Lower interest rates, 50 yr treasuries, negative yield, BOOM...

[pbmus]

Link to tweet

[Cary]

1. Keynes' liquidity trap

[pbmus]

2. Bingo...

[muriel_volestrangler]

14. What do very long term loans have to do with a liquidity trap? (nt)

[Cary]

20. I am not aware of ISLM making any distinction.

Long term interest, short term....

Negative interest is negative interest and it occurs when savings exceed investment.

Right?

[muriel_volestrangler]

21. OK then, what do short term Treasuries have to do with a liquidity trap?

They have existed for hundreds of years, in various countries. Why does any mention of government borrowing, long or short term, cause you say say "liquidity trap"?

The WSJ is not talking about negative interest. It is talking about 50 year bonds.

[pbmus]

22. Your answer is Slippery slope...

You are picking one topic...treasuries...and trying to solicit an answer...

I began with lower interest rates, treasuries, negative yield...

I forgot to mention QE...

Ask yourself why a government wants to sell you a bond that comes due 50 years from now...?

‘United States Treasury securities are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Treasury securities are often referred to simply as Treasurys. Since 2012, U.S. government debt has been managed by the Bureau of the Fiscal Service, succeeding the Bureau of the Public Debt.’

In other words let’s sell some long term debt to pay for our tax giveaway to our 1%...and let the 99ers pay for it...

[Cary]

25. The why is more important than the how.

What is the difference between printing money or selling bonds? The problem with a liquidity trap is that no one has enough money to buy anything and you get deflation. If you are dumb enough to let that happen then you have to use fiscal policy.

[pbmus]

27. In this environment...with GREED being the dominant participle

The answer is wealth is in tooo few hands, and it is looking like it is in the wrong too few...

[Cary]

29. True.

[muriel_volestrangler]

43. The WSJ article isn't about negative yields, though, it's about 50 year Treasuries

Government have issued debt for centuries; the bit of news here is that they're considering longer terms. Why? Because they reckon they can. Some government debt has lasted a lot longer than that (some has been undated; this decade, Britain paid off debt dating ultimately back to the South Sea Bubble of 1720).

If what you're worried about is the government increasing the total debt, then why talk about a liquidity trap? They are different things.

[pbmus]

44. Negative yields are Happening all around the world...to the tune of 17 Trillion

Last edited Sat Sep 14, 2019, 07:26 PM - Edit history (1)

Imagine if I came to you with a deal.

Give me $10 today and I’ll return $9 to you in a decade or so.

No way right?

This is happening all around the world and on increasing basis.

Maybe you didn’t go to Harvard Business School, but perhaps you recall an early lesson from your Junior Achievement class that tells you this is not how it’s supposed to work.

You are supposed to put your money in the bank and be rewarded with interest. This is supposed to be wiser than trading your precious allowance at the candy store for an awesome, yet fleeting sugar rush.

Nicholas Colas, co-founder of DataTrek, put it plainly enough: “Bonds are supposed to pay the owner of capital something to pry the money out of their hands.”

Nevertheless, some really smart investors around the world now have invested about $17 trillion in government bonds that offer negative interest rates, according to Deutsche Bank. That represents about a quarter of the global bond market.

///////////

Investors are willing to pay a premium—and ultimately take a loss—because they need the reliability and liquidity that government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth.

//////////////

Description, A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest." Wikipedia

///////////////

So when governments or corporations cannot sell there bonds...to pay there debts...and they are politically unwilling to raise taxes...or they give away a trillion here and there...what’s next...?

////////////

It’s called QE...in Europe almost 3 trillion euros, and in the USA, If you thought the Federal Reserve was done with quantitative easing, you might only be half right. As soon as next year, analysts say the Fed will resume large-scale buying of debt securities -- this time just U.S. Treasuries -- in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.

https://www.bloomberg.com/news/articles/2019-05-21/qe-may-be-over-but-the-fed-s-u-s-debt-hoard-is-set-to-double

///////////////

Next.....? In my opinion, it could be the yuan or a combination of dollar, yuan, euro, and yen...or...?

The next president will have there hands full, similar to what Obama went thru but with more deflation....starting in 21, 22

[muriel_volestrangler]

46. So, nothing to do with 50 year Treasuries, then

Why did you bother linking to the WSJ article, and putting them in your title?

[muriel_volestrangler]

48. But your article says they'd be more likely to buy short term, not long term, securities

What the Fed buys matters. Officials have said they may skew purchases toward shorter maturities, but no final plan has been set. The Fed holds no T-bills after swapping them out earlier this decade to drive down longer-term yields. Bill purchases could help lower short-term funding costs and widen the gap between 3-month and 10-year rates -- a key bond-market recession indicator -- after that part of the yield curve sporadically inverted since March, says Margaret Steinbach, a fixed-income investment specialist at Capital Group.
...
Developments in short-term funding markets could force the Fed’s hand. This month, the Fed reduced its interest rate on excess reserves, or IOER, to keep its target rate from drifting higher. Some observers say the rise is a knock-on effect of the QE unwind, which has caused demand for short-term cash to rise.

The news about a 50 year debt seems a complete red herring for this thread. Even if it makes up most of the OP.

[muriel_volestrangler]

51. Why would I buy them? No one has tried to tell me why they are relevant

Indeed, I get the feeling no one here knows anything about them. The thread seems so incoherent it's absurd.

[A HERETIC I AM]

59. One reason it's incoherent....

Is because people seem to think “Yield” and “Interest Rate” are the same thing.


They aren’t, and I don’t think any central bank or anyone else is selling new issue debt securities with a negative INTEREST rate.

When you hear of a bond yield going negative it is a result of the price of the bond being bid up so high that the yield becomes a negative figure. That situation does not last very long, as a general rule because it is a freak of supply and demand.

Yield and interest are not the same thing, but they are being conflated here.

[Cary]

26. Treasuries? Nothing.

Negative interest rates are what happens when savings exceed investments. Why would a business invest in labor and capital, to increase production, when the company can't sell what it produces currently?

ISLM.

[SWBTATTReg]

3. And wait for the other shoe to drop...companies will, despite their healthy balance sheets (...

loaded w/ cash from the 2017 tax cut and jobs bill), go out and borrow this cheap money by the truck loads. By doing so, they are locked into a 50 year deal where they pay negative interest, pay the principal back in cheaper/inflation ravished dollars, and those lending the funds are basically left holding the bag. Not the borrowers.

Go figure. I suspect that this won't go very long, otherwise, you'll have loads of people going out to the market place, borrowing tons of funds at negative cost, and turn around and capture the cost and reap some rewards via putting into a decent dividend paying stock (if you can find).

What happens to the stock market and other markets such as this, when rates are negative? Stock dividends drop to zero or less, and then how do you price the stock (X price = earnings per share times some factor, etc.). Is this a sign of too much liquidity and that the central banks / Feds need to rein in credit markets, etc.?

[pbmus]

4. Short answer is YES...

However, growth in this economy is based on cheap money....

And what greed wants, greed gets....

[SWBTATTReg]

5. Similar to the housing bubble eh? Wonder how one fixes something like this? Perhaps by ...

the Fed issuing a flood of treasuries (massive amount) and soaking up all of the excess dollars floating around in circulation, but what to do w/ the excessive corporate profits being reaped by businesses? Eventually everyone is going to run out of places to invest this cash...

[pbmus]

6. I can think of at least a dozen places...

But this would incur political will that is not present today...

We must go back to Eisenhower era tax rates...

and start a national infrastructure work plan to rebuild our country...

An online groupthink devoted to carbon reduction ideas ... with rewards tied to reduction %...

And on and on and on...

[SWBTATTReg]

8. Very good thoughts...and of course rump hasn't said a word about infrastructure...or anything for ..

that matter that is truly productive or constructive. He's been more intent on dismantling ...

[smirkymonkey]

7. What effect will this have on the average Joe on the street?

Not just the stock market, but the overall economic implications?

[pbmus]

9. Mixed bag...slightly higher consumer prices for next year or so...due to many factors

However, home loans cheaper, business credit cheaper, lower savings rate, volatile stock market...

Just a few I can think of...

[SWBTATTReg]

11. Good list!

[smirkymonkey]

13. Thank you!

Much appreciated!

[SWBTATTReg]

10. Probably an uptick in inflation for critical materials...

as bidders bid up prices, competition heats up for limited resources (vs. unlimited cash), some consumer staples will go up in price (competition and tariffs), and the consumer will be left behind more and more, since a lot of the 2017 tax cut and jobs money is going back into non-productive (for most part) endeavors (stock buy backs, etc.), and the excess cash is NOT paid back to workers (pay still isn't keeping up).

One other thing...people are going to find out that their savings aren't returning what they would like to see, all while inflation keeps eating away at their dollars, thus, might start buying in bulk in advance of inflationary pressures on needed items by the consumer (that is, a disincentive to save)...

I'm sure that there are tons of other stuff that will happen to avg. Joe, but this is a tiny bit off the top of my head.

[smirkymonkey]

12. Thank you. I appreciate your reply.

Are you an economist? Your explanations are very clear and concise.

[SWBTATTReg]

16. Thank you. Yes, I have a minor and major in Economics, but stayed in data processing...

and telecommunications.

Telecommunications and DP was much more interesting.

But, I do keep abreast of economic trends (I guess it never goes away, when one is seeped in it)...

take care!

[KPN]

15. Gotta love how the Wall St oriented financial

class refer to these basically greed/driven concepts as “innovation” and, of course, innovation is good. As if this stuff is “products”. It’s not. It’s all artificial and artificially created wealth. .... The bill always comes due later for these “innovations” and the middle class tax/payers shoulder the burden.

I’m sick and tired of Wall St. driving our economic policy. When will labor and genuine small business (not the 500 or less employees businesses as SBA defines small business) have weight in policy decision making equal to their actual weight in the economy as well as the tax base.

[SWBTATTReg]

17. You're absolutely right. Large Business and Predatory Capitalism has been driving the ...

boat, not rational economics. What we are going through now is that politics is driving rational decisions (which is why I applaud the Fed reserve chairman keeping to his guns in defying rump and cronies in pushing for an interest rate cut.

Maybe one day cooler heads will prevail. I certainly hope so.

[pbmus]

18. When monetary policy is tied to a combination of factors...

To include

1. Labor

2. A precious metals index

3. A commodity price index



Our present monetary policy is based on these factors...

short-term interest rates;
long-term interest rates;
velocity of money through the economy;
exchange rates;
credit quality;
bonds and equities (debt and corporate ownership);
government versus private sector spending/savings;
international capital flows of money on large scales;
financial derivatives such as options, swaps, futures contracts, etc.

/////////////////////////

I desire/propose a monetary policy based in reality...not political whims

[KPN]

19. No kidding. And there's another epic euphemism "financial derivatives" as in "something good

flows from" -- like the 2008 housing debt driven Great Recession! Amazing how Wall St turned that into one of, and according to some, the longest bull markets in history.

[DFW]

23. Here in Europe, there is now also talk of negative interest rates

Europe has always had a tendency toward the "control freak state (UK mostly excepted)."

If negative interest rates come to pass, I foresee here: a boom in buying of physical gold (France and Belgium are almost at complete control freak levels on that, in case they ever decide to go full Nazi-style confiscation). A big uptick in the gold price will not come until Central Banks decide they think it's a good idea, too (been happening recently: Gold has gone from $1200 to $1500 during the 2019 calendar year). Also, it will remove inhibition on speculating on property. No interest to pay? Let's buy up all the houses we can find! It would probably also cause a boom in big-ticket items that people usually need to finance (cars, home remodeling, etc.). It will also completely impoverish people on fixed-income retirement, and savings accounts, although those have been virtually worthless now for years.

A few years ago, during a budget crisis, the government of Cyprus decided it would just take from its citizenry 10% of every bank account balance over €100,000. Poof, it was gone. If there is no cash (and Europe is trending that way), they have control over ALL of your wealth and can seize as much of it as they want with one stroke of a computer key. Say someone like Trump decides to wipe out the US deficit. All bank accounts with a balance of over $10,000 are wiped clean, seized by the US Treasury, now to spend as Trump sees fit (not legal? watch for the executive order). It's easy to quote Frank Zappa ("it can't happen here" ), but I wouldn't bet the farm on that. Dictatorships are seldom benevolent.

[Turin_C3PO]

24. Scary thought,

that Trump or whoever could just wipe out and steal all of our money.

Off topic: Frank Zappa was such a visionary. If you read his 1988 book, the last few chapters deal with the path America was/is on. Zappa predicted our current problems.

[DFW]

31. I quite agree

And I doubt that Cyprus is technologically more advanced than the U.S. government.

Here in Germany, the legal limit of cash transactions that didn't have to be registered was €10,000 (similar to the $10,000 limit in the USA). Starting next year, the government is reducing that to €2000. The used car market here is huge, since German cars are usually well-made, and people sell their used ones for cash all the time. People drive four or five hours to see, test, and buy used cars in the €1500 to €10,000 range all the time. No one wants to wait around for a bank transfer to be credited or a check to clear, so these are often sold for cash. Any such transaction as of next year will be against the law. The reasoning given was "to combat money laundering," which is the biggest bunch of garbage imaginable. It's their excuse for everything, including eliminating the €500 bill from circulation.

The drug trade, huge here, launders its money (usually all in €10, €20 and €50 bills) by reporting huge turnover from video arcades (where no one ever visits) and out-of-the-way taxi companies who hardly ever drive customers. They report hundreds of thousands every week in turnover. The tons of small bills are deposited, duly reported, and presto! the money is legal. This was explained to me by an officer of the BKA (German FBI). But the politicians don't like to go after guys like that (they shoot back, kidnap family members of uncooperative politicians, etc.). So they go after the poor guy who wants to get €6000 for his fifteen year old Mercedes, which he himself bought for €9000 three years ago. Pretty courageous, right?

[Blue_true]

52. Hasn't Germany already issued one set of negative interest rate bonds? nt

[pbmus]

54. Yes ...as of July 2019...1.9 Trillion

https://www.bloomberg.com/graphics/negative-yield-bonds/

[Blue_true]

55. I think that was the second Tranch. The country issued a less discounted negative interest rate

Tranch about a year ago.

DFW is tuned in to the goings on there and across Europe, maybe he has more insight.

pbmus, what do you think about negative interest rate securities? I honestly would not put a dime into them.

[pbmus]

56. personally no but certain circumstances might warrant there use

ie quick liquidity, writeoff , large investment funds or investors......

[DFW]

57. It might have happened and went right by me.

I don't keep assets here except for money to pay tax bills and personal expenses, so I haven't followed that very closely.

I keep my assets back in the States except what I need to live on, and a little cushion over that. I realize times are supposed to have changed, but the word "Enteignung" did originate here, and since I'm finding they are only too willing to ignore pertinent aspects of the double taxation treaty with the USA here, I am not leaving assets laying around here just in case the AfD or "Die Linken" (two sides of the same coin here) should manage to sneak into a position of power. To paraphrase, control freaks are bad, total control freaks are totally bad.

No one I know here would personally buy such a financial instrument, of course, but if the country forces its citizens to do so, there will no longer be the option.

[Blue_true]

60. Thanks. nt

[at140]

28. When interest rates are artificially set low,

it creates artificially large asset bubbles (housing, stocks, land, minerals etc).
And bubbles always seem to burst eventually.

It proves to me one thing...gov't can manipulate economic cycles but can not eliminate cycles.

[at140]

30. We better elect Elizabeth Warren president and end this madness

Countries in Europe have been doodling with negative interest rates, and their economies are flat or worse.

Learn from mistakes of others, because we can't afford to make them all ourselves.

[pbmus]

33. Fortunately or unfortunately...depending on your position

Last edited Sat Sep 14, 2019, 08:12 PM - Edit history (1)

We are a global fiat monetary system....if Europe drowns itself in fiat...we will be in a world of hurt..that’s why 10%-20% of our 07-08 bailout was European banks and other financials...

[Hoyt]

37. Not so sure about that. All the stuff she's promising and her "Economic Patriotism" will

likely make things worse.

[at140]

50. What she is promising is small potatoes compared

to what the top 1% are accumulating. M4A-EW version will cost lot less than what it seems on the surface because instead of the health insurance company profits, and the large staff doctors must employ to handle will be eliminated. Every doctor has 3-4 employees in front office + billing staff. My wife spent a lifetime in medical office billing, and the number of hours she had to spend haggling with health insurance companies is crazy ridiculous. With Medicare, there is no time wasted.

[Hoyt]

53. You ever filed a Medicare claim? And, it won't be 5 years before

M4A will go back to prior authorization, etc., to control utilization.

While I think we will eventually have single payer out of necessity, don’t believe there will be any great administrative cost savings. That myth was blown when all insurers and Medicare started using the same claim form and codes 40+ years ago.

[at140]

58. Just asked my wife, a lifetime medical biller.............

and she said, Medicare approves smaller amounts than private but there were far less denials compared to private insurance, provided the right codes were used.

My wife is now retired, and undergoing chemo treatments for cancer. Would you believe her Medicare advantage approved the chemo first 3 treatments and then denied the 4th? Same doctor, same treatment. It is just tactics used to delay payments by private insurer Humana.

[roamer65]

32. Trade war, currency war, world war.

[pbmus]

34. That is the nihilistic intention...Putin et others...

[roamer65]

35. Doesn't matter what length they offer on Treasuries.

Soon they will be mostly owned by the Federal Reserve, just like the Bank of Japan owns most of the JGB market.

[pbmus]

36. Not sure what you are talking about.?

Current Foreign Ownership of U.S. Debt

In May 2019, China owned $1.11 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second-largest holder is Japan at $1.1 trillion. Both Japan and China want to keep the value of the dollar higher than the value of their currencies.

////////////

FLAT CURVE DILEMMA

Market expectations of imminent easing grew after the BOJ pledged in July to act pre-emptively “without hesitation” against risks that could knock the economy off the path toward achieving its 2% inflation target.

Waiting until the subsequent meeting on Oct. 30-31 will allow BOJ policymakers time to scrutinise the bank’s “tankan” business sentiment survey for clues on how much the pain Japan is suffering from the U.S.-China trade war. Policymakers can also see the initial consumer reaction to a sales tax hike that kicks off in October.

The BoJ is under no political pressure for imminent action.

Japanese Finance Minister Taro Aso said on Friday it was up to the BOJ to make monetary policy decisions, adding that Japan’s economic fundamentals remained solid.

Another problem the BOJ board could discuss next week is the persistent decline in long-term rates that threaten the bank’s policy aimed at controlling the yield curve.

The YCC policy was introduced partly to prevent the yield curve from flattening too much, as excessive declines in long- and super long yields will erode profit margins of financial institutions.

But downward pressure on global long-term rates pushed Japan’s 10-year yield to -0.295% last month, well below the -0.2% level seen by markets as the BOJ’s line in the sand. The 20-year yield briefly hit to 0.015%, barely staying above zero.


Sources have told Reuters the BOJ likely won’t tolerate the 10-year yield from sliding below -0.3%, as that could push the 20-year yield below zero and flatten the yield curve.

The BOJ may eventually need to coordinate with the Ministry of Finance, which issues public debt, to control the supply of bonds to steepen the yield curve, Daiwa’s Iwashita said.

“The BOJ may keep trying to prevent super-long yields from falling by reducing bond buying. But there’s a limit to what it can do alone,” she said.

[roamer65]

38. QE. Massive QE.

Who else is gonna buy 1T plus of deficit?

Something else I can see coming is mandatory purchase of Treasury funds with 401k’s.

I’m guessing a mandatory 10-20 of your 401k will automatically go to Treasuries.

[pbmus]

39. Well if that happens...you can kiss your ass and many others, bye bye...

[roamer65]

40. I'm halfway out of fiat currency.

I’ll leave it at that.

[pbmus]

41. I've been out since 1972....

[roamer65]

42. Good man.

Only thing left for me in fiat is my 401k.

Only reason its still there is the penalty I would take for withdrawal.

[Buckeyeblue]

45. It's an interesting idea

For foreign countries it's mostly about investing in the dollar. You could offer negative interest and you would probably still get takers, because it's a safe investment.