Now that the global tally of negative-interest debt issued has passed the $10 trillion mark, it might be worth taking a moment to reflect the yet unknown implications posed by the intrusion of…reality.
Interest rates in the EU, Switzerland, Japan, and now Germany have dipped into negative territory almost in lock-step. That so many people are willing to take losses and accept higher fees to have their investments held reflects a loss in confidence of sovereign fiscal policies across the board. And still they continue to pour money into bonds, driving prices up and yields down even further (the former moves inversely to the latter). This suggests that not only financial institutions but the global financial system as a whole has little faith in the ability of its governors to stimulate anemic economic growth.
So now for a reality check:
-if the status quo is maintained, interest rates will stay at zero or below for the foreseeable future. Savers, retirees and pension funds will see the value of their capital dwindle away to nothing, throwing millions into welfare programs already stretched to the breaking point from the ’08 crash, QE4ever policies, massive migration waves, and the anti-gravity effect of negative interest rates.
-if central banks DO raise rates, the amounts required merely to service the mountain of debt governments around the world have built up since the crash would spike exponentially overnight. This would send seismic shock waves through the global financial system, triggering a liquidity crunch and innumerable bankruptcies. History has shown that contagion in global debt markets soon spreads to equity markets, which in all probability will incite the next crash.
-if such a rosy scenario does come to pass, or is brought about by an external incident (Brexit, a Chinese Lehman Moment, a terror strike with WMD, pick one, any or all are possible in the immediate future), one of the most likely outcomes is that the credibility of the major currencies of exchange will be eroded to the point of disappearing. Who will pay what to whom, when no one knows who owns or is owed what, and who would accept payment in worthless, ultra-debased scrip anyway?
Sounds a bit like a Three Stooges routine, don’t it?
Such is the bizarre landscape we inhabit, with a soundtrack of political platitudes about “recovery”, “growth” and being “much better off than the last time” being brayed nonstop as the new music of the spheres.
Welcome to the Subduction Zone.