Why Negative Rates Can’t Stop the Coming Depression
By Tyler Durden
Submitted by Bill Bonner via InternationalMan.com,
Are you ready to pay to save?
Agora founder Bill Bonner explains why “negative interest rates” are spreading around the world…and could soon come to the U.S.
Like Doug Casey, Bill believes the worst is yet to come.
Bill says the coming financial collapse will be worse than the market crashes in 1987, 2000, and 2008. But this time, he says, it will affect everything from your portfolio…to your bank account…to the cash in your wallet.
About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments…who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future.
Is that weird or what?
Into the Unknown
At least one reader didn’t think it was so odd. “You pay someone to store your boat or even to park your car,” he declared. “Why not pay someone to look out for your money?”
Ah…we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it…and using it as he sees fit.
It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.
A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for.
When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books.
If something goes wrong and you want your money back, you can just get in line behind the other creditors.
The future is always unknown. The bird in the bush could fly away. Or someone else could get him.
So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.
A New Level of Absurdity
That’s why bonds pay income – to compensate you for that uncertainty.
Inflation, defaults, depression, war, and revolution all raise bond yields because all increase the odds that you won’t get your money back.
That’s why countries with much uncertainty – such as Venezuela – have higher interest rates than countries, such as Switzerland, where the future is probably going to be a lot like the past.
Venezuelan 10-year government bonds yield 11%. The Swiss 10-year government bond yields negative 0.3%.
The interest you earn on a bond is there to compensate you for the risk that you won’t get your money back. Or that the money you do get back when the bond matures will have less purchasing power than the money you used to buy the bond in the first place.
You never know. Maybe the company or government that issued the bond will go broke. Or maybe the Fed …read more
Source: Why Negative Rates Can’t Stop the Coming Depression
