The concept of debt instruments with negative yields raises many questions and concerns. While it’s apparent that as bond yields decrease, bond prices tend to rise, implying that bond investors might benefit from capital appreciation, it’s troubling when this appreciation stems from negative yields. This situation suggests an inherent problem with the very nature of the capital involved.
Traditionally, capital markets operate on the principle that lenders purchase debt instruments, such as bonds, at yields that sufficiently compensate them for the risk of default over a specified duration. However, the acceptance of negative yields creates an abstraction that contradicts the fundamental principles of these markets. In fact, negative interest rates challenge the very business model upon which banking relies.
How can banks effectively loan money when they are not rewarded for the risks associated with potential loan defaults? If lending inevitably results in losses, what incentive exists to extend credit? Without a profit motive, the rationale for lending disappears altogether.
Currently, the total amount of government and corporate debt yielding negatively has reached approximately $17 trillion. The primary instigators of this phenomenon are the European Central Bank and the Bank of Japan, whose aggressive money-debasement policies far surpass those of the Federal Reserve. Their manipulation of both currency and interest rates has resulted in contrived capital markets.
Negative Interest Rate Policy (NIRP) undermines commercial banks’ abilities to accumulate capital and manage losses. In effect, it poses a threat to the viability of these banks. Consequently, NIRP could imply a form of nationalization of commercial banking through central bank policies.
Japan and Europe are already teetering on the brink of an irreversible situation. In the United States, President Trump persistently encourages Fed Chair Jay Powell to adopt negative rates. The reality is, he may not have a choice in the matter…
Roadkill
Nestled in western Wyoming, between the Teton Mountain Range and the Gros Ventre Range, lies a high-altitude valley. The steep slopes historically traversed by 19th-century fur trappers created a sensation of entering a “hole,” which is how Jackson Hole received its name.
Life at the valley floor can be unforgiving. The phenomenon known as radiational cooling causes the temperature to plummet as denser cold air from the snow-covered ground seeps down the valley, sometimes reaching an astonishing -66 degrees Fahrenheit. Yet, for a fleeting moment each year, Jackson Hole transforms into a veritable paradise during the late summer. Nevertheless, this idyllic setting doesn’t mask the underlying issues present in the region.
For instance, resident Gale Wilson captured a poignant moment on Sunday evening, photographing a moose and her calf near Highway 390 and the Snake River. Tragically, upon stepping outside the next morning, she discovered the lifeless body of the calf. “It just ruined my day,” she lamented.
Sadly, incidents of moose roadkill along this stretch of Highway 390 have become alarmingly frequent. Mark Gocke from the local Game & Fish department has lost count of the number of moose fatalities. To address this alarming trend, he is diligently working on an official record, anticipating that he may need to add several new entries before the weekend concludes…
Dead Meat in Jackson Hole
This Thursday through Saturday, the Kansas City Federal Reserve is hosting its 37th annual economic symposium in Jackson Hole, bringing together central bankers who resemble 19th-century fur trappers in their pursuit of knowledge. Questions about their expense reports are better left unasked.
As of now, Fed Chair Powell has not delivered his speech. He has a host of options regarding what to address, but it’s apparent there are certain topics he will avoid. For instance, he won’t acknowledge the disarray among global central banks as they compete in a race to implement increasingly imprudent policies. Nor will he admit that accepting guaranteed losses on bonds held to maturity is a flawed strategy for investors and pension funds striving to meet long-term obligations. He certainly won’t discuss how retirees may face significant challenges in the coming decade.
Furthermore, Powell will not openly declare the looming obsolescence of the Federal Reserve or how it has drained the nation’s resources, redirecting wealth to Washington for its purposes. He won’t admit that he might be the last person to hold the title of Fed Chair, nor that the economic paradigms of the 20th century have reached their limits. He won’t acknowledge that increasing debt issuance no longer equates to enhanced economic growth and that the Fed fosters wild asset price fluctuations, speculation akin to a gambling casino, and severe market cycles. Yet, despite this awareness, he may still lead the nation further into the realm of negative yields.
The surge in moose fatalities in Jackson Hole serves as a poignant metaphor. The central bankers find themselves in dire straits, and they are acutely aware of it.
Sincerely,
MN Gordon
for Economic Prism
