The fundamental premise underlying negative-interest rate bonds is that lenders pay government borrowers for the “privilege” of lending to government. Based on this premise, governments receive loans at less than the face value of the bond. For example, if you loaned $100,000 to the government on a negative-interest loan, you might only receive, say, $98,000 when you redeemed that bond. You’d lose $2,000 for the privilege of lending to the government.
In all of world history, I doubt that there’s ever before been a time when lenders paid borrowers for the privilege of lending money.
The world is embracing negative-interest rate bonds for the first time. That fact is not evidence of economic creativity and financial innovation so much as evidence of desperation and the financial madness that lies at the heart of debt-based monetary and economic systems.
A few facts about negative-yield bonds:
• According to Bank of America Merrill Lynch, the global amount of government bonds having negative yields is now $13 trillion,.
• Just two years ago, there were virtually zero negative-interest rate bonds. The subsequent, two-year rise to $13 trillion is unprecedented.
• In February A.D. 2015, the total amount of negative-interest debt was $3.6 trillion.
• By February A.D. 2016 that negative-interest debt had nearly doubled to $7 trillion.
• In the five months since February, A.D. 2016, the amount of negative-yielding bonds nearly doubled again to $13 trillion.
• The spread of negative-yielding bonds is unprecedented, fantastic and accelerating.
The Sovereign Man recently published an article entitled, “The financial system is breaking down at an unimaginable pace” which reported that:
“Like subprime mortgage bonds from ten years ago, negative-interest bonds are also toxic securities, since many are issued by bankrupt governments (like Japan).”
Show me a negative-interest rate bond, and I’ll show you a bankrupt (or virtually bankrupt) national government.
Q: What’s the meaning of the term “toxic securities”?
A: It means paper debt-instruments (promises to pay) like stocks, bonds, bank accounts, derivatives, mortgages, fiat currencies, etc.–that can’t be paid. “Toxic” securities are those issued by individuals, corporations and governments that are incapable of ever paying their debts in full and are therefore technically bankrupt.
“Toxic” is something of a fancy adjective meant to imply that even though some securities may be “toxic,” they’re still valuable in that they will someday be repaid and are therefore still valuable “securities”. That’s a lie, however. “Toxic securities” are those issued by borrowers who have become, or were all along, bankrupt.
In a debt-based monetary system, debt is deemed to be wealth. Bankruptcy cancels and destroys debt. Thus, in a debt-based monetary system, bankruptcy destroys our “wealth”. That’s why we can’t admit being bankrupt. That’s why we can’t allow nations like Greece to declare bankruptcy. If Greece were allowed to declare/admit that it’s bankrupt, the resulting destruction of Greek debt-instruments would wipe out so much “paper wealth” that it might trigger the collapse the global economy.
On the domestic level, we refer to securities that can’t be paid as “toxic” and “problematic” to avoid expressly admitting that the entity that issued such securities is bankrupt. However, sooner or later, the truth will out and we’ll all see that insofar as any entity issues “toxic securities,” that entity can’t actually pay its debts and is therefore bankrupt.
“Just like the build-up to the 2008 subprime-mortgage, private debt crisis, investors are snapping up today’s subprime bonds with frightening enthusiasm. We’ll probably see $15 trillion, then $20 trillion, worth of negative-yielding subprime government debt within the next few months. This trend will continue to grow, until, just like in 2008, the bubble bursts in cataclysmic fashion.”
The Great Recession of A.D. 2008 was triggered by too much subprime private debt. That debt crisis nearly collapsed the U.S. and global economies.
The next financial crisis will be triggered by too much subprime government debt and will collapse the U.S. and global economies.
• The first victim of negative-interest rates will probably be pension funds. Already underfunded, pension funds will find their problems only worsened by low and negative interest rates. If pension funds can’t collect about 8% interest on their investments, who will they pay the promised pensions?
With such a huge portion of the global bond market paying low or even negative interest rates, it’s virtually impossible for many, probably most, pension funds to keep their promises [pay their debts].
As pension funds fail and retirees scream for some sort of relief, governments which are, themselves, already underfunded, will be forced to assume greater financial liabilities for retirees. The additional financial stress will cause such governments to collapse and admit publicly that they’re bankrupt.
Implication: Anyone considering retirement should think twice about relying on unfunded pensions and Social Security in a world of low-, even negative-interest rates. Your pension hopes are being destroyed by this prolonged period of low, and now negative, interest rates.
Likewise, even people whose possible retirement is decades away should think twice about relying on the hope or expectation that the economy will prosper or even stagnate over the next five to twenty years. Negative interest rates on government bonds are evidence that government’s issuing such bonds are already bankrupt. These governments are unlikely to recover until after a global depression has wiped out most governmental and private debt and left the world in a state of madness and even revolution.
Unpaid and unpayable debt (the failure to keep promises) makes everyone (including governments) desperate and crazy.
Negative interest rates are a manifestation of that madness.