Something is rotten in the state of Denmark. — William Shakespeare, Hamlet
POITOU, FRANCE — Every week, we reach new heights of weirdness:
… the worldwide total of debt trading at negative interest rates rose to $17 trillion …
… nearly 15% of S&P 500 companies no longer earn enough money to even cover the interest on their loans …
… the yield on U.S. 30-year bonds fell below 2% — lower than the yield on 30-day Treasury bills …
… and Danish banks are offering fixed-rate mortgages at zero interest over 20 years.
Thanks to negative rates, you can now take out a fixed-rate zero-interest mortgage for 20 years.
You borrow the money. You buy the house. You sell the house 20 years later … and you give back the money. You would have enjoyed two decades of free housing.
Normal Weirdness
But the human mind is nothing if not gullible and credulous. The weirder things get, the more people struggle to think they aren’t weird at all.
Joe Weisenthal argues in Bloomberg that negative rates are perfectly normal:
If you want to hold gold and watches and sentimental things at a bank, you pay to rent a safe deposit box. If you want to hold oil or grain to use it or sell it next year, you can pay for storage in a tank or some other facility. And if there’s a surge in the supply of oil or a bumper crop of grain, and storage capacity is scarce, then you can expect to pay even more for warehousing capacity.
Lincoln said you can’t fool all the people all of the time … but you can come damned close.
There is a “glut” of savings, Ben Bernanke explained.
That is why interest rates are so low, he said, and it is also why consumer and business demand is so weak. Nobody wants to spend money; they want to save it.
This narrative never squared with anything in the real world, where consumers struggled to make ends meet … and savings rates fell from 10% of national income in the last century to just 2.5% today.
Meanwhile, debt levels — anti-savings — soared. In just the last 10 years, total U.S. debt, public and private, rose 40% … or by about $20 trillion.
And why would consumers borrow from credit cards at 15% if they had abundant savings earning only 2%?
Why would students borrow at 6% to pay their tuition? Why would businesses borrow at 4% to buy their own stock?
And how come world debt would rise to $250 trillion while everyone was supposedly stashing cash at record rates?
Patriotic Imbecility
The story didn’t add up. But the battle against evil savings continues.
And in the spirit of patriotic imbecility, we do our part … suggesting ways for businesses to ramp up borrowing, spending and profits.
We proposed, for example, that corporations simply give away their products — thereby getting market share much more rapidly.
Since many companies — especially in the internet space — are judged on customer growth rather than sales or profits, this would surely be a winning strategy.
This was, of course, a joke. But it’s looking more and more like prophecy.
Banks used to give customers free toaster ovens for opening up new accounts. Now, at least in Denmark, they give them free houses.
Or how about office space? WeWork has a twist on the same idea.
Its financial disclosures show that the company loses more than $5,000 on each customer, providing services far beyond what they are willing to pay for.
And why not? If it makes sense to lend money below zero, maybe negative pricing on what money buys makes sense too …
And here we offer the company even more lunatic advice: It would do better to rent the space to itself. Then, it could turn down the heat, cut costs, and show a profit!
Too Much Money
Here’s Weisenthal again, explaining why it all makes sense:
… there’s lots of money out there and a limited capacity to store it all. So increasingly, savers are going to have to pay for money storage services. […] whether it’s fees for oil tanks, safe deposit boxes, security guards, insurance, or wealth managers, there’s nothing unnatural about being forced to pay to preserve your wealth.
Who is this guy, we wondered? Is he allowed out in public? A naif? A mental defective?
If you want someone to store your Corvette, you will have to pay him for it. The warehouse renders you a service. You pay.
But if you lend someone your Corvette, for him to use, it would make no sense at all for you to pay him. He should pay you.
Likewise, you should pay someone to store your money. But if someone wants to use your money — such as when you deposit money in a bank or buy a corporate bond — the user should clearly pay, not the lender.
There is a difference between storing and lending.
In a capitalist economy, heirlooms are stored, but capital is lent out … so that it can be fructified by entrepreneurs and businesses.
The lender knows he may never see his money again; he deserves to be compensated for the risk.
More to come …
Regards,
Bill
• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.