Sunday, September 18, 2016

The truth about why hundreds of billions are being "invested" at negative interest rates.

We've seen the headline news time and again including this recent Bloomberg piece tell us that first sovereign nations and now large corporations are able to float bonds (loans) which bear negative interest.  Common sense says this is stupid to the point of being unbelievable yet here it is not only happening but accelerating in pace.  How can this even be called investing when the stated goal of buying a negative yield bond is to lose money?  Why would anyone do this instead of just going into cash?  I could see doing this if it were some sort of hedge against a bad outcome but if we get hyperinflation then the dollars they would be paid back with would be watered down massively and if we get a deflationary crash then the corporations they invested in would be defaulting en masse.  So how is it that anyone would choose to hold negative yield debt instead of cash??  I can see how some might not want to go into gold after such a big run up but again, holding cash is a much better strategy for avoiding a gold pullback than is holding negative yield debt.

So why oh why would anyone choose this?

Note in the article that the mindset is between holding this crap asset or that. Nobody even acknowledges the elephant in the living room which is that cash is an investment like any other.  In fact, the whole concept of flight to quality or "risk off" should mean that money managers seek to distance themselves from as many third party promises as possible.

So again, why would anyone choose negative yield over simply holding cash?

I'm pretty sure that the truth will evade most people because they don't understand how the global money supply works but the answer has been given in these pages many times before and quite recently too:  There simply is not enough cash in the system for everyone who holds debt as an asset to covert that debt asset into cash. 

Since the money supply consists mainly of debt it makes sense that most assets in the system are not real assets but rather simply debt - promises to pay in the future.  Since most of these assets are borrowed into existence, most of these same assets will some day evaporate back into the thin air from whence they were conjured.  If everyone got scared at once and then decided to trade their debt based assets for cash or gold or any other commodity or physical thing, the value of all those things would skyrocket due to the simple law of supply and demand.  This is what the senator who I linked to in a recent post was talking about when he said "electronic run on the dollar" back in 2008.  People were cashing out their debt based assets for greenbacks and there was no way the fed could keep up with it because the amount of debt being exchanged for dollars is far greater than the number of dollars in existence.

Since then the Fed has added to the supply of dollars in the system by moving the monetary base from $800 billion back then to about $4 trillion today.  This move was to help ensure that there was more cash in the system in order to support another such run on the dollar in the future.  I don't hear anyone talking about this but it is clear what has been done and why.  But all things work within the Elliott wave principle and so I think that the chart of the monetary base actually will turn out to look like the red extension below.  it should bottom soon or has already bottomed  and then will have one more final wave up and then it should pull back hard in three waves as shown.

What could possibly cause the fed to actually remove cash from the system???  In a word, inflation.  And from the looks of that pullback, a lot of it.  It would be seen in the form of rising interest rates and a reversal back upward of the velocity of M2.  It would likely be caused by the one thing that is the real cause of hyperinflation which is loss of confidence in the issuing authority.  This loss of confidence would be made worse by a public show of disorder in our government ranks so I expect to see as signs:
  • fist fights or other violence on the congressional floor, perhaps even a stabbing or a shooting.
  • politicians and then corporate insiders telling tales out of school on each other, lots of whistle blowing and public accusations. Big names which the idiot people think are clean turn out to be dirty as a baby's diaper.
  • a rise in power by some entity that nobody saw coming (not trump or Clinton)
  • people who are supposedly educated and principled above such things found in very compromising situations including child porn/human slavery trafficking, murder and other despicable crimes normally associated with organized crime.
We ain't seen bad yet but it is most definitely coming.

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