Negative yield is an intriguing concept. The whole idea behind paying interests is that your money is worth more today than it is tomorrow. Cash in hand should be worth more than a future prospect. That’s been the case since the invention of finance and money itself. Well, mostly.
What some call Modern Economics presents us with some non-intuitive concepts. And negative yield is among those concepts.
– Can I borrow 20 dollars?
– Sure. But only if you promise to pay me back 19 dollars.
That’s negative yield. A lender will pay to lend you money.
But who the heck pays to lend money?
Some big governments, and now even some banks do too. (You know, using easy taxpayer money they never had to work for?)
Creditor Side Negative Yields
Governments need liquidity and so they issue bonds and sell them at whatever rate the markets are willing to pay for.
But, more surprisingly, private companies also emit negative yield bonds. Which is strange, but if you factor in government intervention it all makes sense.
Governments lend to companies, companies borrow from government. Banks, mostly. Negative yield propagates forward like positive yield does. If a bank charges you 2%/year for a loan, that bank probably got the same loan from government for 1% or less.
Right now there are U$ 17 trillion in negative yield debts in circulation. A staggering amount.
The total amount of the negative-yielding #debt within the Bloomberg Barclays Global Aggregate Index has reached another record-high of USD 16.8 billion. Almost 30% of all debt included in the index comes with a negative #yield. pic.twitter.com/QApaxDXf02
— jeroen blokland (@jsblokland) August 28, 2019
Borrower Side Negative Yields
So, we’ve discussed the creditor side, what about the borrowers?
Well, for them, negative yield is a dream come true! You pay back less than you borrowed. (Sorry Milton Friedman, but there is such a thing as free lunch after all! Or is there?)
Need to fund a startup? Sure, here’s U$ 100 thousand, pay me 99 thousand back. Sounds crazy but it’s supposed to be an incentive to heat up the markets. More startups should be funded, jobs created, tax revenue grows and demand for money becomes higher again so interests become positive. The theory is fine, but for some reason we’re not seeing that growth happen.
There’s an elephant in the room and it’s called Quantitative Easing (QE).
In the year 2002 or so, Japan had a problem. They needed to boost the markets somehow but if they straight up printed money, it’d generate inflation. So they needed some clever solution.
The solution was to actually print money, but to carefully choose who received that money. You guessed it: banks did.
When the 2008 subprime crisis settled, government had to find a way to get the banks back on foot and then the economy could recover. The solution? QE.
Europe then liked the concept, why not? QE goes to Europe. China liked the concept too, why not? Something similar to QE happens in China all the time.
All the QE money is held by the banks. Banks invest in the stock markets. As a result, the stock markets have never been higher in history, but there’s a problem there too: The People still make about the same wages they made 10 years ago and consumer demand for financial products is dropping sharply. Why? Because the financial instruments are too expensive. Bonds are expensive, their price does not justify the returns. Stocks are expensive, with return ratios into the decades range. Buy now and make your money back in 50 years. For example, Amazon.com’s PE ratio is at 73 right now, meaning you need 73 years to make back your investment.
The System is Broken
Negative yields indicate there’s something very wrong with modern economics.
It’s classic supply and demand. There’s too much money in the banks due to QE. And that money did not trickle down to The People. The economy is stagnated almost everywhere, globally, with ridiculous growth rates considering how much debt has been acquired. Things should be moving faster, considering the staggering debt numbers (over U$ 160 trillion as we speak).
QE broke the system.
Governments should not be able to print money for political reasons. Money emission should be controlled and transparent. Expectation of money emission should be regulated.
If only there was a financial instrument with all these traits….
Using Bitcoin, governments would not have been able to save the banks in 2008. They would’ve gone down like basic capitalist theory says they should.
Children learn the basics of finance in lemonade stands. When there’s no lemonade sales or when the money is all spent, the lemonade stand folds. Children learn it the hard way.
Why do banks get free QE money and get saved when things get rough? It’s nonsensical. It’s a complete distortion of the system.
Bitcoin would bring complete transparency to this system. There is no way to print more Bitcoin than is programmed in the source code. It’s impossible to flood the market with some sort of crypto-QE.
The only things wrong with Bitcoin right now is the parallel system of stablecoins which is completely unrelated to Bitcoin itself. In fact the only thing wrong with Bitcoin right now is it’s interaction with the broken traditional system of finance. Someone’s printing stablecoins freely, doing what central banks do, to manipulate the fiat price of cryptos. Bitcoin itself cannot be manipulated, but the traditional financial system around it can. As you can see, it’s the traditional system that’s broken, not Bitcoin.
Bitcoin Negative Yields are Impossible
Bitcoin cannot produce negative yields.
The amount of Bitcoin minted with every block is predictable, so there is no future expectation of abundance. Quite the contrary, Bitcoin is 100% transparent about future money supply. Scarcity is coded into the Bitcoin system’s core.
No government or external entity can artificially generate an expectation of Bitcoin abundance.
Obviously, the current system where government prints money to boost the economy would no longer be possible under a cryptocurrency-based financial system. But that’s the point.
The natural value of money considering supply and demand must be restored. Emission of money needs to be 100% predictable and transparent, not subject to the whims and conveniences of politicians.
If the economy is not doing well, the market itself will realign and eventually a configuration will allow it to start functioning again.
Central bank intervention is a complete disaster. It has generated an unstoppable monster and now politicians demand central bank intervention whenever the economy slows down.
The Federal Reserve loves watching our manufacturers struggle with their exports to the benefit of other parts of the world. Has anyone looked at what almost all other countries are doing to take advantage of the good old USA? Our Fed has been calling it wrong for too long!
— Donald J. Trump (@realDonaldTrump) August 27, 2019
Every elected official wants their tenure to end well economically. When the economy is not doing so well, they demand more money be injected into the economy.
The precedents set in the early 2000’s are still plaguing the economy today.
Bitcoin doesn’t solve everything, but it solves the negative yield problem. There will never be a Bitcoin-based negative yield asset. Ever.