Why Negative Interest Rates Attract Money
The list of countries issuing bonds with negative interest rates continues to grow. France, Belgium, Finland, Denmark, Switzerland, Netherlands, Sweden and Austria, have issued bonds with negative yields. With a negative interest rate, you either pay the issuer on a regular basis for the privilege of lending them money, or - in lieu of paying interest on an ongoing basis - you receive less money back than you originally loaned to that government when the bond eventually matures.
How does this make sense? Aren't you supposed to be paid something in return for lending money to someone? We'll propose two possibilities.
First, it makes sense if fear motivates the lending decision. What would people be afraid of? Perhaps they fear that the other places they can put their money - whether these be stocks, or commodities, or real estate, or...whatever - that they stand a good chance of losing money in any of those alternatives. So they're OK with putting that money that they consider essential to preserve in something that demands that they pay a premium in exchange for the benefit of "safety" - even if that safety does not include being paid back their entire principle.
Second, perhaps they believe that the trend towards deflation that keeps central banks around the world indulging in quantitative easing or other forms of money printing will overwhelm those money printing efforts. If that's the case, and inflation won't take hold, it means that, as a result of continuing deflation the principle they lend will be worth more on a relative basis. That means that the purchasing power of the money they've loaned will increase, theoretically offsetting the loss of principle value. Got that?
Maybe there's something else motivating this sort or behavior, which does seem on the face of it to be somewhat unreasonable. If so, it's not apparent to me. Then again, isn't our world becoming increasingly unreasonable?
For example, if you've ever tried carefully explaining something to someone using strict logic these days, you'll probably notice the difficulty they have following a logical sequence of statements. This will manifest itself in their eyes, as you observe them becoming increasingly distracted by the least noise or activity. Or perhaps you observe their increasing agitation, the result, one assumes, of a certain degree of frustration, borne of an inability to follow what you're saying. Of course, they won't think that they're incapable of follow you; they'll simply think you're not speaking clearly, or perhaps that what you're saying doesn't make sense - a rather ironic conclusion, don't you think?
In addition, their response to your reasoned, even impassioned, logic will likely be something along the lines of, "Well, I think...", without any attempt to address what you've said. You see, in our "democratic" society, everyone has a "right" to think what they please. No justification is necessary as far as whether what they say makes any sense or not. They're just exercising their democratic right to "speak their minds." What could be more important than what I think?
More likely, though, they'll say something like like "I feel...". Somehow our culture equates "feelings" with facts and logic, with feelings actually trumping the latter. It's the ultimate commitment to a world based upon nothing rational whatsoever. After all, "rational" equates with "straightjacket," or to use current parlance, "rigidity." Anyone who sticks with reason in exercising their faculty of intelligence betrays a rigidity in their thinking that's mired in the ways of the past - rational thinking being a characteristic of days gone by. "Rationalism" sinks to the level of other verboten "isms" like sexism and paternalism.
While these examples only scratch the surface of explaining our increasingly unreasonable world, I hope you get the point that simply noting that something is or appears unreasonable won't allow you dismiss the noted behavior as unworthy of a cultured society. To do so would mark you as not only rigid, but probably "elitist" as well. We wouldn't want to drag that sobriquet around with us, would we? It's really a modern equivalent of Hester Prynne's "A." And while one can't be caught judging anyone who indulges in adultery or fornication these days, one can certainly wag one's head and point one's boney finger at anyone exhibiting elitist characteristics like intelligence or rationality.
Then again, circling back to our original query about why anyone would lend money at negative interest rates, maybe we should just remember that investing has never been a strictly rational endeavor. Emotions have always swayed people to put money in places that make no sense.
How does this make sense? Aren't you supposed to be paid something in return for lending money to someone? We'll propose two possibilities.
First, it makes sense if fear motivates the lending decision. What would people be afraid of? Perhaps they fear that the other places they can put their money - whether these be stocks, or commodities, or real estate, or...whatever - that they stand a good chance of losing money in any of those alternatives. So they're OK with putting that money that they consider essential to preserve in something that demands that they pay a premium in exchange for the benefit of "safety" - even if that safety does not include being paid back their entire principle.
Second, perhaps they believe that the trend towards deflation that keeps central banks around the world indulging in quantitative easing or other forms of money printing will overwhelm those money printing efforts. If that's the case, and inflation won't take hold, it means that, as a result of continuing deflation the principle they lend will be worth more on a relative basis. That means that the purchasing power of the money they've loaned will increase, theoretically offsetting the loss of principle value. Got that?
Maybe there's something else motivating this sort or behavior, which does seem on the face of it to be somewhat unreasonable. If so, it's not apparent to me. Then again, isn't our world becoming increasingly unreasonable?
For example, if you've ever tried carefully explaining something to someone using strict logic these days, you'll probably notice the difficulty they have following a logical sequence of statements. This will manifest itself in their eyes, as you observe them becoming increasingly distracted by the least noise or activity. Or perhaps you observe their increasing agitation, the result, one assumes, of a certain degree of frustration, borne of an inability to follow what you're saying. Of course, they won't think that they're incapable of follow you; they'll simply think you're not speaking clearly, or perhaps that what you're saying doesn't make sense - a rather ironic conclusion, don't you think?
In addition, their response to your reasoned, even impassioned, logic will likely be something along the lines of, "Well, I think...", without any attempt to address what you've said. You see, in our "democratic" society, everyone has a "right" to think what they please. No justification is necessary as far as whether what they say makes any sense or not. They're just exercising their democratic right to "speak their minds." What could be more important than what I think?
More likely, though, they'll say something like like "I feel...". Somehow our culture equates "feelings" with facts and logic, with feelings actually trumping the latter. It's the ultimate commitment to a world based upon nothing rational whatsoever. After all, "rational" equates with "straightjacket," or to use current parlance, "rigidity." Anyone who sticks with reason in exercising their faculty of intelligence betrays a rigidity in their thinking that's mired in the ways of the past - rational thinking being a characteristic of days gone by. "Rationalism" sinks to the level of other verboten "isms" like sexism and paternalism.
While these examples only scratch the surface of explaining our increasingly unreasonable world, I hope you get the point that simply noting that something is or appears unreasonable won't allow you dismiss the noted behavior as unworthy of a cultured society. To do so would mark you as not only rigid, but probably "elitist" as well. We wouldn't want to drag that sobriquet around with us, would we? It's really a modern equivalent of Hester Prynne's "A." And while one can't be caught judging anyone who indulges in adultery or fornication these days, one can certainly wag one's head and point one's boney finger at anyone exhibiting elitist characteristics like intelligence or rationality.
Then again, circling back to our original query about why anyone would lend money at negative interest rates, maybe we should just remember that investing has never been a strictly rational endeavor. Emotions have always swayed people to put money in places that make no sense.
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