Deflation Causes Negative Interest Rates?

09 Feb

Negative Interest Rates Confuse [courtesy Google Images]

Negative Interest Rates Confuse
[courtesy Google Images]

Speaking of the Swiss chocolate giant Nestle’, Mike “Mish” Shedlock wrote (“Nestle’ Has First Ever Negative Interest Corporate Bond”) that:

“Economic madness continues nonstop. In the race for safe havens, Nestle’ bond yield has fallen below zero.

 “Nestle’s short-term euro-denominated bond yield has fallen into negative territory, possibly marking the first time in history that a corporate bond maturing in more than a year has had a negative yield.

“Yes indeed folks, you can now pay Nestles for the privilege of lending it money.”


Get that?  If you lend euros to Nestle’, they’ll only accept your loan if you pay them for the privilege of lending them your currency.

Nestle’s new policy isn’t exactly a first.  Several European banks have already imposed negative interest rates on bank depositors.  But Nestle may be first major corporation to issued bonds with negative interest rates.

Of course, on the face of it, paying negative interest rates sounds nutty.  But are negative interest rates really evidence, as Mish Shedlock said, of the “Privilege of Lending Gone Mad”?

I don’t think so.

I suspect that negative interest rates anticipate deflation.  Just as inflation allows borrowers to repay their debts with cheaper dollars, deflation requires borrowers to repay their debts with more expensive dollars.

Thus, if you lend currency to Nestle during a period of inflation, Nestle will repay its loan with currency that has a diminished purchasing power. For example, in an era of inflation, I could lend $1 million to Nestle’, and when Nestle’ repaid the $1 million, it might only have the purchasing power of $900,000.  By means of inflation, I (the lender) would lose $100,000 in purchasing power, and Nestle’ (the borrower) would be gain by $100,000 in purchasing power.

On the other hand, if I loaned $1 million to Nestle’ during an era of deflation, Nestle’ would be forced to repay that loan with currency that was “more expensive” (had a higher purchasing power) than the currency originally borrowed.  I.e., when Nestle’ repaid the loan in three years, the $1 million they borrowed might have $1.1 million in purchasing power.  Result?  Due to deflation, I (the lender) would gain an unearned $100,000 in purchasing power and Nestle’ (the borrower) would lose $100,000 in purchasing power.

Nestle’ didn’t get to be one of the world’s greatest corporations by playing the fool.  If Nestle’ sees that we’re entering an era of deflation, Nestle’ will not accept loans that will cause them to lose purchasing power.

Therefore, to offset the possible losses incurred by the borrower (Nestle’) due to deflation, Nestle’ is imposing a negative interest rate.  Nestle’ is charging interest on the money it borrows because Nestle’ anticipates deflation, economic depression, and being forced to repay whatever currency it borrows with “more expensive” euros, dollars, etc.  Nestle’ is charging a negative interest rate to offset the losses in purchasing power they might otherwise suffer due to deflation.

Negative interest rates sound nutty, alright—but they make perfect sense in our brave new world of fiat currencies, economic depression and monetary deflation.


Posted by on February 9, 2015 in Inflation/Deflation, Interest Rates


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5 responses to “Deflation Causes Negative Interest Rates?

  1. steve

    February 9, 2015 at 4:41 PM

    Talking about Deflation, this came in today from a company called Windrock. I had never heard of them and don’t know why I received the email, but this list of commodities and their deflated prices is scary. The title is Oil Isn’t The Only Thing Crashing and the web address is

  2. Toland

    February 10, 2015 at 7:18 AM

    Only an economic ignoramus, or an intentional deceiver, would say what Mike Shedlock said: “Yes indeed folks, you can now pay Nestles for the privilege of lending it money.”

    This is NOT what is happening. No one is paying Nestle to borrow their money.

    What’s actually happening is that bonds issued by Nestle have acquired a negative YIELD – not, as ignorantly or deceptively implied by Shedlock, a negative COUPON RATE. Big difference!

    A negative yield means purchasers in the SECONDARY market must pay a higher price in nominal terms than what they will get back in total interest and principal over the remaining life of the bond.

    This can temporarily happen to bonds when, for example, a big institutional player is buying them up like crazy because it does not have the option of staying in cash (which it has a sudden surplus of – see the ECB stimulus).

    It does NOT mean Nestle is getting paid to borrow money. lol

    Get a clue, Shedlock, and stop spreading false information which can materially damage the finances of those who mistake you for a credible source.

    • Henry

      February 10, 2015 at 4:30 PM

      @Roger > “Only an economic ignoramus, or an intentional deceiver, would say what Mike Shedlock said…”

      The second option. Mike Sheldock works for a hedge fund, so he’s not going to make the dilettante’s error of mistaking yield for coupon rate. This also means he, like so many other hucksters in the financial media, has a conflict of interest in regards to the subject matter he sensationalizes.

      But at least Shedlock discloses his conflict of interest on his website. This does put him somewhat above the common weasel who gets you worked up over financial doomsday or whatnot with an undisclosed conflict of interest. “Caveat emptor” and “Let the market decide!” are the favorite mottoes of this latter type of predatory wanker.

      • Toland

        February 10, 2015 at 10:41 PM

        Roger? That’s okay, buddy. I knew who you was addressing.

        Yeah, there’s a lot of hackwork out there in the Financial News category. I recall Roger describing how it’s connected to politics, as most “market forces” are since the bankers took over in the early 20th century.

        In this case, the NWO’s little helpers are allowed to make a buck off you as they get you literally INVESTED in the doomsday scenario which the NWO itself is orchestrating. And thus (as usual) you STOP STRIVING for a future without the NWO.

        Doomsday is coming!!! – because my hand-wavy hackwork, which has a decade-long track record of being WRONG, tells me so. Therefore, “invest” in doomsday (buy my expensive “survival” supplies, etc).

        Now that you’re “invested” in doomsday, you’re not likely to try and prevent it, are you? Welcome aboard the NWO!

        Clever, them rascals.


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