ECB: Negative interest rates for depositors aka. coerced spending and gambling
How desperate are our thought dealers to maintain the status quo? Beyond any comprehension. Worse yet, they have yet to inform the masses that this is all heading towards a brick wall which is really what they should have been doing all along i.e. admitting that they can't borrow us out of this catastrophe.
How desperate are our thought dealers to maintain the status quo? Beyond any comprehension. Worse yet, they have yet to inform the masses that this is all heading towards a brick wall which is really what they should have been doing all along i.e. admitting that they can't borrow us out of this catastrophe.
A liquidity trap is the point at which the rate of return on an asset class no longer justifies further investment, because the risk:reward is not justified. In the context of European interest rates that today just went negative via the ECB, I think we all see where this is going. Essentially savers are paying to lend their money to borrowers. The "idea" is to punish anyone who is trying to save money for future consumption and force them to spend it all today. Because we all know that instant gratification is the basis for a sound economy - save nothing, spend everything.
Who would ever want to invest in any fixed income asset that pays a negative interest rate? That's where this all gets "interesting", because Central Banks have systematically created the ultimate "Greater Fool's" market in which investors are forced to chase financial assets based upon their historical price appreciation as opposed to sustainable yield. Forced gambling.
Who would ever want to invest in any fixed income asset that pays a negative interest rate? That's where this all gets "interesting", because Central Banks have systematically created the ultimate "Greater Fool's" market in which investors are forced to chase financial assets based upon their historical price appreciation as opposed to sustainable yield. Forced gambling.
The Greater Fool's Market: Central Banks artificially severed liquidity from solvency
Liquidity of course refers to the flow of money into an asset class hence supporting continuous trading with minimal bid/ask spreads. Solvency refers to whether or not the asset is able to independently cover its liabilities over a longer period of time. Historically, liquidity always followed solvency for obvious reason. Insolvent assets were generally illiquid with buyers few and far between and massive price premiums. Central Banks of course changed all that. Zero percent interest rate policy essentially reduced investors' time horizons down to "now", as in what can I buy that will give me rate of return now, regardless of what happens in the future or whether or not I can get out of this trade. In other words Central Banks are leveraging (literally) Wall Street's morally hazardous short-term bonus fetish. Investors today buy assets assuming that there will always be a greater fool coming after them to pay even more.
There's no marginal buyer of insolvent assets when liquidity reverses
WARNING: Approaching Peak Fools
In the context of the stock market, theoretically, there is no "upper bound" to the price that will be paid for the Dow. In fixed income however, those assets are bounded by a fixed time to maturity and a fixed face value upon maturity. Therefore, relative to the mega carry trade strategy, the maximum price is reached at the point at which the funding interest rate approaches the investing interest rate.
Just today, ZH reminded us that Ireland's 10-year bonds now yield less than U.S. Treasuries.
(Clearly, Ireland is Ponzi financing using short-term funding)
This despite the fact that U.S. is far more solvent than Ireland:
Debt to GDP:
U.S. 101%
Ireland: 124%
2014 Deficit as % of GDP
U.S.: -4%
Ireland: -7%
Credit Rating:
U.S.: AA+
Ireland: BBB+
Last Quarter GDP
U.S.: -1% (1Q2014)
Ireland: -2.5% (4Q2013)
Ponzi Borrowing 101
Ireland is borrowing 7% of GDP this year for a -2.3% GDP growth rate. Yeah, that's Ponzi borrowing. Honest GDP "growth" is -9.3%.
FULL CASINO
Global sovereign solvency has always been a problem post-2008. It never stopped being a problem and in the interim has been allowed to become a far larger problem. However, with interest rates now going negative, liquidity is going to start becoming the terminal issue. There will be no buyer of insolvent ponzi bonds when liquidity reverses.
Central Bank policies have done nothing more than to discourage responsible saving and instead encourage gambling. Beyond Ponzi bonds, the stock market has been the other key beneficiary of this "Greater Fool" based strategy. Therefore, at the point at which we run out of fools with money to throw away at the casino, this will all end. Without notice.
