Negative real interest rates: Officially a reality

japanese bonds negative rates

Japan issues 10 year bond with negative interest rate

japanese bonds negative rates

The Japanese government has become one of the first lenders in the history of the world to issue debt with negative yields. Investors will now have to pay 2.4 bps for the privilege of lending the Japanese treasury money for 10 years.

Despite the Bank of Japan now printing 80 trillion yen ($700b) a year to buy bonds and fight the deflationary beasts, inflation has collapsed to near zero. This has caused the central bank to launch a new program: “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate”. This is QE on steroids.

There are two main reasons why central banks fear deflation. Firstly, the real gain that comes from a decline in the cost of living can’t be taxed. Secondly, the real value of debt outstanding becomes more as the value of currencies they’re denominated in increases. This ties in to the first moves of the war on cash we have been seeing in certain developed economies. This is being done under the pretense of fighting organized crime and money laundering, but a more sinister reason may be that it is simpler to confiscate (tax/charge negative interest/bail in) digital money in a bank account than 500 euro notes stuffed in mattress. It remains to be seen whether these moves by central planners will work this time.

Is the US next?

“If it were positive to take interest rates into negative territory I would be voting for that,”  – Janet Yellen (then San Francisco Federal Reserve Chair), 2010

The American economy isn’t growing as expected, and with the US$ being at close to 10 year highs against other major currencies, discontinuing this interest rate hiking cycle as Europe and Japan start easing is definitely not off the table.

Due to 2016 being an election year, any easing before the November election would be difficult. Janet Yellen as an avowed Democrat can’t lower interest rates or restart QE or forward guidance, as this will be seen as blatantly favouring Hillary Clinton.

donald trump praying market crash

Federal Reserve policy has been known to affect the stock market…

The (lack of) logic behind negative interest rates

Would you rather have a 2L coke today, or a 330ml a year from now? No sane economic being will ever choose the latter. In a free market, negative rates can’t exist.

From the Mises Institute:

The notion that time-preference and the originary interest rate could be zero, does not only sound absurd, it is also a logical impossibility: Positive time-preference and a positive originary interest rate are logically implied in the irrefutably true “axiom of human action.”

Human action is purposive behavior, implying the use of means to achieve ends. Action requires time (it is impossible to think otherwise). Thus, time is an indispensable and scarce means for achieving ends. As such, it must be economized, which necessarily implies that an earlier satisfaction of wants is preferred over a later satisfaction of wants.

If a determined enough cabal of central banks would ever be successful enough to make all rates negative, there would be no incentive left to save or invest. Capital consumption would ensue, and the market system would be turned on its head.

Let’s see how long this experiment lasts.