly willing to give it to them.

          Which leads to:
          4) More regulation, much more regulation.
          5) State procedures to insure tax mules proper behavior, more procedures, much more procedures.

          By this time freedom is gone, as well your ability to be creative and earn some decent money, unless you are part of the big EUssr aparatchick.

          I’m not dumb, and four years ago, I started to realize that MSM narrative was not what really is going on.

          And begun reading mostly Zerohedge and Wolfstreet, that’s when my life changed, I saw a way out!

          I wanted so badly to go Galt!

          Begin to understand the difference between PSI20 Index AKA PSI18 (only has 18 companies because the others do not qualify for the index to make it 20) and S&P, DJIA, Nasdaq et all.

          US finantials, now that’s freedom ! I’m a programmer ! what a match !!!!!!

          (in PSI18 you may only short 2 stocks through CFD) is this freedom ? everything is tight.

          I found my place on heaven on Earth.

          My friends and family are following me now, some are trading stocks others ETFs. The fixed income people discovered the wonders of TBills and Treasuries ETFs!

          I’m certain all over EUssr there are much more examples.

          Don’t fool yourselves, don’t be afraid, if USA has a “cold” the rest of world will go back to the stone age!

          What we are witnessing is a global fight against USA finantials, in order to bring yield down to avoid capital flight and carry trades to USA.

          People in EUssr are full of this police state regarding money, me and my father wanted to rent a safe deposit box in a bank, when we saw the paperwork involved we gave up the idea!

          Have you seen those EUssr negative yields growing every single day? but they are NOT risk free!
          Try and be curious to see for each country it’s respective Credit Default Swaps, it’s overwhelming!!!!!!!

          There’s no escape in EUssr what’s under your mattress is yours, whats in the system is “Theirs”

          Only way out is to open a brokerage account in USA, and that’s what scares EUssr the most, when people wake up one day
          And it’s gone!

          USA really is the land of the free and the brave, which I aspire to be living in a 5~10years.

          God Bless

        • Zantetsu says:

          Pinto, I am a programmer living in Silicon Valley and I would welcome you. I am not sure how much I believe your statements but I certainly would welcome your passion and diversity of viewpoint to the leftist down-with-the-USA bubble that is Silicon Valley USA.

        • Craig says:

          Norway, Denmark, New Zealand, Singapore, South Korea, republic of Georgia(lots of entrepreneurs moving there or using it as a close to Europe base) due to low cost of living and there remote company owner visa.

          Look forward to seeing your Tbilisi portfolio…

        • fajensen says:

          I think it depends on ones perspective.

          Wether one is living amongst the 1% or the 99%. The 1%’s will never have enough, so every day of their lives they try to hoard more and when they cannot, they bleat and whine on how bad the targeted economy is.

          On the opposite side, the 99%, the vast majority of the people in the EU, even in France, have healthcare, unleaded drinking water, some place to live, and some kind of income – whatever the “1%’er numbers” say.

          From Europe, we perceive the US as splitting into 3’rd world and 1’st world fragments, becoming like Brazil maybe.

          Sure, “1% the numbers” are still good, but, with shanty towns, people living (and shitting) in the streets, police gunning down people with impunity, hepatitis, bubonic plaque coming back even, bankruptcies over needing medical care, and Flint being just The Appetizer, then we think we are rather doing OK “over here”.

          I’m not an American, but give me a better and more innovative and dynamic economy than the USA, with democratic freedoms largely intact and a modicum of rule of law

          I gather you have never tried to set up a business in the US?

          I can tell you that the US is, by a generous margin, one of the most bureaucratic and heavily top-down regulated business environment in the 1’st world – that is if you want to sell a product, provide a service or dare manufacture anything!

          Many European businesses investing in the US learned, when they were cleaned out by lawyers and US regulators, that the image they have of the US business environment is Americans dreaming about how work and life should be like and selling their dreams in Hollywood movies.

          US legislation is written as “Code” – thick volumes of detailed rules and instructions that shall be followed to the very letter as decided upon by The Inspector, who can easily shut you down, demand ever more work or maybe just take an envelope with cash and go away. And you will be stuck in litigation all of the damn time. If you are a foreign business you will tend to lose because nobody likes the away team.

          In the US facility we had 35 people for running the very same machines that we needed 8 people for in the UK – because The Code mandates which kinds of people you shall have for each kind of task on the plant, whereas in the EU the regulations describe outcomes so if one has a self-inspection system for, say, electrical works, one can use “skilled people” for some kinds of electrical works even though these are not electricians.

          There is of course a social component also to this – because the US has no social safety net, there is a lot of lenience for simple bullshit jobs like piccolo, janitors, valets and receptionist, where the less fortunate can also make an existence.

          I am not saying this part is bad: In most European businesses, everything is already bummed hard into and even past peak performance – which is not sustainable.

          I see, right now at work, a lot of industrial assemblies made by supposedly good companies which are poorly made shit and is sent back for rework – because somehow they managed to find the very cheapest place to have it made and that place also just happens to empty the people that McD didn’t want! Or maybe the workers just don’t give a shit anymore, after all they haven’t had a raise since 1980 or so.

        • roddy6667 says:

          “Shanghai and Hong Kong – financialized serfdoms with soul-crushing systems meant to dull the human spirit and curtail human freedoms”
          Really. You need to go to the Post Office. Get a Passport. Go to these places you babble about and see what is really going. Stop reading the talking points your handlers send you.

        • Les says:

          FRB, BOJ, and ECB policy is Marshall Plan in reverse. Prop up the middle to keep the alliance together.

      • joe saba says:

        to bad excessive debt is taking down not only u.s. but entire world
        pretty soon no one will want any fiat currency
        and when banksters think NIRP then I’ll take out 100% cash and buy assets only

      • HC says:

        Actually the USA helped win WW2. Without the USA the Nazis and their allies would have taken over the world. Certainly the USA entered the conflict later in the piece but they were instrumental to the end of WW2 and rebuilding countries afterwards.

      • Pinto says:

        For Zantetsu

        If your a programmer than do your own search. Every broker in USA has an API which turns programmers life a lot easier as surely you must know.
        In EUssr there are algos also but only for whales, they use we services and as a programmer you surely know the difference.

        You said:
        “down-with-the-USA bubble that is Silicon Valley USA”

        If it is a bubble? Can be! But the market has the freedom to find out, you can be bullish or bearish depending on your view!

        But that does not happen in EUssr, you must be bullish by law, why is banned to short wiredcard ???!?????

        That’s another big difference

        • fajensen says:

          I am sorry, but this reminds me of that time around 2008 when the guy fixing my boiler was giving me investment tips while he was working.

          I think maybe I just need to short the markets more, such confidence is rarely seen on the way up :)


          Regarding Zero Hedge, there was once a golden time when it was mostly a niche site promoting Gold-Buggery and Chart-Pr0n, with the occasional conspiracy rant article thrown in to lighten things up a bit.

          Then they found out that DooM-Pr0n hysteria and Anti-EU agit-prop generates them more revenue, so now it is solid hysteria all the way and never a chart in site.

          Anyone investing according to ZH-DooM & “Europes Imminent Collapse into Heathen Communism” would have missed about 10 years of unbroken Bull Market or about 300% of value in their portfolios.


          One can do pretty much whatever one likes via a Swedish brokerage account, with lower costs and less tax trouble – anything goes here, very democratic. Avanza, for example.

        • Zantetsu says:

          That’s not the type of bubble I was talking about.

          I always call Silicon Valley a ‘bubble of unreality’. I’ve lived here a long time but every time I travel outside of Silicon Valley I see that the world doesn’t quite work the same in ‘real places’ as it does here. There are just significant differences to the way people work and live here that are due to the constant influx of money from the tech industry. People can have attitudes and beliefs that wouldn’t survive long outside of our little ‘utopia’ if it weren’t for that.

          Very often political discussions confuse me until I remember that they are talking about what goes on ‘in the real world’, not in the bubble of unreality that is Silicon Valley.

        • NBay says:

          During the ’29 Crash, bankers, brokers, execs, business men, etc, committed suicide by the hundreds, if not thousands. Is it possible that that very unfortunate “adjustment” to our financial leadership mental “gene pool” was a real big loss to this country?
          I mean, during and after the Financial Crisis, even though people were painting bodies, targets, etc, on Wall Street to encourage and help them, the only suicide I know of was ONE European Noble unknowingly feeding people to Madoff. But he did blast those leadership quality brains all over his office.
          As Topol sung, and lamented the loss of in Fiddler, “Tradition”.

    • curiouscat says:

      Wall Street is exactly the reason it will happen. The reason central banks have not acted to return to a normalized interest environment is to protect the zombie corporations – some have estimated these as high as 15% of the companies in this country – who would not survive if interest rates returned to a rational level. They would fold because their revenues would not support their debt service. Zombies go down, their capital investment losses accrue to whom? Wall Street.

      But, as Dennis Miller used to say, I might be wrong.

      • sierra7 says:

        I don’t think you are wrong at all. Just reflect back to the miserly uptick in interest rates by the FED last December and what it did to the “market”!

      • WES says:

        CuriousCat: Well for sure it has created zombie retirees! I am likely one!

        • NBay says:

          I would just love a definition of a Zombie Retiree especially from someone who says he is “LIKELY” one. And I mean one of WR quality, with backup data, etc. But I’m not holding my breath on that.

    • mike says:

      It may be that the bank’s owners see the end coming and seek negative interest rates, because this subsidized income will come to an end if th ere as another 2008 style need for bank bail out: China, the IMF, the EU, and Japan might not be as willing as the “Fed” was to give these persons free money to gamble. Major banks’ derivatives/other gambling risks are so big that the US can no longer bail them out alone.

      If interest rates fall below the real rate of inflation, that is effectively a negative interest rate. With today’s repeal of the strongest provisions of what was called the ” Volcker rule,” which was much weaker than the original provision proposed, if interest rates go negative, then that means that the banks are engaging in the maximum possible profit taking before the recession: they are doing the maximum gambling before the table is closed by the justifiably angered people after a depression/recession.

      Tax payers are the guarantors of these banks. The current “Volcker” rule (as watered down) already was inadequate, because major bank’s assets are so hard to value and gambling was allowed with their assets, even though all of their assets came from “recapitalization” from the Fed and government: i.e., free government money from the tax payers.

      Actually, that limitation allowed massive gambling of far more than the true assets of banks with government and depositor money. If one of the six biggest banks had to go into bankruptcy, the economic effects would depress the value of the classes of their assets, so the computation of what proprietary trading could be performed was already flawed.

      They live and die based on federal subsidies: the protection that the government gives to fractional reserve banking and to their gambling on derivatives, which they claim has been based on only proprietary trading. Now, that limitation is off and banks can gamble with depositor’s funds under the “reform” enacted today, just when a recession has been predicted by so many experts that may collapse one or more of the gigantic banks.

      It is kind of like if a company that transported pure nitroglycerine over bumpy roads decided that would be a good ideal to transport nerve gas or plutonium in the same trucks. I will not predict disaster but I will tell you: “I told you so,” as I told many clients in 2008-9.

  2. Rcohn says:

    I have a simple question for everyone .
    How does anyone make money buying bonds with negative returns ?Some have suggested that if there is deflation that is greater than the negative returns, the an investor will make money via REAL returns. The problem with that argument is that every FIAT currency in the history of the world has always inflated itself away.
    As I have stated before , the other side of negative/ very low rates means very low returns on capital.
    This in turn discourages Capex, which will mean fewer jobs in the future. Fewer jobs mean more social unrest and the eventual collapse of the EU.Collapse of the EU means that the EU will no longer be the currency of the Eurozone and each country will then be forced to reissue its own currency. The transition from the EU to their own currency is the very definition of chaos.

    • C Jones says:

      Capital appreciation is the new carry, that’s how you make money. Which works … until it doesn’t work.

    • Kent says:

      Only a few fiat currencies have inflated away. Most inflate slower than the actual increase in living standards so it isn’t all that noticeable.

      • Rcohn says:

        Until maturity ,bond prices obviously fluctuate , so there are trading opportunities , both up and down.A trader could just as easily lose money as well as make money. Just look at the recent example of the Austrian 100 year bond.But at maturity bonds are only worth their face value(assuming there is no default), which is usually 100.If you pay more than 100 and hold the bond , you are guaranteed a capital loss . If this loss exceeds any interest that is paid, then you have lost money

        INflated away means that ALL fiat currencies have lost value over time. Standards of living involve another factor , incomes.

    • Robert says:

      Prior to the onset of WWI (not coincidentally a year after the Fed opened shop), the world’s leading economic powers operated with their own currencies in an ordered system known as the gold standard. It was anything but chaos. A Frenchman had no problem accepting a Brit’s pound, and vice versa.
      But central bankers, who operate from the shadows, with one set of rules for themselves, and another for the people, cannot abide by a gold standard (hell, any standard- just Google Andrew Jackson+ Bank of the United States). Now Central Bankers are thick as thieves, but how does CB A really know how many yen, rubles, lira or dollars CB B is really surreptitiously cranking out in his basement? Any more than the members of the Euro community enforced the rules regarding deficit spending?
      Andrew Sennholz, in his outstanding book Age of Inflation, wondered when the world would “make peace with gold.” Because the innumerable (undeclared) wars we are forced to endure would be impossible if, instead of being funded through inflation, required citizens to actually fork up their precious gold, or silver, to finance them.

      • Jack says:


        It’s a good question “when the world will make peace with gold?”.

        The answer or more precisely the following on question would be ( have we learned anything from history)?!

        Gold standard requires fiscal responsibility and sticking to the Rules of fair and equitable conduct of trade and most importantly requires peace!

        The absence of all these factors in the equation/s perpetuated by the contemporary ( Financial Vandals)! Will mean they like the previous generations of these fancy inventors of financial products will meet their demise ( if history is anything that merits our contemplation).

        The size of a Economic Problems facing the world today is NOT larger than the size of The problems faced by the Empires of Yore! ( relative to their own surroundings and the era the represented).

        Figure this out,

        The whole world is now hinging on some scoundrel tweeting away lies and promulgating unfathomable stupidity ( this condition basically puts the excesses of Nero to shame)!

        If by all accounts the Executive power in the states was keen to preserve what’s left over of the declining influence that it exerts on the world events it would have ( long ago ) abolished the FED and thrown there board into the slammer!! With the keys thrown into the Mariana Trench!!!

        But that won’t happen, so the effective fizzling and dilution of the US’s economic influence on the world stage will continue and reaches a stage where it meets its Normal death and be resurrected as a second rate power!!!

        No amount of China bashing will help save their position at the helm. No amount of fomenting unrest in HK or EU , ME will redirect the attention from the real problems facing the US.

        Will they make peace with themselves?

        Will they make peace with the rest of world?

        If history is anything to judge by , the answer is No.

        Sorry the answer to your question was a bit long! :)

        • Sarcastic Fringehead says:

          Looks to me right now the smartest investment is gold buried on your own private property. Problem: could be declared illegal, see Executive Order 6102 effective 1933-1974, believe it or not.

    • JZ says:

      Google net present value for bond “price” calculations. Following is an example of how you make money by having negative interest rates.
      UST issue 10 year paper promise to pay you 100$ after 10 years with 0 coupon. How much would you pay NOW to get that paper? While you are thinking FED printed 100$ and buy it. Market price is then 100$ and the “yield” is then 0%, since you pay 100$ now and get 100$ 10 years later. Assume “you”, forced by FED setting the yield at 0%, also buy that paper st 100$ since there is no alternative.
      Next day, UST issue 10 year paper promising to pay you 100$ 10 years later with zero coupon again. While everybody is thinking, FED printed 110$ and buy that paper. This sets the bond yield at -1%. You sell your yesterday’s paper to FED, and you make 10$ profit.
      Got it?

      These MFers can jerk themselves around -1% or even -2%, but I am sure at -3%, everybody will take out their money and put under metress. Then they will do cashless or charging fees if you want to put cash under metress back in the bank. I am sure the rich will play alone but I am NOT sure what the poor guys with 300million guns will do.

      • JZ says:

        Here is the difference between US and EU or Japan. In this country, we have mass shootings armed by 2nd amendments. EU and Japan? Not so much. While these shooters are confused about who to shoot and they keep doing it at malls or schools, at -2% or -3%, I think they will figure out why their lives are in a mess and they know where to shoot.
        I wish the they make the wrong calculation and go EU or Japan style by going negative. If they are smart, inflation by MMT is the way to go in this country.

        • Wolf Richter says:


          How appropriate that you put MMT and mass shootings into the same context.

        • JZ says:

          Wolf, I am saying mass shooting happens because society is sick. Society is sick because these UNsound monetary policies. At -2% or -3%, people will wake up and suddenly realize what has been sickening the society. On the other hands, MMT is more confusing and less absurd, it will make people stay alive but NOT feeling alive or well. MMT will zombify the society. NIRP, on the other hand, may wake up the society. Which one would you think the ruling class do?

        • WES says:

          Jz: To create confusion, the ruling class is doing both at same time!

      • Brant Lee says:

        The old women in India who hid their money, from their old man, under the mattress found out what happens. In 2016 India demonetized the currency forcing people to turn in the old for the new. Now old man is drinking up the stash and old lady wished she had turned that paper into silver where it would still be safely hidden.

        • Sing a long says:

          I ran into a poor man in North india last month (his mother and he were not paid by a Contractor in India during the demonetization phase (december 2017). He is still waiting for his 27000 rupees wages for 3 months work ($400); The contractor said he could not convert all his old Cash notes into New only a fraction…….gives him the run around.
          The poor lost a lot…

        • NBay says:

          My now retired middle school teacher sister was evidently pretty highly respected. She went to Sac and DC and other places often where the contents of Social Studies textbooks were debated. (Has picture of herself, Lynn Woolsey, and some others on cover of a Social Studies teacher mag to prove it). Anyway, getting a group’s concerns on the agenda was not cheap. She told me about, gay, religious, etc, groups which I expected, but the one this India comment brought to my mind was a demand that references to the Caste System be removed as it reflected badly on India-Americans.
          I’m not sure what to make of that, other than India is a very different country, and including them in this discussion seems to be an apples and oranges thing, to me, anyway.

    • RepubAnon says:

      Back in the 1980s, the inflation rate was greater than the interest rate. If you put your money in a savings account, you lost value every month even though you showed a paper gain.

      How is a negative interest rate significantly different than this? Other than making you loss very clear.

    • BringBackTheMonarchy says:

      It’s almost like Europe should never have abandoned the silver denier.

    • Old-school says:

      Warren Buffet has a good track record of making long term calls.

      When he was running money in the 70’s he shut his investment company down because with treasuries paying 16% the investment outlook for stocks was not promising.

      Fast forward to about 7 or 8 years ago and he said his trust for his wife has 90% sp500 index and 10% short term treasuries. No intrrmediate or long term treasuries at all.

      I have heard him say he doesn’t like fixed income returns because govt is constantly debasing currency.

      He tends to take a 20 year plus view so not saying if your time horizon is short you should follow his advice.

      • NBay says:

        Not sure if Buffet’s advice applies to even wealthier peasants who don’t yet realize they are on long term menu just like middle classes.
        I think his “The First Billion is the Hardest” kinda says it all.

  3. Jonathan Vause says:

    but what else can happen when desired/ex ante savings are greater than profitable investment opportunities, and how to avoid this problem when growth is anaemic (and basically whatever growth we observe requires ‘debt out the wazoo’/total debt increasing faster than debt servicing capacity/real economic value created by the investment)? of course we can debate why S > I (increasing inequality and rich people not spending their money, aging populations, third world oligarchs parking their money in safe havens, or whatever) but we can’t debate that whenever S is greater than I, the value of savings must necessarily fall (eg when people buy into WeWork’s IPO, or bitcoin, or whatever other temporary bubble asset bubble tickles their fancy). on the plus side, after all the bubbles pop the rich get poorer, so it’s not all bad

    • Kent says:

      Great comment. The industrial revolution is over. The last great invention that drove the creation of millions of jobs, the Internet, is almost 3 decades old and pretty much played out. Negative interest rates follow negative investment returns in things like Uber, WeWorks, AirBnB and all the rest. Couple that with mass inequality and you get too much money in too few hands, having to make too many bad decisions.

      • Winston says:

        “The industrial revolution is over.”

        No, the next one is widespread automation of low skilled jobs (even low-wage China is having that problem) and even some high skilled ones via expert systems. UPS is already using a few self-driving trucks. Automation of trucking alone will cost millions of decent paying jobs. Kinda’ makes the current (illegal) importation of cheap, uneducated labor appear long-term unwise, no? Unless those higher birth rate groups are intended to keep the entitlement Ponzi going a bit longer using stolen SSNs while THEY still have jobs.

        Anyway, this only adds to the very long list of things being done that are long-term unwise like using the artificial manipulation of the price of money to run the world and gutting our industrial base to build up a Chinese adversary into far more of a threat than Russia, proving the truth of the old commie adage, “A capitalist will sell you the rope you hang him with.”

        • Kent says:

          The industrial revolution created hundreds of millions of decent jobs. The coming automation will destroy tens of millions of decent jobs. The industrial revolution was naturally inflationary. What’s coming is naturally deflationary. I see negative interest rates as just the natural result.

        • John Taylor says:

          Kent – the industrial revolution led to many peasants being evicted from their lands and desperate for any kind of work to survive, as well as the destruction of cottage industries that many made decent livings from (such as textiles) as they were replaced by low-skill factory jobs.

          There are a lot of similarities between the industrial revolution in the Victorian eta and the new revolution in automation, including long periods of deflation, stock bubbles (particularly in railroad companies), and political unrest.

      • NBay says:

        Agree. The too much money in too few hands can only be dealt with by ENFORCED fiscal policy. Monetary policy can only cause more problems. Where are the factories, infrastructure we were promised, and as said above, when will the losers get wise to it?

    • JZ says:

      What else can happen…… No matter what happens, one has to stick to some sound principles. Like if S>I, you don’t kill people or invading other countries. Like even S>I, you don’t manipulate money to make sure S<I. I know debates on how to carry out monetary policy is NOT as bad as debating which country to invade or which people to kill, it should NOT be discussed. Money should be sound and rate should be what ever it is. If market wants to invest, so be it. If money does NOT want to invest, so be it. Like the market decide as opposed to force it.

  4. KPL says:

    “How will this end? No one knows because no one has ever done this before.”

    It just cannot be good. Insanity is the only way to describe what the central bankers are doing and it is a given we have a disaster in the making when it unravels if one is willing to see it. You just cannot tell what will be the tipping point. But then that does not mean the tipping point does not exist.

    • James Levy says:

      The Political Economist Mark Blyth does a nice job of laying out why the post-war high employment, high income, worker-friendly economy was “reset” in the period 1978-1999 in a deliberate effort to boost profits and squeeze labor in order to “make finance great again” and return the whip hand to Capital. This could be done because those with real money got organized and won over/bought off the political class. The economic crisis of 2007-9 should have led to another reset, but the forces arrayed against it were too strong for the weak-kneed likes of Barak Obama et al. so instead of resetting the rules of the game, the gamblers were made whole and the system infused with whatever levels of liquidity were needed to keep it going. The rich stayed rich and got richer. Everyone else suffered or just got by. We now live in a failed system that endures because the governments and central banks insist it must because the people who own those institutions aren’t interested in changing anything, because the current dispensation is so beneficial to them.

      • NBay says:

        YEP! And the banks aren’t the only institutions that want to “conserve” things exactly the way they are. Corporations have their niches just like the “sovereign” little dictatorships they are, and want to keep it that way, or go PE and get further away from “bothersome” gov’t even more, lobbied to hell as it is by them, anyway.
        Saw S>I, above, whatever happened to r>g?

    • Robert says:

      Whenever you hear “The Fed” or central banks in general, think “The banks that own the Fed”, etc. because that is the reality. Wolf thinks that “negative interest rates crush banks”- get a clue: NIRP is a banker’s wet dream come true: you paying THEM interest on your savings. In fact the push for all-electronic currency is to keep disgruntled savers from saying to the banks F-U and stuffing their money in the mattress.
      “This started out as a short-term emergency experiment.” What a laugh- when a robber sticks a gun in your ribs and tells you “this isn’t a robbery, it’s an experiment,” just say “Thank God.”

      • Petunia says:

        You are correct, a digital cash society is a captured wealth system. They control the money, they control who can buy and who can sell. Expect only listed corporations to be sellers, only listed investments to be allowed, only products produced by listed companies can be consumed, etc. Total financial confiscation and personal slavery seems to be their goal.

        As I have said before, we are a lot closer to 1932 than 2032.

      • Wolf Richter says:


        In its basic activity, a bank makes money on the difference between its cost of funding and the interest income from loans. When that spread shrinks, the bank makes less money.

        Negative interest rates are difficult to pass on to customer deposits because customers find other places to go with their money. So interest rates on loans come down, but the cost of funding goes down less, and doesn’t go negative. And so the spread gets squeezed, and the bank makes less money on its basic activity.

        (And so it will find other high risk activities to where it can make some money).

        • BringBackTheMonarchy says:

          “Negative interest rates are difficult to pass on to customer deposits because customers find other places to go with their money.”

          Don’t worry the IMF is already two steps ahead in that department. Soon they will make sure there is nowhere savers can hide.

        • sunny129 says:

          Very informative and thought provoking article on the subject of NIRP, effects on Banks and the Price discovery>


          I posted a comment with the ‘salient points’ of this article today at WSJ – digital edition under (invitation to readers ) Thoughtful dialogue. with acknowledgement to you. Thank you.

        • Leser says:

          The particular banks owning and controlling the Fed are probably less concerned about the diminishing margin on classic lending. Capital Markets and Advisory rather, where the fees are proportional to volume and credit expansion therefore quite welcome regardless of interest rate level.

          Furthermore, making yield less accessible greatly benefits the elite gatekeepers. The fantastical fees at sovereign-level scams such as 1MDB, Saudi Aramco and all the unsung heists in between dwarf anything earned in the more competitive marketplace.

    • Old-school says:

      I think the restructuring will come during the next revession. It could have occurred during the last one, but society wasn’t there.

      Next recession military spending, pension and social security ponzis will have to be dealt with. Politically it will be important who is in power as it will determine winners and losers. It’s been can kicking since last recession.

  5. CoCosAb says:

    I’m not worried at all!

    I know already who is going to pay for all this financial and monetary terrorism in the end. Just look at the Trillions that the top +-36 million people gained/added since 2010.

    In the mean time, modern monetary slaves just have to enjoy and keep consuming.

    Go to the movie or to a summer music concert!

  6. Ensign_Nemo says:

    A computer program that tries to divide by zero will generate an error and halt the compilation or execution of the program. The machine stops actually working, it just sits there and does nothing until a change is made.

    The same thing appears to be true for the economy in general. If the cost of borrowing money is zero, then it makes perfect sense to borrow as much as you can for any damn thing you want. IOW, there is no reason to care if all of the money will be repaid, as long as more credit is available a person or a company or a government can just borrow more to make the next payment on the old loans. Everything will become an economic zombie, an entity that appears to be alive but has no actual vitality.

    Zombies today, zombies tomorrow, zombies forever.

    All of this is courtesy of our central bankers, who make voodoo witch doctors look like paragons of restraint and sobriety.

    • WES says:

      Nemo: You are right about the problems computers have dividing things by zero!

      Unfortunately some central banker accidentally solved this problem by dividing by a negative number instead!

    • Wisdom Seeker says:

      The key phrase is “as long as more credit is available”.

      That is not guaranteed.

      So who controls the availability of credit, and what are their motives?

      This is actually a very deep question. Superficially it’s the banking system, backstopped by the Fed. But Constitutionally it’s Congress that has authority over the Fed and over the national money. Yet even Congress is not its own master. Who controls Congress? And how do you change that?

      So long as Zombies control the government, the people will get to eat NIRP.

      But since the Zombies ride both the “donkeys” and the “elephants”, this is not a matter of one party vs. the other. What is required is a wholesale cleansing of both parties.

      But a strong minority on both sides are beholden to the zombies, paid and fed by them, or counting on them for retirement. Much like Social Security or Medicare, the policies which support the Zombies may be politically untouchable.

    • Zantetsu says:

      But who do you borrow from? If the lender is not making any return then why do they bother lending to you? So how can you borrow “all the money” if those who already have “all the money” won’t lend it to you?

  7. Satya Mardelli says:

    Normal rates tend to keep American business in check if the risk premium is measured correctly. Assuming the rating agencies do their job correctly any business that exhibits deteriorating business fundamentals will be penalized with higher borrowing costs (cost of capital). It’s this group that populates the junk bond/high yield crowd. Eventually the weak sisters are liquidated through bankruptcy, dumb investors lose their money and the cycle tends to repeat itself.
    However, if poorly run corporations can borrow money at zero or sub-zero rates then the cleansing effect of an appropriate risk premium is lost. What happens then? My guess is that well-run corporations will then have to compete with zombie corporations that have an unlimited access to the capital pipeline.
    If that happens then any incentive to invest in a well-run corporation is lost. Think about it; why invest in a company that has no pricing power? Their profit margins will be squeezed unmercifully. No matter how hard they try, the competition can meet or beat their price because zombie’s cost of capital is zero or less than zero.

    • d says:

      You just described basically the issues every business faces, when forced to compete with ccp china.

      The variance being that ccp businesses have unlimited interest free credit and are not even required to make a profit.

      regularly the ccp will dictate lenders convert NPL to equity at prices dictated by the ccp then hold this equity on their books at prices dictated by the ccp until the ccp possibly one century permits them to sell some of the Forced equity if a buyer can be found at the ccp dictated price.

      Adding insult to injury the ccp then dictates tthat teh lendersupply fresh credit to the previous defaulter as the repeat defaulter currently has NO debt’s so must be credit worthy.

      This turns the lender/bank and the borrower into unrecoverable Zombies.

      No normal business that attempts to brake even let alone make a profit can possibly compete with such.

      These methods are used by ccp china to destroy entire industries in smaller countries and force manufacturing out of highly developed nations.

      • Rcohn says:

        China is a prime example of a mercantilist.
        I am sure that a number of readers are not fans of President Trump, but our Chinese trade policy over the past 15 years has destroyed millions of jobs and funded a very aggressive military buildup .

        • d says:

          15? try 27 plus Clinton still curses the decision he was part of, to allow ccp china to join the wto, with 20/20 hindsight.

          If you look at ccp china, so often, they say, we will do A, when in fact they do, as they always planned to do, Z.

          So many in the west simply refuse to accept that this is standard ccp policy when dealing with the west.

          “China is a prime example of a mercantilist.”

          ccp china is much worse than that, as a mercantilist simply seeks global economic advantage.

          ccp china seeks to lever this global economic advantage, into total ccp system, only world domination backed by its military.

          The Aim is not just a Hegemony but a 1 world order, that order being the ccp order controlled from Beijing. For teh benefit of ccp china, and only ccp china.

          china is still the middle kingdom and all must bow to it. Still being core chinese thinking. Only now its the ccp chinese middle kingdom, which will rule everywhere, unless opposed seriously, quiet soon.

          The win loose indicator being the UNCLOS ruling on the Philippine EEZ. If ccp china is not made to adhere to that ruling, barring a scucessful major conflict to suppress ccp china. (not necessary a full scale military confrontation)

          The democratic west, with is democratic systems, that desperately need an overhaul, is dead.

          Which brings me back to the words of my great aunt who dined with Stalin on more than 1 occasion in the late 40’s

          “The Soviet/ccp/Communist system, is a very bad system, we DO NOT need, or want it, here (in the west).”

          She helped found and run CND, which Stalin funded. We know this, as she arranged much of the original seed money for it, with him personally.

          As Stalin came to fear humans finally had the ability to destroy themselves totally, and if not restrained, they would.

          This evil creature used to be her Gofer, she was never nice, even as an adolescent.

    • envo says:

      Amazon fits nicely into that description.

      They can tap virtually unlimited cash and use it to sink competitors.

  8. JT says:

    I know how it well end. like any ponzi scheme…slowly and then very quickly.

    eventually bond liquidity will dry up and no-one will be able to sell as “no greater fool” can be found.

    then stock market goes down, bond values crash, interest rates on bonds rise, gold goes up alot, we have big recession.

  9. David Hall says:

    The S&P 500 has a dividend yield of over 1.9% (WSJ). There are risks of downturns. People who bought and held for 20 yrs. profited.

    • sunny129 says:

      There are several ETFs of various kind/ sectors/ region ++ with dividends over at least 2.9%, all of course with some risk of various variety. Been in the mkt since ’82. When the earnings fall so are the yields/dividends! Be aware that 40% of earnings of S&P come from over seas!

      At one time it was know in equity mkts ( before CRONY Capitalism and when BAD news is good and whispers from FOMC more important than fundamentals) that once the yield/div in S&P goes below 4.0% it is a yellow flag! Below 3 % red flag!

      May the low price capital has DISTORTED the normal investment matrix I used know under which I traded/invested! We are in uncharted territory, I guess!

  10. Old-school says:

    Free enterprise can be a good system that kind of miraculously improves standards of living in a noticeable way every generation. All of us have played our little part in it. A competitive market keeps people on their toes to run an efficient operation, continue to use newer technology and serve the needs of customer. Representative democracy usually does a good job of adequate regulation and redistributing some of the gains.

    The way I see it negative interest rates and the growing wealth divide is a failure of politics, probably corruption in politics with revolving door policies.

    My whole adult life I have heard the Fed chair tell Congress that the debt is on an unsustainable path, but is not an immediate problem. The reality now is that interest rates must be low to service the debt and we must suffer the consequences of what that does to the real economy. I think what it means is real standard of living for the average guy stagnates as the wealth creation machine is weighed down with debt. Maybe that is OK, but it can be dangerous as too many people become unsatisfied in what the economy is doing for them and we get Antifa, white nationalism, socialism…

    • Rcohn says:

      According to the PEW research center, average hourly wages were $22.65 in 2018 and in 1964 were $20.27 in inflated adjusted dollars.

      • Zantetsu says:

        Perhaps so; but the cost of an ipad was $300 in 2018 and the cost of an ipad equivalent in 1964 would have been what? 3 billion dollars maybe? And how much would a 200 HP car from 2018 that got 30 MPG and had vastly superior safety standards cost in 1964? Probably the modern equivalent of $100,000. But we get them for 1/3 of that.

        Why do people need to make more money when the money they do make can buy so much more?

    • Saltcreep says:

      I’m a great fan of small society and free small scale enterprise myself in principle, Old-School, if it observes an underlying great respect for and governance of resource usage and limits, and an understanding of what constitutes a real surplus that can be enjoyed without eating up the underlying balance sheet (financial and natural) and screwing up the future for our descendants. (I sort of see that this is pure idealism, and doesn’t accord with the demands of evolution, though.)

      The conundrum for sustainability is that those who misbehave will become succesful in dominating those that observe limitations, so the winners are decided by the most aggressively oriented towards resource exploitation. Thus, e.g., the aggressive and unsustainable burning of viable fossil energy reserves that has driven most of what we today see as our current prosperity by far trumps the contributions of sustainable accumulated ingenuity.

      The US IRS uses, I believe, 5.8 million BTU as their benchmark energy equivalent for a single barrel of oil, which I’ve been led to understand equates to about a decade’s worth of human labour input. Whilst such vast seas of energy are easily accessible and used by us without needing to exert much energy obtaining them they provide an incredible boost into the current economy from using energy stored through hundreds of millions of years. Our problem in the present is that we decades ago peaked in terms of the easy sources, and we’re hitting on ever less productive sources for our economic juice, so we’ve instead replaced the real net energy boost with a debt boost in order to provide an appearance of continuation of prosperity, even whilst society rots and inequality increases.

      Note how the affliction is affecting every so called developed economy, regardless of the ruling political agenda, and yet we largely persist in just observing our navels and claiming all would improve if our particular incumbents were replaced with some others who are willing to slightly change the emphasis of their debt usage patterns.

      Burning all that old, stored energy has probably already screwed us in so many ways as we’ve raced up the exponential curve, concentrating a lot of possibly otherwise more widely separated bad outcomes into a short time period…

      • stan6565 says:


        + 100

      • Old-school says:

        I am not for reverting to local economies as there is a magic in the continual improvements in capitalism with all it’s worts.

        My dad now 89 grew up on self sufficient farm with virtually no petrol use. It was very inefficient and not that clean.

        Winter time there were 3 fireplaces that had to be kept burning on the property. Two mules for plowing aren’t so efficient either. It was a hard life.

        He made his living later as sewing machine mechanic. I remember watching them roll out fabric about 100 layers deep and cut with special cutting blade around patterns. Its a simple example of a 100 × productivity improvement that happens when we specialize. It’s about human brainpower to do more with technology, but govt has it’s role to fill in gaps of those hurt in process.

        My dad still gardens. It’s in his blood. But his use of petrol, fertilizer, chemicals is much more per output than a 1000 acre farm with big equipment and technology.

        I always say we have the luxury of first world problems instead of third world problem of figuring out which bug you are going to eat today.

  11. historicus says:

    How much money do you have to have to retire…when interest rates are negative?
    The ECB operates at the direction of the member nations. They have decided they will no longer pay for the money they borrow. Trump admires this.
    But who empowers these central bankers that manipulate and tell us what interest rates will be? The same who benefit.
    Governments now can operate sans financial constraints of borrowing.
    Deficits and debt now become assets that bear interest. Governments get bigger and bigger.
    Central banking is socialism… is economic decision making by committee, an earmark of socialism. And here they are in Europe engaging in this activity to save……failed socialist countries.

    Anyone see a problem? This is MMT.

    • Old-school says:

      In a normal world your interest rate on treasury investment should offset inflation so if you plan to live 35 years and need $30,000 you need about $1.05 million. At financial repression of -2% below inflation I think you are going to need $2.1 give or take. That’s how it’s done if you are a broke-ass government.

    • IdahoPotato says:

      Germany Sees Anemic Demand for First 30-Year Bond at Zero Coupon.

      Debt agency admits sale of 2050 bond may have been ‘too large’.

      as per Bloomberg.

      • Robert says:

        It seems that at Deutsche Bank, people were lining up at the withdrawal window and telling the bank manager “The lack of interest is mutual. Close my account.”

    • WES says:

      Historicus: Since socialists control government they can change the rules to help finance their future survival. They care not about the people, only themselves. Socialism for the people has always been a hoax! That is what history teaches but few study history!

      • d says:

        Socialism, like Communism is for the masses.

        Not the people who run the place, who are the ultimate corrupt crony capitalists. (look not further in America than AOC with her MAJOR family wealth

        One only needs to look at the ccp chinese politburo, every single one of them, is a $ billionaire.

  12. james wordsworth says:

    The US economy is doing well because of insane tax cuts and ridiculous deficit spending. Ultimately this will force rates even lower, because any increase in rates will drive the deficit higher. Ultra low rates keep the game going for a bit longer.

    The real, never talked about problem, is that to address climate change we need much less consumption, not more. We need to ditch GDP and move to a basket of alternative measures (life expectancy, health, CO2 emissions, etc.) And ultimately as tech makes more and more “humans” into debt/work slaves, we need a method of putting money at the bottom. Yes UBI is going to become a viable solution (especially with negative rates – which reduce the cost). Without the drive to just make and spend more money (psychologically self destructive to start with), maybe we can find a way to not destroy the planet and yet live reasonable lives as we spend our limited time floating through the universe.

    • Unamused says:

      You are too late.

    • CoCosAB says:

      I hope you understand you’re trying to talk members of a specie, that doesn’t care at all about the Planet and, the funnier part, to preserve their life support systems, aka ECOSYSTEMS, to start caring!

      Also, never mind the fact that many others have been trying to wake the so called “intelligence” of these (we) animals without any type of success.

      But hey… At least is good to know that a few aren’t totally brain dead.

      • sierra7 says:

        To get the attention of the jackass first you have to hit it upside the head with a piece of 2×4……The public is the one that has to wield the 2×4….the jackass is the political/economic system.
        All that is “for sale” today is essentially represented by the same old, “Snake Oil”…and their peddlers. Wake up!
        We need a return to the “Commons”; a return or a renovation of a human society.
        We are confusing “lifestyles” with “quality of lives”.
        There is a difference.
        What do you think I will do if we enter into a period of “negative interest rates?” I’ll take every damned penny out of my credit union tomorrow……and wait for the black markets to spring up.

    • W.E. Farr says:

      At the recent climate change conference in Chicago this past few weeks, about 1,200 attendees and speakers (according to my SIL) flew in from all over the globe on aircraft that spews tons of CO2. Funny that they didn’t ride their bicycles to the conference!

      (apparently, they flew to get the frequent flyer miles).

    • weinerdog43 says:

      “Who are the real national socialist in this scenario?”

      That would be you. Please keep up.

    • Old-school says:

      I didn’t take political science. I remember about falling out of my chair when I heard that was a degree. I am assuming what they tell you in political science 101 is that nothing gets done in a democracy unless you say it’s a crisis. I think the general older population becomes skeptical.

      If the Al Gore’s of the world want me to follow them then they should lead by example and live in a modest home, take a train instead of a jet when possible and don’t try to profit from the global warming agenda.

      It’s nearly always about the money.

    • Ethan in NoVA says:

      The UBI money will just get taken as part of the normal equation by the usual suspects. Rents will go up to take it all, or food prices.

      • Dale says:

        Exactly. All government subsidies (housing, education, healthcare especially) only serve to drive costs upward, with the putative beneficiaries worse off than ever.

      • d says:


        I live in a nation that effectively has a small UBI.

        Small room rates and small garage rates, have risen to more than the weekly UBI.

        For UBI to possibly achieve anything, long term positive for a society. Rents and land prices must be controlled and deflated. This is why UBI alone can not solve the problems, and all UBI pilots are deemed failures.

        Or speculators with access to cheap finance will simply continue to make it impossible for small peopel to have any sort of life beyond complete financial slavery, close to any sort of employment source.

        Those on a UBI can never hope to rise, no matte how they try. When everything they earn goes to a rent seeker, simply to provide basic shelter which should be a basic human wright.

        Single generation social and economic upward mobility, has basically been eliminated, for the 90% + again, by the peopel who previously suppressed it, pre 1900.

        We had a system in our country that eliminated massive short term land and property appreciation to some extent a small % of the beneficiaries of that system, abused it.

        The Maximum Shareholder Value, maximum profit now, finalization deregulation mob deliberately destroyed it, instead of reforming it.

        40 plus years after the decisions were made to destroy it the administration is vainly trying to restore it with very little success to date. as they have lost control of the land.

        They can not drive land price down by over 80% without crashing the housing economy and several financial institutions.

        Nor can they increase the minimum wage by 100% + which is the other option to restore housing affordability to rates we had 40 Years ago.

        Note I said affordability, not price.

    • envo says:

      Whatever one’s take is on climate change (btw – if you read a lot of ancient history, there has been very dramatic climate change events over very short periods of time – decades … but I digress) here’s the thing:

      Reducing consumption will end in tears.

      Here’s how:

      If everyone bought a car every 12 years instead of say ever 5, the automotive industry (which extends far beyond the manufacturers and dealers – think steel and aluminum companies, think plastics, think chips and so on) would literally lay off tens of millions of workers.

      And because we are reducing consumption of everything those workers would not be able to find jobs.

      And laid off people buy nothing. They end up living under bridges.

      Since this policy applies to everything, that means hundreds of jobs INCLUDING YOURS at some point – vapourize.

      Need I go further?

      So you see, what you are suggesting might sound good (to you and perhaps the Green Party supporters) but in the real world what you are suggesting, if implemented, would lead very quickly to the total collapse of civilization.

      I am no fan of how humans are wrecking the environment and extincting animals.

      But at the end of the day there is a acronym for what we are doing look up TINA.

      On the bright side, since it is humans that are clearly the PROBLEM, it looks like we are soon to add another species to our extinction hit list.

      How ironic is that!

      • Zantetsu says:

        You are saying that we either consume ecosystem-damaging products or we consume nothing. That is a false dichotomy.

        We have a third choice: consume products that damage our ecosystem less. People will still have work, products will still be made. But it will be on a more sustainable level.

        I would be fine with everyone working 20 hours a week and buying half the stuff with half the income.

      • d says:

        “Reducing consumption will end in tears.”

        Only because you have a business model based in.

        Ever increasing population, consuming goods, with ever decreasing lifetimes and quality, funded by ever increasing volumes of cheap fiat credit.

        The answer is to reduce the population (which can be done in a civil manner although the, Hindus, Catholics, and muslims, will not like that, or cooperate willingly) and the number of Globalised Vampire Corporate Entities.

        Whilst increasing quality and lifespan of goods.

        The Globalised Vampire Corporate Entities, dont like that Idea, therein, lies the problem..

    • Old-school says:

      I am not too worried about climate change as if the problem is severe enough enough resources will solve it. There are always problems and it’s all about a system to direct resources to the best place.

      I live in the south. It’s an intolerable place for two months in the summer. Not many wanted to live here a hundred years ago. Now we just tolerate it and stay inside in the A/C. Many people find living here better than living in a cold climate as winters are mild. Humans can adapt. Humans slowly migrate as technology changes things.

      Remember we measure pollution in ppm now. In the past people died ignorant of pollution and disease. It was a mystery.

      We have a political system that allows a lot of fighting before we commit big resources to solve a big problem.

  13. unit472 says:

    We’ve come a long ways from Walter Bagehot’s dictum ” central banks should lend early and freely (ie without limit), to solvent firms, against good collateral, and at ‘high rates’ to arrest panics. Because Bagehot lived in world of hard money Central Banks could not expand their balance sheet by 400 or 500% to buy up every distressed loan some reckless or corrupt banker had made. Those guys went to prison and their creditors bankrupt.

    Today the Angelo Mozillos, Franklin Raines and Fred Goodwins get to keep their fortunes and the debts of their banking empires are made good by the taxpayers. Thus reckless behavior and financial fraud is underwritten by Central Bankers engaging in untested theories and ‘temporary emergency measures’ that can never be ended less the whole damn system collapse. QE and Zirp become a sort of Frankenstein monster its creators cannot destroy

    • Iamafan says:

      By the way, I downloaded his famous Lombard Street writings for free to my Kindle. Any serious person who wishes to read about Central Banking can do so for free.

      • CoCosAB says:

        The illusion (or delusion) was already alive and well at that time!

        “I can imagine nothing better in theory or more successful in practice than private banks as they were in the beginning. A man of known wealth, known integrity, and known ability is largely entrusted with the money of his neighbours. ”

        Which is to say that at that time the author was already against the ACTUAL private banks.

        But today the delusion still persists.

    • Dale says:

      Whenever Bernanke comes up in a conversation I recall how he violated Bagehot’s Rule by saving the insolvent, the stupid, and the greedy, firmly laying us on the present unsustainable course.

  14. Crush the peasants! says:

    Negative interest rate student loans. Ka-ching!

    • Iamafan says:

      I think default describes what’s really happening.

    • CoCosAb says:

      Like compound negative interest rates? It would be faster…

      • WES says:

        CoCosAb: Notice nobody talks about the power of compounding, the eighth wonder of the world, anymore!

        Central banks must be getting desperate that inflation isn’t enough so now need to add the power of negative compounding to the mix!

    • BrantLee says:

      Negative rate payday loans. Better than helicopter money.

      • NBay says:

        I sorta saw REAL helicopter money once. (No parents would drive any of us kids over to get some, although we all threw our best shit fits). Around 1957-8, East Bakersfield, CA. The local merchants (to increase business, I guess) announced ping pong balls would be dropped from a helicopter onto the main drag on a Saturday. Thousands! Most held nothing, but there were hundreds of gift certificates and other prizes worth up to a few $1000.
        Big mistake, even with extra cops. Saw pictures in local paper, and on local Channel 10 news.
        Things were cool in those days, was fun growing up. And easy oil was flowing….saw 17 cents a gal. Feel sorta guilty about it, but I never have had a say in anything about this “culture” in my life, just along for the ride.

  15. Iamafan says:

    What is the haircut assigned to a negative yielding collateral repo? I assume that’s what it’s used for since most of them are sovereign.

  16. Negative interest rates mean only one thing: the death of liquidity. That means the death of markets. At a time when we need to inject more money into the world, our governments are working against us and sucking it all out.

    We are staring into the abyss known as the Greater Depression.

    • CoCosAb says:

      Logical to very few!

      negative interest rates means destruction of paper-digital-money. If we destroy it naturally and eventually it will start to turn into a rock!

    • Sergey says:

      The reason for negative interest rates is to *raise* liquidity. It’s supposed to serve as an incentive to *not* park money in bonds but to lend it out into the economy since money put away into a 10 year bond does not circulate through the economy (although, one can argue that government spending does trickle down into the general economy so than corporate debt).

      The ongoing negative interest rates show that confidence in business growth in the EU and Japan is very low.

      • WES says:

        Sergey: Isn’t it ironic that negative interest rates actually reduce liquidity and reduces consumer and business confidence such that they tend to save more due to the increased uncertainty about the future!

        • Sergey says:

          No, not ironic. Low and even negative interest rates are a symptom of low confidence. They are not the cause. We too had nearly 0% interest rates quite recently. Mind you, I completely agree that negative interest rates are a bad idea but simply raising the rates (which is what should be done) won’t do much to address the underlying fundamental problems that are the cause of current ongoing economic uncertainty.

  17. timbers says:

    “Just do it.”

    It’s not that hard, folks.

    The Fed should have raised not lowered them. And the Fed should raise rates now. By the Fed’s own standards and proclamations, it is still in easing mode and has never not been in easing mode since what…2008?

    And if doesn’t raise rates? Well more and more Illinois type thingy’s are in our future I suppose.

    Just do it.

    • Sergey says:

      The Fed has not been in easing mode for a while now. They’ve implemented a policy of Quantitative Tightening (the exact opposite of QE) and they’ve raised rates back in December. However, they’ve been under very heavy pressure from the President to cut rates drastically and to re-implement QE. Part of their reasoning for the recent rate cut was uncertainty brought about by the trade war. Ironically, that had the opposite effect of encouraging the President to push ahead with the trade war within 24 hours of the announcement.

      The current gag order implemented by Powell makes me think that, despite analyst expectations, we may actually see a rate hike this time since another rate cut may once again embolden the President to be more hawkish on the trade war.

      • WES says:

        Sergey: I am a bit puzzled by your comment that the Fed rate cut only encouraged Trump to continue with his trade war. He actually delayed new trariffs by 3 months!

        One could argue that Obama got low rates from the Fed while the powers-to-be who oppose Trump have instructed the Fed to punish Trump by raising interest rates. Maybe it is OK if a Dem but not for a Rep?

        But then again it is understandable the powers-to-be oppose trade that benefits Main Street at the expense of Wall Street.

        • Sergey says:

          WES: He introduced the September 1st tariffs right after the July 31st cut. The 3-month extension was put in place later due to “Christmas fears” and that extension mostly applies to tariffs on electronics. A wave of tariffs is still due to hit on September 1st.

          As for Obama’s low rates, Obama was elected in 2008 – right in the middle of the Global Financial Crisis. At that point, low interest rates and QE made sense. However, keeping the interest rate low and having ongoing QE does not make sense in a strengthening economy since it tends to create bubbles.

          Trump himself campaigned on the fact that low interest rates and QE are a way to falsely boost the economy. Now that he’s in the Presidential seat, he’s clamoring at the Fed to do the exact opposite.

          Raising interest rates is not “punishing Trump”. It’s stopping the current corporate debt bubble from inflating even more than it already has. Low interest rates tend to benefit Wall Street more than Main Street since it makes borrowing a lot easier. High interest rates, however, tend to be reflected in increased CD and Savings Account rates. Our current rate at 2.5% is still, historically, extremely low.

      • Powell offered Prez a way to get his rate cuts, stir the pot on trade. It’s a perfect deal, done with a wink and a nod. Powell gives him another rate cut in Sept and Trump backs down on the tariffs. Market gets a double shot of impetus through holidays. Reelection campaign gears up, and Powell is absolved of blame. Had to do it, trade wars and such…

    • polecat says:

      “When people who have nothing left to lose .. THEY LOSE IT !”

      Gerald Celente

  18. Bette Holtman says:

    Thank you for the information about the writing of Walter Bagehot. Have it in my Kindle for further reading!

    Also currently listening to “ When Money Dies” by Adam Fergusson on Audible.

    • Petunia says:

      Also take a look at this novel about what a financial collapse might look like: “The Mandibles: A Family History 2029 -2047” by Lionel Shriver. It was selling at B&N for $6 last week. I highly recommend it.

  19. Iamafan says:

    I’ve been thinking about NIRP bonds for a while. I think the big institutions that buy them think they are free from default and can serve as collateral to borrow and make money at repo. Of course this does not apply to junk nirps.

    • MC01 says:

      I know I will be proven wrong over the next year, and I am probably still very optimistic, but technically speaking securities can only pay a zero coupon at very worst.
      If I remember correctly “negative yield” is a metric reflecting the relationship between the present price of a given security and the remaining yield to maturity (YTM): to give a quick example a $100 bond with a YTM of 16% trades for $170 it has a negative yield of about 4.4%. In short it means at that price the buyer is losing money.

      As a bond investor, there are only two reasons to buy bonds at those prices.
      The first is if you are truly desperate about yield you are prepared to the handed a true rotten deal.
      The second is, well, if you hope to sell them at a profit to somebody else down the road.

      Both dynamics are playing out right now, with the second very strong in Europe where it’s an open secret The Fox and The Cat will start buying old rusty bicycles with renewed enthusiasm shortly. Even Italian bonds are doing very well, and that’s despite that country being without a government and with an eye-watering €23 billion budget shortfall.

      Junk bonds trading at a negative yield are, sadly, the product of insurance companies, pension funds and the like being caught in the open by monetary policies.
      These outfits need the yield so badly they have to overpay for very unsafe stuff without being rewarded for the extra risk: real-world yields may not be truly negative but they are truly pathetic.

      • Petunia says:

        These pension funds forget that they have a responsibility to preserve capital, not just to create income. If they can’t create income, they have a duty to sit on the cash. Now there’s a controversial theory.

        • WES says:

          Petunia: I think you have forgotten that the government has the power to change the rules of the game! Governments have changed the rules to legally force pensions to buy negative yield bonds!

        • Petunia says:


          I haven’t forgotten the govt does whatever they want. I only have to read the news to see it. One of the reasons I don’t like investing in gold is that when the govt wants it, they will take it.

        • WES says:

          Petunia: Sadly what you say is true!

          However the first economic lesson I ever learned, as a kid, came from playing a game with my Grandfather, a farmer. After lunch he would sit in a chair, resting, and wave a $20 dollar bill in his hand. We would try to snatch the $20 bill from his hand.

          Alone we could never succeed in snatching the $20 bill because he could move it too quickly! Only when the three of us (gov) gang tackled him would we succeed!

        • medial axis says:

          Petunia: “…One of the reasons I don’t like investing in gold is that when the govt wants it, they will take it.”

          That’s why many see bitcoin as better than gold, governments cannot confiscate it, so long as only you hold the private keys.

        • Zantetsu says:

          Medial Axis, bitcoin is a fantastic idea at small volumes but unfortunately it does not scale. Lots of smart people are working on alternatives to try to address that though so … fingers crossed …

        • NBay says:

          Gov’t does exactly what big donors and Corporations (which is where big donors are allowed by law to make their “blame free” piles, increasingly in private ones, although there are a few public ones remaining) tell it to do. While political seats are not quite “bought” (as in the City of London, where more money = more seats), they might as well be. Getting mad at “our” government is totally stupid, as it hasn’t been “ours” for a long long time, but the “democracy” charade goes on as long as TPTB deem it required, which I figure won’t be a hell of a lot longer. I wish Unamused would disclose their end game, as I haven’t figured it out yet.

          We used to talk on Haight St about ITT eventually having it’s own army…..HAHA…we were sure naive, but we had useless ad driven consumption and growth for it’s own sake pegged right.

  20. Iamafan says:

    Truly fascinating read:

    *Even at zero or low positive repo rates, there is a perverse incentive on the Seller to fail, inasmuch as a failure to deliver creates a free option on the repo rate. If the repo rate rises subsequently, the Seller can cure the fail with collateral borrowed through a separate reverse repo. He will owe interest at the original repo rate on the cash he receives on repo on which he has just delivered but will receive interest at the new higher rate on the cash he gives on the reverse repo.

  21. Dale says:

    Who buys negative-yielding debt? Not mutually exclusive:
    1. Investors who are required to for reasons of assessed risk. Insurance companies, pensions, and (partially) banks. The low rates cannot possibly meet their investment requirements to remain solvent, so the CBs are basically dooming them to failure.
    2. Investors speculating that interest rates will get lower. If rates go higher instead, they will lose incredible amounts of money. But they don’t care, the CBs have their backs.
    3. Investors who don’t have access to higher rates due to capital controls, but still need to park their money somewhere. Recently the CBs have worked with certain financial institutions to make sure that foreign exchange insurance is just high enough to limit the attractiveness of lower-risk bonds with higher interest rates (e.g., US Treasurys compared to EU bonds).
    4. Lazy and stupid investors (don’t underestimate this group!).

    • elkern says:

      Thx, this helps a bit. When I studied Econ in college (1980’s), Negative Interest Rates were mentioned as an interesting mathematical discontinuity, and waved off as “obviously” impossible in the Real World, so I’ve had trouble making sense of all this.

      It kinda seems like a perverse form of inflation – like the CB’s pumped gobs of “money” into the top end of the economy, to the point where Big Players are running out of ways to spend or invest it. Like a Government propping up the economy by literally printing money – but only printing $1B notes, and only giving them to people who already have one. This drove up prices for Very Expensive Things (NY RE, Big Art, Corporations), without much inflation at the bottom end (can’t buy a beer with a $1B note, but you could buy the company that makes it).

      High Gini means the Main Street economy is limping along, limiting options for Wall Street to invest in new ways to suck more money out of the Real Economy.

      Wolf’s OP speaks of Banking as it should be – symbiotic, thriving in concert with the larger Society – but it has become parasitic, and it’s killing the host (us).

      Ironically, the ideological rejection of Fiscal Policy (Inflation! Inflation! Inflation!) in favor of Monetary Policy has led (inevitably?) to a place where CB’s only tool – Rates – no longer works. They’ve been running things with smoke & mirrors (QE, Zero Interest) since 2008, and now they need new tricks to keep it going a little longer.

      This ain’t gonna end well. Balloon’s gonna pop.

  22. raxadian says:

    So how many people are making money borrowing on negative Japanese and European rates and then going to the US and lending on positive rates?

    • economicator says:

      The question is, how can one do this as a private citizen? Any brokerage offering that?

  23. MCH says:

    As to the question of how this will all end. I think the answer is slowly until there is a need for a digital change.

    At some point the dreaded N word is going to appear in the language of all the talking heads. Because banking like electricity is going to be essential to a functional society, once you get to a point where collapse is inevitable, the only recourse to even keep the basic functions going will be Nationalization. Given the state of the EU, isn’t it any wonder why the Brits want to leave the party. It will cause a ton of economic pain in the short term, but this NIRP policy just give the Brits another excuse.

    Wolf, I am also surprised you haven’t talked more about Gold lately. Is the central banks are already stocking more of it in preparation for whatever comes next. Can they even do that?

  24. SocalJim says:

    Negative rates would ruin all those fancy financial stochastic calculus based PDE models which underly all the derivative pricing models. So many assume away negative interest rates … I can imagine.

    Then, what about cap structure arb? How that work with negative corp debt?

    Sounds like lots of fun … I would go back to work just to watch and play.

    • Dale says:

      At least for BS, the options pricing is not very sensitive to the risk-free interest rate (including negative values). So for low NIRP, maybe ok.

      But capital structure is a different story. I think you would see buybacks go through the roof, as a way of converting equity into debt. (Sort of what’s been going on the last few years with low interest rates, but more so.)

      • SocalJim says:

        Not Black Scholes … the stochastic interest rate processes underlying derivative pricing is one of the issues … some are lognormal, other distributions require shifting … what a mess.

  25. Lets wait and see what the new head of the ECB does? We could just “twist again like we did last summer..” The pronouncement that CB policies have failed is not shared by the people who make these policies. They consider their policies a success. Are we in a crisis? Look at the markets, and asset prices, is the last decade a miserable failure? Eventually the economy will invite even greater participation. Keep your eye on the sparrow…

  26. Iamafan says:

    Actually the Fed is very ready since 2004:

    *From early August to mid-November of 2003, some market participants lent money at negative interest rates to borrow a particular Treasury note. The episode is instructive because it refutes the popular assumption that interest rates cannot go below zero and demonstrates how the collateral value of a security can lead to negative interest rates. The episode also shows that the ancillary costs of failing on an obligation to deliver Treasury securities can sometimes be significant. Finally, the episode shows that market participants will modify old contract forms to meet new needs—demonstrated in this case by the appearance of guaranteed-delivery repo contracts—as economic conditions evolve.

    PS. There is a max 3% (minus FOMC Fed Funds Rate) for fails now.

    Ah, there is always something new to learn.

    • Wolf Richter says:

      Yes. And during the financial crisis, yield on some Treasury bills (I don’t remember if it was just the 1-month of if it went up to the 3-month) dropped below zero on panic buying when people thought their banks would collapse. But it was only brief periods, and only a tiny bit negative, and the yield curve was comparatively steep at the time, and you could step up the maturity a little and get 2%. At, there has been a page for a long time (it’s still there) with a warning that this might happen occasionally.

      • Iamfan says:

        Here it is.

        *Treasury TIPS auction rules allow for negative real yield bids and describe how the interest (coupon) rate on the original issue would be set if the auction stops at a negative real yield. TAAPS handles negative-yield bids for all TIPS auctions, both for original auctions and reopening auctions.

        In April 2011, Treasury amended paragraph (b) of 31 CFR 356.20 to state that if a Treasury note or bond auction results in a yield lower than 0.125 percent, the interest rate will be set at 1/8 of one percent with the price adjusted accordingly (i.e., at a premium). This change applies to all subsequent marketable Treasury note and bond issues: Treasury fixed-principal (also referred to as nominal) notes and bonds as well as Treasury inflation-protected notes and bonds.

        This refers to TIPS only.
        Do bills and fixed coupon notes allow for negative yields?

        • Wolf Richter says:


          “Do bills and fixed coupon notes allow for negative yields?”

          I think you’re asking if they can be issued (rather than get traded) with a negative yield. The answer is, Yes.

          With bills, normally you buy them at a discount from the government when issued, and then when the bill matures (for example, in 3 months), you get face value. The difference between the discounted amount you paid and face value represents your interest and therefore your yield. This is the situation now.

          A negative-yield bill means that you have to pay a premium over face value to buy it, and when it matures you get face value. The premium you paid over face value is your negative income, or negative yield.

          Back in the day, this happened because there was so much desperate demand at auction, and the EFFR was at near 0%. But it didn’t happen for long, and the negative yield was barely negative.

          I am not aware of any coupon-paying US Treasury note ever having run into a negative yield situation at issuance. But it’s possible that they will.

          The explanation in the link you added says that the lowest coupon any note will pay is 0.125%. So it will always pay a coupon. But it may be sold at a premium that is large enough to where, if you hold it to maturity, the coupon payments are not enough to compensate you for the premium you paid, and you end up with a negative return. And that would be your negative yield at issuance of the note.

          But if market yields drop further into the negative after you buy this negative-yielding note, you will be able to sell it at a higher price and therefore book a profit.

          But remember, as the note gets closer to maturity, its price goes back toward face value, no matter what the market yields are. The last guy holding it on maturity day gets paid face value. So to make money on these things, to have to sell them after yields fall further.

      • NBay says:

        Yeah. That was when the Vanguard Treasury Money market fund was closed to new investors. But who (in the uninformed world) would have ever guessed QE was coming? I remember Cramer “calculating” it couldn’t go below 500, and some other CNBC regular stuck his neck out and called bottom within 3 days. Actually was fun watching the whole bunch going nuts with fear, quitting, ranting, spilling beans, etc.
        And saw actual bottom (Mar 9?) at 666.7. Expected evangelists to go bonkers over that, but never heard a peep.

  27. tommy runner says:

    regulations are ineffective w/out consequences for the violator. whom regulates a fully autonomous circle jerk body. if they want to use cute mil terms like ‘shock and awe’ may I suggest fragging for regulation and consequence in one toss or.. push the big red fn reset button that says ‘don’t push’ before these assholes resume the world invitational championship.

    • medial axis says:

      Yes, so long as crime pays then doing crime is economically rational and so some will do crime. This is the problem in the banking and the financial sector in general – there are loads of regulations but it appears it still pays to break them. While that remains the case then breaking regulations will continue – it’s the rational thing to do.

    • NBay says:

      Yeah. I can sure relate to that form of regulation.

  28. Gooseburt says:

    Why can’t the Fed and Powell make a strong case about disinflation and thus, provide a reason as to why they are unwilling to lower interest rates and hence being responsible, versus allowing the Fed to become a weaponized hedging tool for crooks?

  29. timebank says:

    Nobel economist Paul Krugman says zero interest rate environment the ‘new normal’ (, 14 Jul, 2016)

    “New York-based economist says US interest rates trapped in conditions similar to the 1930s for the foreseeable future

    “The Fed really, really wants to raise rates. They may do it. The statistics doesn’t look so bad. But if the Fed does raise rates, it’ll be sorry. We’ll just be importing dollar strength,” he said.”

  30. Gandalf says:

    Here’s a question – isn’t NIRP going to eventually cause ANOTHER massive financial crisis as banks are forced to make more speculative loans and buy more high yield junk bonds to try to make back that negative interest rate?
    NIRP is basically turbocharging an already unstable system inherently prone to boom and bust oscillations

    • Wolf Richter says:


      It might. But the irony is that if NIRP causes another financial crisis, even deeper NIRP will be inflicted on the economy to deal with it :-]

      • MCH says:

        Yes… Deeper, Harder, Faster. More NIRP. It sounds like a bad joke, and it makes me wonder who else would follow suit in this race to the bottom.

    • Iamafan says:

      This is a good question. If the GFC was caused my “mistrusting” and “doubting” the solvency or ability to pay of your counterparty; wouldn’t negative yields signal mass default of the obvious. I don’t think our financial system is ready for this lunacy. In the USA we still value collateral. The sounder the better.

      • medial axis says:

        So what is the soundest collateral? And are you sure it’s not overpriced?

    • Old-school says:

      For a retiree I think you have to try keep your head and not make a fatal investment mistake. I think you have to determine your personal inflation rate.

      Then match up your income needs by using a duration matching scheme. You can do it in many ways but just like a pension fund your needs for income must be matched by time horizon of your investments. With dividends very low the duration on stock investments become very long. 2% = 50years, 4% = 25 years. Sure you should get capital appreciation but you can’t count on that as income.

      You can look for alternative investments, but you have to be careful not to go up the risk curve as that can be fatal mistake.

  31. Vichy Chicago says:

    It’s times like these that I remind myself of something Jean-Claude Juncker said: “When it becomes serious you have to lie”.
    [In 2011 regarding Greece’s financial meltdown.]

  32. Mean Chicken says:

    Bang-bang, Maslow’s hammer?

  33. polecat says:

    You just gotta love it – Humans talking up supposed rational abstract economic concepts .. whilst donning their gilted blinders .. with the sole purpose of enriching themselves, at the expense of everyone and everything else ! .. minus all the negative externalities where the planet’s now tenuous ecosystems are concerned.

    … and Man is supposed to the ‘rational’ animal …


    • polecat says:


      crosses heart and hopes to live a little longer then expected by our overlords …

    • Winston says:

      “Economics is generally regarded as a social science, although some critics of the field argue that economics falls short of the definition of a science for a number of reasons, including a lack of testable hypotheses, lack of consensus and inherent political overtones.

      “Underlying the difficulty in developing and testing an economic hypothesis are the nearly unlimited and often unseen variables that play a role in any economic trend. The frequency of immeasurable variables in economics allows for competing, and sometimes contradictory, theories to coexist without one proving the other infeasible. This uncertainty has led some observers to label economics the dismal science.


      But central banks can run the world anyway…

      • d says:

        Economics is a “Historical” topic.

        As all economic theories, are only proven or disproved, in History. Sometimes you need a 100 year plus gap, between event and rationalisation of the event, to see what really happened.

        Freidmans “Maximise shareholder value” has only been proven to be a colossal failure 40 plus years after it was adopted and even now, the consensus is only just starting to agree. It hollows out entities and seriously damages the other real stakeholders at the expense of the entire economy, so is fundamentally wrong.

        Although many here have realised its faults long ago.

        When People like Jamie Dimon come on board with a position that rejects a theory (Maximum shareholder value) that has massively lined their personal pockets. You know that theory has seriously screwed the pooch.

  34. Winston says:

    Excellent! I’ve been posting links to your fantastic reports in “Rah-Rah! Everything is just great!” forums everywhere.

  35. Randolph says:

    My running theory is that the Fed (likely part of the deep state that tried to get rid of Trump), will not enact negative interest rates or even cut aggressively under Trump’s watch.

    My feeling is that ‘They’ would rather tank the economy than see Trump re-elected. So under a democratic administration we can kill the Trade war and keep out-sourcing our prosperity (thus keeping inflation under control).

    Then the Modern Monetary folks (Possibly Bernie or Warren- pick any of them) will demand the FED undertake QE and negative rates to support their generous social programs. And because of the new ‘open borders’ policy and free trade agreement with China the USA will be enveloped under a nice and comfy deflationary blanket in which to experiment with negative rates.

    Or is that too elaborate?

    • Zantetsu says:

      Yes. You are squarely in tinfoil hat territory.

    • Old-school says:

      This is a little extreme but it gets the idea across. The Fed is the only game in town on asset prices, but real wealth is future inflation adjusted cash flows of stocks which they have no positive long term affect. The wealth affect is fools gold. Don’t be left holding it.

  36. Rowen says:

    I wonder what’s worse for an economy: NIRP or negative population growth rate (e.g. Italy/Japan)?

    • d says:

      Longterm NIRP is worse as NPG must eventually cause some wealth trickle down to a lesser # of recipients. Therebuy increasing their + net worth.

      Also the # of persons effected Negatively by bankrupt deceased persons must shrink.

  37. Wes says:

    Too much electronic money chasing to little of assets? The Keynesians refer to this as pushing on a string. When you push on one end (interest rates) of the string the other end doesn’t move. This is a unique situation to modern economics because in the past whenever money was created by the Federal Reserve the economy expanded and new assets were created and yielded positive returns. It is now almost impossible to find real price discovery. As stated by Mr. Richter it has become difficult to even assess risk accurately. If rates were to go negative in the US it could cause an exodus of deposits from the banks. When money earns no return Gold becomes a viable alternative. Especially when a currency devaluation may happen.

  38. Memento mori says:

    If negative rates become a reality here, I wonder how IRS will treat all those negative incomes that people will start to declare on their tax returns .

    • d says:

      by denial.

      As you “Invested ” in a known negative rate security, with the “intent” of loosing money.

      Which in most places negates any claim for tax relief on a deliberate loss.

  39. Doug Mittas says:

    I would rather burn my money then leave it in a negative interest bond or account. I don’t want my money being lent to money morons to buy houses, cars etc. on my hard work and savings. It is like cancer, if your going to die you might as well kill the cancer sooner then later.

  40. Unamused says:

    You probably weren’t wondering what NIRP/ZIRP has to do with employment statistics, but you should probably get an explanation anyway.

    Marketwatch reports that the U.S. created 500,000 fewer jobs since 2018 than previously reported, as new figures show. Hiring doesn’t appear to have gotten the promised big boost from Cheeto Benito’s humonguous tax cuts, but really, none should have been expected. Tax cuts for the rich never pay for themselves, which is why the debt resulting from the Reagan tax cuts are still on the books all these many years later.

    It’s easy enough to see why. Employers hire employees when there is some prospect of making a return on the investment, but there is no such prospect. The same goes for any investment. Since people are already being bled so badly they’re having to go into debt, there simply isn’t much left to get by hiring more employees. Tax cuts for the rich do nothing to change that. The money isn’t invested if there’s nothing promising to invest in. It either gets misallocated into cash-burning Tesla wannabes or gets salted away in overseas tax havens, never to be seen again.

    NIRP/ZIRP was predicted a long time ago, as it is an element of the larger escalating extractive process. Consider that in the 50s it was possible for one wage-earner to support a family in the US. By the 70s it was taking two wage-earners. By the 90s it was taking two wage-earners who also took on debt, and that debt continues to increase, as does government debt and business debt, for very much the same reasons. We’re now in the last stage, where interest rates have gone to zero in the attempt to support even more debt. This trend is due to the fact that the system of extraction by the Financial Industrial Complex depends taking increasing amounts of money out of the economy. As practiced, capitalism will always need more. But there simply isn’t any more it can extract without damaging the economy, but extract it must, so it will proceed to damage the economy.

    “Economic growth” isn’t going to change that, because for the last several decades the benefit of nearly all “growth” has simply flowed uphill. Money seeks its own level, just as water does, but in the opposite direction. The proceeds were not used to create a sustainable economy or a sustainable planet but instead used to up the rate of extraction as high as it could go, until now it’s gone just about as far as it can, damn the economy and damn the planet.

    NIRP/ZIRP tells you, among other things, that The Trends are converging. It’s not just going to be ugly. It’s going to be weird ugly.

    One must pity the children, knowing they have no future.

  41. Xabier says:

    They have a future, just a very tough one, and probably rather brief.

    We perhaps tend to edit out of our collective memory the plagues, wars and endemic diseases which dominated life up to the very recent past.

    We are returning to the true human condition after life for a few decades in a delightful and very comfortable fantasy bubble, that’s all. Pain and anxiety throughout one’s life, not just in the last years of decline.

    Perhaps the extinction of our species, who knows? But that is beyond the proper scope of this blog.

  42. Augusto says:

    Negative interest rates mean the end of saving as a means of planning for the future and a better life, the next generation. It also means the end of the middle class. Consumption and owning things, the ethic of the rich, is the only allowable way now. You must emulate the billionaire gods or be destroyed.

  43. Darren Thompson says:

    Why is Mexico here in north America paying 7%+ on their bonds. Why is there such a big difference between Canada, U.S. and Mexico bonds? Maybe it has to do with the currency of Mexican peso and past problems with the peso.

    • Wolf Richter says:

      Yes, peso bonds have to deal with Mexico’s inflation that tends to run between 3-7%. So you have to have a yield that compensates you for inflation.

    • Pinto says:

      I’ve seen EU brokers: Naga brokers, go bullying, degiro.

      Shorting all of them only possible with cfds. Not the USA way, you reserve your stocks and you’re ready for the game.

      By the way I did not even spend the time to understand how to short via CFD, just another barrier, at this time in life you smell trouble far far away.

      Costs of buying ETFs 0.01% of the operation in my USA broker 5$ fixed.

      I’m using actually cloud iex api to get ALL sorts of intel.
      They still have lots and lots of bugs, but they are involving, do you any idea how democratic it is?
      It’s so amazing cheap for what you get back.

      Zerohedge like all Intel nowadays you have to think for yourself, and cross reference.

      I myself admit that the first year I did not get catch due all that doom porn.

      But guess what !

      What I got to the conclusion is:

      All this economic idiocy around the world is due because most of the population believes in the system. It has to, because their monthly paycheck depends on their faith.

      Ex: NIRP is a default/hair cut on the debt.
      Period, end of story.

      Most of the west population depends on “money for nothing”.

      After that do your own cross reference.

  44. WES says:

    Congratulations Wolf! You did it again!

    Your video transcript was a really big hit judging by the sheer number of great comments!

  45. EMIN SIPAHI says:

    Very good article Wolf,
    I have been trying to understand what others are thinking about the future of negative interest rates and this is the only one so far which can give insight for future.

    Thanks a lot

    • NBay says:

      Agree. But why is Fiscal Policy completely off table with over $100T NET household, “non profit” USA wealth per Fed? And that is just what they know about. Guess I don’t understand economics well enough yet….sigh.

  46. nhz says:

    The best way to rob a bank is to own one. The best way to rob a nation (or the whole world) is to control/own the central banks.

    Europe has been going through this nonsense for years and it shows. It is not only the elites and investor class that profit, all people who live beyond their means (probably some 50% of the population, especially those with large mortgages – a solid voter base) or make stupid business decisions (especially when working in large corporations) profit handsomely. Sane financial decision making, the idea of “saving” and the middle class have to be eliminated at all cost, economic/financial idiocy and parasitic behavior has to be rewarded; the ECB and other central banks are working hard to make this dream come true. In addition this policy also wreaks havoc with the environment because it encourages useless production and consumption.

    This is not just running the economy in reverse, but also running society down the drain. And I’m sure they know what they are doing, it has been discussed for years in Europe and the ECB has decided to pour lots more fuel on the fire.

  47. Spencer Hall says:

    All bank-held savings are temporarily frozen:

    #1) The 1981 “time bomb” (release of savings) is prima facie evidence (resulted in 20.1% N-gNp in the 1st qtr. of 1981).

    #2) The expiration of the FDIC’s unlimited transactions deposit insurance is prima facie evidence (resulted in the “taper tantrum”).

    #3) The 1966 Interest Rate Adjustment Act is prima facie evidence (where the NBFIs were given a .75% interest rate differential), thereby averting a recession when the yield curve inverted.

  48. Spencer Hall says:

    Prima Facie Evidence. The 2018 pivot:
    The interest-bearing character of the DFI’s deposits which result in any sudden larger proportion of commercial bank deposits in the interest-bearing category destroys money velocity.
    2018-11-05 0.49
    2018-11-12 0.49
    2018-11-19 0.56 [spike]
    2018-11-26 0.57
    This is also an excellent device for the banking system to reduce its aggregate profits (as all savings originate within the confines of the payment’s system, and an individual bank’s primary deposit is a derivative deposit – from a system’s perspective).
    It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.
    This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.
    This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent, lost to both consumption and investment). In a twinkling, the economy begins to suffer.
    % Deposits vs. large CDs on “Assets and Liabilities of Commercial Banks in the United States – H.8”
    Jul ,,,,, 12227 ,,,,, 1638.6 ,,,,, 7.46
    Aug ,,,,, 12236 ,,,,, 1629.4 ,,,,, 7.51
    Sep ,,,,, 12268 ,,,,, 1662.4 ,,,,, 7.38
    Oct ,,,,, 12318 ,,,,, 1685.8 ,,,,, 7.31 (twinkling)
    Nov ,,,,, 12313 ,,,,, 1680.1 ,,,,, 7.33
    Dec ,,,,, 12425 ,,,,, 1698.6 ,,,,, 7.31
    Jan ,,,,, 12465 ,,,,, 1732.9 ,,,,, 7.19
    Feb ,,,,, 12494 ,,,,, 1744.6 ,,,,, 7.16
    See: Dr. Philip George – October 9, 2018: “At the moment, one can safely say that the Fed’s plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”
    The DFIs’ savings deposits have a zero payment’s velocity.

  49. Christoph Weise says:

    Negative interest is a contagious disease. Japan started and EU followed to devalue their currency and to ignite a straw fire of consumption. The US is forced to follow suite unless it can live with an artificially strong USD. I agree to all criticism in the article: Negative interest are killing the economy. Negative interest should be exterminated. If need be central banks should be closed down. It takes a global co-ordinated effort to stop this nonsense. Unfortunately the governments feel benefitted and are not willing to act. The citizens need to withdraw their support of governments which pursue and / or agree to negative interest rates.

    • nhz says:

      Not only governments, multinationals and the elites / investor class profit from NIRP policy, a large percentage of ordinary citizens also profits because it allows them to go deeper into debt and live beyond their means, at least for as long as this Ponzi keeps running. Those who are severely harmed by NIRP (people with significant savings and small business) are a small minority for now; a much larger group will realize they were harmed as well later on, when it is too late.

      And so NIRP will probably continue (and get worse) until the financial system and economy are broken beyond repair, or until really bad unforeseen consequences emerge.

  50. niphtrique says:

    Interest is a ponzi-scheme. Time to get rid of it.

    Accept NIRP or print money like there is no tomorrow and destroy your currency.

    NIRP is better and reasonable people should agree.

    Unreasonable people would like to have an artificial floor of zero on interest rates so that the markets will collapse.

  51. rjs says:

    don’t bet against it….negative rates will make the Federal debt a government profit center..

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