Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Negative Interest Rate Absurdity and How It Screws Up the Economy (Video)

  by    0   0

Negative-yielding debt surged to over $15 trillion earlier this month. This pile of negatively-yielding paper includes government and corporate bonds, along with some euro junk bonds.

In a recent episode of the Wolf Street Report, Wolf Richter called this “NIRP absurdity.” And it could be coming to America.

Negative interest rates started out as a short-term emergency experiment during the Great Recession. Now it has turned into the new normal. How will this end?

Last week, the European Central Bank began hinting at another, “shock and awe stimulus package,” as Richter called it. In an interview with the Wall Street Journal, Finnish central bank governor Olli Rehn raised the prospect of new easing measures. He said, “It’s important that we come up with a significant and impactful policy package in September. When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”

This, of course, would be on top of the shock and awe stimulus that the ECB has already unleashed. The entire German bond market, including the 30-year, now has negative yields. And yet the German economy has contracted two out of the last four quarters, despite negative rates from the ECB and negative yields on its own government 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 as Richter points out, there are already folks who want the same prescription for the US economy.

So, what’s the problem?

For one thing, negative yields destroy the business model for banks.

They make future bank collapses more likely because banks cannot build capital to absorb losses.”

Richter pointed out that the European Bank Stock Index has dropped 11% since rumors of another big ECB stimulus package began circulating. The recent plunge wasn’t from some bubble high. It has dropped 78% from its peak in 2007.

As Richter says, banks are a crucial factor in a modern economy.

European banks are sick, sick, sick. And with negative yields, they’re getting the exact opposite of what they need.”

We’re seeing a similar phenomenon in Japan. The Japanese bank index peaked at 1500 in 1989. It is currently at 129. That’s a 91% drop.

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 bad for the real economy that relies on banks to provide the financial infrastructure so that the economy can function.”

Richter said one bank can fail, but if the whole banking system collapses, it’s like turning out the lights on the economy.

Richter goes on to explain exactly how negative rates disrupt the fundamental business model of banks and drives them to take riskier actions.

Negative interest rates don’t just impact banks. They have an even more profound destructive impact on the real economy.

They distort or eliminate the single most important factor in economic decision making — the pricing of risk.”

Richter notes that some junk bonds in Europe are now trading with a negative yield. This indicates 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 with huge risks because these assets are used as collateral and the value has been inflated by negative yields.”

The longer negative rates persist, the more screwed up an economic system becomes.

How will this end? Nobody really knows because nobody has done this before. But we do have some idea and so far, the outcomes are already bad.

WhyBuyGoldNowBanner.070815.590

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

Artificially Low Interest Rates? So what?

The Federal Reserve has held interest rates artificially low for decades. Even after pushing rates to zero in the wake of the 2008 financial crisis, “normalization” only managed to raise rates to 2.5% — hardly “normal.”  The central bank began cutting rates in 2019, even before the coronavirus pandemic. But what difference does it make? […]

READ MORE →

Peter Schiff: What’s Going on With the Price of Gold?

Gold has been rangebound of late, bouncing between $1,750 and $1,800 an ounce for several months. Given the inflationary environment, one would expect gold to be soaring. So, what’s going on with the yellow metal? And when will the price of gold go up? Peter Schiff tackled this question during a recent Q&A session on […]

READ MORE →

Peter Schiff: There Is Only One Type of Inflation

When talking heads and politicians talk about inflation, they tend to make distinctions between “food inflation,” or “energy inflation,” or “wage inflation.” In this clip from his podcast, Peter Schiff explains that this isn’t the right way to look at inflation. In fact, there’s only one type of inflation. And the Federal Reserve is the […]

READ MORE →

What’s the Difference Between Naturally and Artificially Low Interest Rates?

We know that the Federal Reserve pushes interest rates artificially low by manipulating the federal funds rate (the target interest rate that commercial banks borrow and lend their excess reserves to each other) and using monetary policy maneuvers such as quantitative easing. But could we have low interest rates without Fed intervention? In this clip, […]

READ MORE →

Peter Schiff: The Debt Ceiling Is Really a Debt Floor

We have a temporary truce in the debt ceiling fight. On Thursday, President Biden signed a bill increasing the federal debt limit by $480 billion. But this isn’t an end to the debt ceiling fight. Congress just kicked the can down the road. The increase is only expected to keep the US government solvent until […]

READ MORE →

Comments are closed.

Call Now