• 11 hours Putin Signs “Digital Iron Curtain” Into Law
  • 14 hours Russian Metals Magnate Sues U.S. Over Sanctions
  • 17 hours Tesla Looks To Jump Into Indian Market
  • 19 hours Global Banks Lay Groundwork To Re-Inflate Asset Prices
  • 1 day Homeowners Experiment With Risky New Investment Trend
  • 2 days U.S. Tech Stocks Look Increasingly Vulnerable
  • 2 days De Beers To Expand World’s Most Profitable Diamond Mine
  • 2 days Ford CEO Gets Raise After Massive Layoff Round
  • 2 days Germany’s Flirtation With Recession Could Cripple The Global Economy
  • 3 days Where To Look As Gold Miners Inch Higher
  • 3 days Google Faces Billions In Fines From European Regulators
  • 4 days The Energy Industry Has A Millennial Problem
  • 4 days Russian Banks Scramble For Sanction Loopholes
  • 5 days Gold ETFs Take A Hit After Four-Month Run
  • 5 days European Union Takes Aim At Ten New Tax Havens
  • 6 days Goldman Defends Trillion-Dollar Corporate Buyback Spree
  • 6 days $600 Billion At Risk As Boeing Fallout Continues
  • 6 days Venezuela Has Yet Another Crisis Developing
  • 6 days Wells Fargo Accused Of “Ongoing Lawlessness”
  • 7 days Hollywood Agency Returns $400M Investment To Saudi Wealth Fund
Lending: The Good, Bad, And Ugly

Lending: The Good, Bad, And Ugly

Aristotle said, “The most hated…

The Chatroom Cartel Running Global Bond Markets

The Chatroom Cartel Running Global Bond Markets

Eight major banks have been…

  1. Home
  2. Markets
  3. Other

Stupidity of Negative Interest Rates Expands to Spain; Deflation Shock Thesis

Spain Joins the Negative Interest Rate Club

Reader Bran emailed a link this morning to an El Pais Article that showed interest on a 6-month treasury auction in Spain went negative.

Rather than translate, please consider the Wall Street Journal report Spain Joins Negative Yield Club.

Spain has joined the sub-zero debt club, just.

The Spanish Treasury on Tuesday issued short-term debt yielding a shade under 0%. The €725 million ($796 million) in six-month Spanish debt delivers an average yield to investors of -0.002%. Buyers were still keen, placing bids worth five times that amount, according to the Treasury.

Another slug of 12-month T-bills, also issued Tuesday, yields just 0.006%.

This is quite a turnaround for Spain. The country was at the heart of the eurozone debt crisis at its darkest hour. In June 2012, it sold similar short-term debt yielding 3.237%.

Negative Interest Rate Thesis

Ben Bernanke made the claim "In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative."

Quite frankly, that's idiotic.

In the absence of central bank monetary foolishness, negative interest rates cannot happen. I discussed that briefly in Thrown Under the Bus: Another Look at the Self-Serving Launch of Ben Bernanke's Blog and the Brookings Institute's Pandering Role.

Pater Tenebrarum's article Ben Bernanke's Apologia for the Fed that discusses why in detail, but a simple question is all it takes to prove the absurdity of it all.

Simple Question

Ask any person on the street, at random, if they would rather have a dollar today or 97 cents five years from today and they will probably look at you as if you were nuts for asking.

I believe the average 4th grader would understand the stupidity of the question. One would not even need a clear grasp on the subject of "time preference" to understand the absurdity of it all.

Heck, ask a 4-year old kid if he would rather have two lollipops today or one tomorrow. As long as the kid understands the question, I assure you he will know how to answer.

Natural Rate Can Never Be Negative

The "equilibrium" or "natural" rate can never be negative.

Interest rates are negative because central banks unleashed more money than anyone wants to borrow. Given deposit insurance only covers $250,000 and given money needs to find a home, depositors accept negative interest because they have no other choice. On top of that, the Swiss National Bank explicitly set deposit rates negative.

But the key reason rates are negative in many places is central banks use newly created money to buy bonds, and investors front run the trade. For further discussion, please see Another Definition of Deflation: Antal Fekete Defines Deflation as a "Pathological Slowing in the Velocity of Money".

The intention of the Fed (central banks in general) is to get businesses to invest and consumers to borrow. But what if businesses see little chance to make profits by expansion? What if credit-worthy customers do not want to borrow?

Deflation Shock Thesis

Central bank actions did not spur lending, so they buy more and more bonds, apparently under the theory "if it doesn't work, do more of it, until it does work". The ECB and Bank of Japan have taken over where the Fed left off.

Such idiocy has led to yet another asset bubble of enormous magnitude, in part fueled by corporations borrowing money at low rates to buy back their own shares at ridiculous prices.

When various bubbles in equities, junk bonds, and housing pop, the result will be an enormous deflation shock, the very deflation the central bank fools believe they are preventing.


Back to homepage

Leave a comment

Leave a comment