Consumer Debt with Negative Rates is “a Perversion.”
I’m not sure what, if anything, Ewald Nowotny, Member of the ECB Governing
Council and Governor of the Austrian National Bank, and I agree on in terms
of monetary policy. But today he said something that is exceptionally
truthful – and a glaring expression of just how hypocritical a central bank
and the people that run it are.
Nowotny’s keynote speech today at the European Forum Alpbach in
Switzerland was titled
(my translation from German), “Low Interest-Rate Policies: Free Money for
All, or Savior in an Emergency.”
A rhetorical question which he then proceeded to answer with utmost
clarity: Free money, or worse, money with negative interest, is not for
everyone. Only governments and corporations are allowed to benefit from it,
but not consumers.
In fact, consumer loans with negative interest rates would be “a
perversion,” he
said to all those waiting eagerly for their negative interest mortgages
where they would actually be paid every month for having borrowed a ton of
money to buy a ludicrously overpriced house. Even Switzerland, which has the
deepest negative rates in the world, has drawn a line.
“I believe it would be a perversion, an economic one, for loan rates to
suddenly be negative. It totally goes against the economic nature of a loan,”
he said.
And I totally agree. Negative interest rates, or negative yields, go
“against the economic nature” of debt. Negative yielding debt is an absurdity
that exists only because central banks have created it and forced it upon
their bailiwicks.
“In Switzerland that has been ruled out for loan agreements for a long
time. Now it has been ruled out for Austrian loan agreements,” he said. So it
has been formalized. Consumers shall forever be barred from benefiting from
borrowing at negative rates, and thus from getting paid to borrow. So forget
loans and mortgages with negative interest rates.
But here’s where the hypocrisy and deviousness comes in: thanks to the
scorched-earth central bank policies, governments in Europe and Japan have
been borrowing at negative yields for a while, and an ever larger pile of
government debt now sports those negative yields.
Benoît Cœuré, Nowotny’s buddy on the ECB’s Executive Board, offered this
chart showing just how far the negative yield absurdity has gone, with
Switzerland (top line) selling 30-year bonds at a negative yield, and Japan and
Germany selling 10-year debt with negative yields. In total about $12
trillion in government debt sport negative yields:
In July, Germany has sold €4 billion of 10-year bonds with a zero-percent coupon and at a price above face value.
This guarantees that investors, such as pension funds that have to buy these
bonds, will never receive any interest payments. And if
they hold the bond to maturity, they’re guaranteed a capital loss – not
counting the losses due to inflation of the 10-year period.
And corporations, even US corporations with subsidiaries in the Eurozone,
are borrowing at negative yields by selling euro bonds, in some cases directly
to the ECB via private placements. No market needed. As of July,
according to Bloomberg,
there were about $500 billion of corporate bonds with negative yields. And
that pile is steadily growing.
Central banks have forced this sort of financial repression on investors
so that they will lose money not only to inflation but also in nominal terms
when they invest in what are considered high-quality debt. To make any income
whatsoever, no matter how tiny, investors have to take huge risks.
Central banks have made financial repression their policy. The cash flow
of savers has gotten destroyed long ago. Pension funds are next. Financial
repression is ugly and discriminatory for the “other side” of the deal.
However, when consumers, who’ve been on the “other side” of the deal and have
felt the brunt of central bank policies all along, line up for the same
absurdities and “perversions” that companies and governments benefit from,
well, forget it. Nowotny put his finger on it: Central banks will move heaven
and earth to keep that from happening. Access to the benefits of these
absurdities and “economic perversions” is limited to an elect group.
And in Japan, these policies are
getting even more perverse, as the two biggest buyers of Japan Inc.
are flying blind and don’t care. Read… QE,
End of the Private Sector? Japanese Government Now Largest Shareholder of 474
Big Companies
