Simone Wapler – La Chronique Agora (France) –
Negative-rate bonds reached $ 9,500 billion in May, a 10.5% increase from April, CNBC said.
What does “negative rate” mean in our world where money is no longer merchandise, gold or silver-metal, or even banknotes with no intrinsic value, but simply debt?
Today’s money is no more than an inion found somewhere in a computer memory. This inion indicates that an entity (bank, government) owes money to another (bank, government, business or even individual).
Negative rates are the financial innovation of the 21st century. But it is not certain that this financial progressivism is a source of prosperity.Since the dawn of time, it was generally accepted that when someone had money and put it at the disposal of someone who did not have it, he received a reward, interest. This is no longer the case.
The winners and losers of negative rates
Concretely, for you and me what do negative rates mean?
- That if you have money and you want to “park” it safely so that it is available and remains yours, you have to pay. After all why not ? You pay well for having a safe …
- Except that a safe with bundles of tickets, it is no longer possible with the restrictions on the cash, the species.
- That if you have savings, you want to place it with little risk and keep it in financial form, the return you can expect is very low.
- If you had projects that were based on an average historical interest rate, they would be wiped out. For example, you would expect that the time of retirement, the proceeds from the sale of your business, or the capital that you had accumulated by taking a few risks would yield you about 5%: well, that’s a failure.
- That everything you buy is expensive, and probably much too expensive. With such low rates, each spot purchaser is competing with many potential buyers on credit, which raises the bid. This explains why stocks are expensive, real estate is expensive and yields are declining everywhere.
- If you hope that your wealth will bring you back, all you have left is speculation: buy what is already expensive, hoping to sell it even more expensive, all other things being equal.
- That those who already own a large heritage can hope to inflate it by borrowing (to the effect of leverage). Only hope since everything is already very expensive.
As you can see, these implications are harmful to us.
Now, here are what negative rates mean for the authorities: governments, financial industry, banks, etc.
Negative rates mean that:
- Institutional investors, large multinationals, sovereign wealth funds prefer to park the money they have on deposit in state debt rather than in banks.
- Governments can continue to “roll their debt” and finance their promises since interest costs them nothing.
- The margins of banks in their lending activity are very low and they must also retreat to speculative activities.
- Those who owe money have an advantage over those who have money available.
- That zombies, dead weights, those who survive when they should go bankrupt multiply.
As you can see, negative rates favor over-indebted and spending governments, non-performing companies and pure speculation.
Supernova or Ice Age?
Bill Gross, the former star manager of the bond, warned in 2016 that this $ 10,000 bn of negative-rate bonds would be a “supernova” that will explode one day.
In reality, money as it exists today is an insult to saving, liberty, foresight and the individual.
Money is nothing but a promise of a government (or the European Central Bank in the case of the euro) that a figure is written down somewhere. But it is not long ago, a promise to pay something to someone.
When you have to pay, it is the taxpayers who are called.
Few people still really understand all the implications of negative rates. The volatility of the bitcoin, the electronic currency that does not depend on any government, proves that more and more people are wary. Volatility is no more than doubt as to the establishment of a price. Episodically, it seems that the bitcoin becomes more and more sought after and prized.[Editor’s note: In what way can the bitcoin be useful to you today in France? Our Special Report tells you everything about this subject … and of course how to get it! Just click here to receive it.
Bill Bonner thinks that we are not going to see the explosion of a bond bubble, but on the contrary a glacial era during which the bonds will hold well even if they do not yield anything.
But what will happen when the welfare states no longer have the guarantee of the taxpayers to support their borrowings that bring nothing back? Louis Rouanet thinks that nobody will soon be “rich enough” to guarantee public spending.