of Negative Rates
2018 Easan Katír
There are nineteen countries where sovereign bonds have traded at negative rates, most notably Switzerland. Five Central Banks have adopted negative rate policy.(1) While this is often seen as an anomaly, the author proposes that negative rates have positive benefits in a world awash with debt. In 2016 there were $12.2 trillion(2) in bonds priced at negative rates. From Switzerland at -0.923% on her 2-year sovereign note, to Germany, Netherlands, Sweden, Denmark, Austria, Ireland, France, Spain, Italy, Portugal and others, there has been so much money created that owners must pay to store it, and it’s been given a name, the Global Savings Glut.(3)
Some see negative rates as a sign of doom. Instead of messy defaults or grinding inflation, this is simply a by-product of central banks’ money creation, and a least painful way to begin to reduce the otherwise unpayable government debt.
Why would someone allocating capital choose a guaranteed negative rate? To avoid bigger losses in his home currency, stock market or real estate. To a Zimbabweian businessman, a guaranteed -1% in Swiss Francs is a very good deal.
For years this author has postulated this is one practical way to eventually pay down otherwise unsustainable debt. With negative rates, borrowers pay back less than they borrow. Negative 2% for about fifty years, and the debt disappears --- about 99% of it, at least.
One could argue that much of the US has negative rates too, since banks pay almost nothing, then charge fees which more than offset the minuscule rate. Why would any lender do this? The retail lender would not; but would put money “under the mattress” that is, cash. However, the big banks have too much money to fit under even the biggest mattresses.
Those years when we could buy 9% treasury bonds and go to the beach are long gone, aren't they? In 1935 Cambridge economist Keynes predicted the eventual "euthanasia of the rentier", a macabre way of putting it --- which has now come to pass. Capital used to be scarce. Now no-one will pay much to rent money.
Governments used to pay significant interest to borrow money. Not now. In some instances, now lenders pay them. The US government has borrowed money through TIPs bonds(4) with a negative (-0.655%) interest rate. France, Denmark(5), Germany(6) and Japan(7) are also borrowing money at negative rates. Governments are deeply in debt, so it makes sense they would turn the tables and receive interest for borrowing more! The more they borrow, the more they receive in negative interest. Problems solved!
Governments already spend more than they collect from taxpayers, so as we all know, they borrow the difference. One has to admire this elegant further solution for the redistribution of wealth. At -0.655% interest, the world debt will be paid off in less than two hundred years.
Of course, this is not very good news for those who are mandated to invest in government debt: public and private pension plans and insurance companies. In the case of state pension plans, taxpayer residents are legally obligated to make up the difference if their state pension doesn't earn 7.5% a year. That’s another issue.
The stock market didn’t notice the move from ZIRP to NIRP
"I think this is a regime change and the BOJ's main policy tool is now negative interest rates," said Daiju Aoki, an economist at UBS Securities in Tokyo. BoJ Kuroda said. "We added interest rates as a new easing tool to our existing QQE framework."(4)
As of a few years ago, Europe and Japan have a NIRP, 'negative interest rate policy'. The European Central Bank announced negative interest rates. Depositors need to pay to keep money on deposit. The advent was an unprecedented event by a major Central Bank, but it didn't bother the stock markets, as Europe and the US rose on the news.
This is the current debt milieu. Let’s note possible repayment options. The easiest is currency inflation, where the debt becomes easier to repay though the numbers stay the same. This almost invisible method is the most likely course, as it is politically palatable. We propose another possibility, the actual extinguishment of debt through negative interest rates. Example: negative -2% annual rates for fifty years would virtually eliminate sovereign debt, which is otherwise very difficult to repay.
Do solutions need to be complex? If we label a problem as complex, doesn’t that mean we are still grappling to understand it? Are many problems, if defined from a perspective of solution, simpler than they first appear?
In 1935 unemployment was high, tariffs were in place, populations were starving; band-aid solutions were applied to many parts of the body humanity, with little lasting impact. Then FDR delinked gold from the dollar --- a simple stroke of the pen. More jobs were created. Goods were bought and sold. From that simple solution, millions of human lives improved.
So a simple solution of negative rates can rid the world of crippling debt. One may think a solution is not convoluted enough. It is not complex. Solutions follow a trajectory: They start from confusion, to jealousy of others who offer a solution, to fear of missing out, to clear recitation and memory of what actually happened in history to solve problems. Many major solutions in the final analysis were mostly straightforward and direct. Labeling an issue as complex is a curtain pulled across the unwillingness to to think clearly, whether by design or by inability. From history one sees that most solutions were simple, then one proceeds to logically look at the puzzle pieces of the present and put together a straightforward solution for our future. In the case of irredeemable debt, there are two logical paths: inflate the currency, and thereby make the debt value decline, which is happening at the CPI rate or higher. Another solution is negative interest rates, which actually reduces the numerical debt each year. In practice, it will be a combination of these two which may keep the debt manageable. Working against this will be the increased borrowing each year to fulfill political promises, to meet public pension guarantees and entitlement and military expenses. Working for the debt reduction will be the increased economic activity of a prosperous America.
Of course, not all solutions are simple, even though sometimes they have been and can be. The simplicity is apparent to the many afterward in hindsight. Prior to the solution, all seems chaotic. Why is that? Because no one sees where all the threads of the problems lead, few see who holds the ends of those threads, and those who do have weak voices in the cacophony of policy and commerce. The steps: see the threads. See who holds them. Take the chance to make the move. Manage the reporting on the effects.
What comes next after a proposal? Next is the coordinated will to activate a plan, the oversight to steer it through the inevitable obstacles, guided by the higher force of compassion for the greatest good for the greatest number, a process we presume our central bankers follow.
Most papers’ conclusions are inconclusive. They conclude “more research is needed” but in this case, the conclusion is clear. What is needed is the political will to act. The market will eventually provide the stimulus, as Keynes predicted eighty years ago. It will not happen all at once. There will be no revolution. It will continue as it has started, gradually, and then accelerate, as the rentiers seek a safe place to keep their capital from eroding too fast. Negative rates will be most extreme in the safest refuges, already evidenced in Switzerland. These great slow, seismic shifts in wealth will eventually occur. This is the future.
(1) BIS Quarterly Review, March 2016 How Have Central Banks Implemented Negative Rates? https://www.bis.org/publ/qtrpdf/r_qt1603e.htm
(2) Bloomberg.com Negative Rates https://www.bloomberg.com/quicktake/negative-interest-rates
(3) Samuelson, Robert J. The Global Savings Glut
(4) Bloomberg.com TIPS auction https://www.bloomberg.com/news/articles/2012-07-19/u-s-10-year-tips-auction-may-yield-record-minus-0-655-
(6) Germany negative bond rates https://www.thelocal.de/20160713/germany-makes-investors-pay-interest-on-bonds
( ) BIS Visualize negative rates https://www.bis.org/publ/qtrpdf/r_qt1603e.htm
Graphs source: Bloomberg Quicktake https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ipLcjXZ5MvJE/v0/800x-1.png
Submitted to the Federal Reserve Bank of Kansas City Economic Policy Symposium 2018
Other papers by the author:
No Time Like the Present, 2007
Superior Returns from Average Indicators, 2008
More Debt is Not the Answer, 2009
On the lighter side: