Almost Daily Grant’s (ADG) made the pronouncement on December 14th that a “new benchmark in financial repression” had been set: ”a record $18.4 trillion in global debt is priced to yield less than zero, up from less than $8 trillion in March and a five-year average of $10.3 trillion.”
ADG consulted interest rate historians Sidney Homer and Richard Sylla, who opined, “nominal negative yielding debt had never been seen in material size in the 4,000 years of interest rate history prior to the current cycle.”
Economist Ludwig von Mises never imagined such a thing, writing in Human Action,
There cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalist to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.
We can’t be sure what Mises meant by “very soon.” But, to read ADG, the march toward “the original state of poverty” will continue. ADG cites Financial Times’s John Dizard, who believes (paraphrased by Grant’s) that ”The potential catalyst [is]: A swath of T-bills [that] is set to mature in the first half of next year without fresh corresponding issuance on account of the Treasury Department’s ‘historically high’ $1.5 trillion cash cache at the Fed, potentially exacerbating a supply vs. demand imbalance.”
Dizard is not alone. Bank of America’s Mark Cabana says, “there is going to be a train wreck at the front of the [Treasury] curve next year. There is way too much cash chasing too little paper.”
Credit Suisse strategist Zoltan Pozsar weighed in, “A bill shortage would radiate out the curve, to the two-year and three-year, out to the belly.”
In Europe, where negative nominal rates have been the norm since 2014 and are currently minus 50 basis points, European Central Bank president Christine Lagarde said that further easing remains “part of our toolbox.”
One person who sees it differently is money manager Mike Wilson, who told Kiril Sokoloff on Real Vision, that inflation has begun to make a comeback which will soon be reflected in interest rates. Wilson said,
So I think the seeds have been sown for many, many years. They’ve been sown for political reasons. They’ve been sown for reasons of inequality that are only building now. This battle with China—between the US and China—is obviously inflationary. It’s a deglobalization movement. So all of these trends that were somewhat pushing inflation down for 30 years are starting to reverse.
Wilson continued,
The one big one, as you mentioned earlier, which is an important one, is the size of the debt. I think that’s the one that people can’t get past. They say, well, the debt is so big, we can’t let interest rates go up. But if you’ve got inflation, who cares? If you’ve got inflation, interest rates can go up. If you get 3%, 4%, 5% inflation further down the road, why couldn’t interest rates be 2%, 3%, 4%, as long as your real rates are negative—you can fund your deficit in perpetuity, in many ways. So I think it’s just—as you say—the snowball gets moving. And you end up getting more than you bargained for. So that’s how I see it.
Sokoloff answered with a metaphor about crossing America, “And you get to the Continental Divide, and you never know when you passed it. It seems to me like we passed the Continental Divide between disinflation and inflation.”
Wilson believes the US banking system is sick, thus muting money velocity and in turn monetary policy. Fiscal policy will spur inflation and interest rates in his view. “If you really want to get inflation, you want a steep curve,” Wilson said. “You want the banks lending. You want money supply growth. That’s how you get inflation. And we haven’t been able to generate that for 10 or 15 years for a lot of different reasons. But why stop that now? Why would they compress back-end yields and ruin their banking system if their goal is to get inflation?”
Murray Rothbard wrote, “The rate of interest is the price of ‘time.’” It’s safe to say the world’s central banks have manipulated and mispriced what time is worth. Instead of Powell and Lagarde setting this price, Rothbard should be heeded, “the best interest rate is the free market, or the ‘natural’ interest rate, set by the workings of free man under natural law, i.e., the rate determined by the supply of and demand for money loans at any given time.”
If interest rates are not set by the free market, there is no freedom.
