Negative Interest Rates: Has Money Lost its Value?

Agora Publishing head Bill Bonner at Bonner and Partners explains

A negative nominal interest rate – meaning a negative rate before you account for inflation – implies an odd world…

…maybe even a world that cannot really exist.

To lend at less than zero suggests you believe the present value of money is less than its future value – in other words, deflation. And you must assume that the risk of default or inflation is near zero.

This allows the Italians to go out and build roads or pay pensions with money that cost them less than nothing.

How long this will last, we don’t know. But as long as rates remain below zero (and they could go lower!) money is not just free… it’s a cost not to borrow!

Imagine you are buying a house. (Now, you can see the mischief afoot!) If lenders are willing to grant a loan at a negative nominal interest rate that’s secured by nothing more than the full faith and credit of the Italian government, then lenders should surely be willing to extend credit to you against the value of your house.

That would leave you with a curious mortgage – one that pays you interest. At the Italian rate, a $1-million house would come with an extra income of about $19.16 a month.

This raises profound metaphysical issues. If a mortgage carries negative interest, it implies that the house (an equal capital value) also has negative value.

After all, you have to pay someone to live in it. And if houses are worth less than nothing, we have to wonder what a car is worth… or a diamond ring… or a luxury cruise?

Does that mean that money has no value? Or even negative value?

After all, you can no longer give it to someone in exchange for a positive interest payment. Now you must pay him to store it for you, as though it were furniture that won’t fit in your house. You don’t like it anymore. But you don’t have the heart to throw it away.

And if money has no value, what happens when you hire, say, a gardener to pull out weeds? Should you pay him? Or should he pay you? How many hours should he have to work for you before you consent to take his money?

The whole thing is so contrary to nature we gasp when we think of it. We are flummoxed.

But you are a smart person, dear reader: Maybe you can figure it out for us.

The Strange Case of Sweden

This is all prelude to taking up the strange case of Sweden…

All we know about Sweden is what we learned by watching the movie The Girl with the Dragon Tattoo.

And all we learned from that was that Swedes tend to be murderers, sadists, lesbians, and pock-marked wimps.

Maybe that accounts for the torturous financial system the Swedes are creating.

Reports Business Insider:

Sweden is shaping up to be the first country to plunge its citizens into a fascinating – and terrifying – economic experiment: negative interest rates in a cashless society.

The Swedish central bank, the Sveriges Riksbank, on Wednesday held its benchmark interest rate at -0.35%, the level it has been at since July.

Though retail banks have yet to pass that negative rate on to Swedish consumers, they face increased pressure to do so as long as the rates remain where they are. That’s a problem, because Sweden is the closest country on the planet to becoming an all-electronic cashless society.

Remember, Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATMs from rural areas, annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”

A resistance is forming, and some people are protesting the impending extinction of cash. Björn Eriksson, former head of Sweden’s national police and now head of Säkerhetsbranschen, a lobbying group for the security industry, told The Local, “I’ve heard of people keeping cash in their microwaves because banks won’t accept it.”

Alert readers will recognize this negative interest story as one we have been following. We believe it won’t be long before we have negative rates in the U.S., too.

The feds will pivot to even stricter controls on cash to gain more control over the economy and practically unlimited power to tax and spend – without congressional approval.

Sweden is ahead of the U.S. feds on this one. We can only hope it goes far ahead, fast, and blows itself up before the U.S. pivots down that path, too.

Negative interest rates are now being combined with the "war on cash" to ensure the capture of resources by the government and their cronies.

All these as warned by the great Austrian economist in his magnum opus "Human Action" in 1940 or 75 years back.

Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

The result of which would be... 

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.