Wednesday, August 31, 2016

Negative Rates Uber Alles

 A pretty simple chart to begin with after such a long time away from blogging.  Yet... simplicity is often underestimated to the detriment of us all.


German Government 10 Year Bond Yield

German government debt yields have been coming down for 45 years (thank you Ronnie, Maggie and Deng) and are now in negative territory ("thank you" Lehman, Bear, Countrywide, Iceland, Ireland, etc etc etc).  Yes folks, it has come to this absurdity: a government issues money/debt and then charges YOU interest to lend it back to them for ten years!!  Talk about weird...

Bund Yields For Last 12 months
Apart from macro-economic effects (pensions, anyone?) what is the more immediate meaning of negative interest rates?  For one, it means that people are SCARED.  So scared of depression, deflation and bank failures that they are willing to pay dear old Deutschland a premium over holding hard cash.  Yes, Bunds are now in the same asset category as gold bullion, where you have to pay fees for secure vault space.

Scared, you say?  But Lehman et. al. failed years and years ago.  The Big Short was about... 2008 for chrissake!  Why are people humming Shi**y Days Are Here Again and dragging their savings into a Euro Gotterdammerung, eh?  Well, it's not as if the current crop of European politicians and eurocrats are economic geniuses who inspire confidence.

 Let's look at just one (but very important) EU institution: "The Eurogroup is an informal body where the (finance) ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro. Its main task is to ensure close coordination of economic policies among the euro area member states. It also aims to promote conditions for stronger economic growth."  Its President is the 50-year old Dutchman Jeroen Dijsselbloem, a graduate in agricultural policy who started his political career straight out of college; i.e. zero private sector experience.

Yup, I'm scared alright... At least Hank Paulson was at Goldman for 32 years in a row before he became Secretary of Treasury, and when push came to shove back in the Lehman fiasco days, he had the gravitas to whip his erstwhile investment bank peers into a very disagreeable agreement within one weekend.  Jeroen... what? Will lecture them on corn?

So, yeah, people in Europe are scared. Scared of cluelessness, incompetence and dogmatism (just listen ONCE to Wolfgang Schauble the German MinFin - don't worry you won't miss anything: he keeps repeating the same stuff over and over again).

However, over at the ECB we have Mario Draghi, a bona fide Goldman alumnus who is trying desperately to create some inflation, something that will drag (pun, get it?) the EU out of its funk and into some semblance of geographically balanced growth (it's all about Germany these days).

Give the man a hand, will ya?  Because I simply hate that Uber Alles nonsense...


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