Negative Yields “No Big Deal”
Former Fed Chair Alan Greenspan sees No Barriers to Prevent Negative Treasury Yields.
Former Federal Reserve Chairman Alan Greenspan says he wouldn’t be surprised if U.S. bond yields turn negative. And if they do, it’s not that big of a deal.
“There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan, who led the central bank from 1987 to 2006, said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.”
Joachim Fels, global economic adviser at Pacific Investment Management Co., detailed earlier this month a view that there’s been a change in the fundamental economic theory of time preference that helps explain why people are buying debt with negative yields. He postulated that extended life expectancy and an aging population have caused people to value future consumption more than current spending.
Greenspan, 93, said he views Fels’s thesis as very plausible and also a reason why more debt has a yield below zero. He doesn’t think it will last forever.
Flashback August 4, 2017
Please consider Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.
“The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,” Greenspan said on “Squawk Box.”
Flashback July 31, 2017
Alan Greenspan told Bloomberg TV : “By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
Now it’s “No Big Deal”.
Alan Greenspan on “Irrational Exuberance”
On December 5, 1996 the Maestro warned of “Irrational Exuberance“.
Click on the link for an amusing video.
By the year 2000 Alan Greenspan embraced the “productivity miracle” of technology and no longer saw any bubbles.
That’s precisely when the technology bust started.
Negative Time Preference
As noted above, Joachim Fels, global economic adviser at Pacific Investment Management Co, suggests “there’s been a change in the fundamental economic theory of time preference that helps explain why people are buying debt with negative yields.“
Time preference can never be negative. Never.
To believe in negative time preference is to believe things such as “It’s better to have 90 cents ten years from now than a dollar today”.
Yields are negative only because central banks manipulated yields negative. They would never be negative on their own accord.
Investors buy negative yielding debt firmly convinced central banks will manipulate yields even more negative.
Zero Does Have Meaning
Alan Greenspan is wrong. Zero is very meaningful with negative being even more meaningful.
It means central banks have hit a brick wall. They cannot cram any more debt into the system. There is no tolerance for paying interest.
That’s the meaning, and the evidence is overwhelming.
- More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
- Inverted Negative Yields in Germany and Negative Rate Mortgages.
- Fed Trapped in a Rate-Cutting Box: It’s the Debt Stupid
As Gold Blasts Through $1500 the implied message is that central banks are out of control.
Gold has the meaning of zero correct even if central bank clowns and analysts don’t.
Mike “Mish” Shedlock
Negative interest rates are how a government defaults without actually calling it a default.
What happened to the Alan Greenspan who said this?
“Anything that we can do to raise personal savings is very much in the interest of this country.”
O means Everything.
That is Proof, that Central bankers are Clueless,Corrupt or the real Axis of Evil that has now conned the world for over a century.
F.i.a.t money IS fake/counterfit money, that a Govern ment deklares Legal tender for paying Taxes.
Ok, thats fine, I am very happy to pay my taxes, with fake money, BUT, I reserve the right of SAVING a dollar a day IN real money like Silver and gold.
Below 0 interest rate is only possible because central banks are Monetizing debts and buying bonds of bankrupt governments.
That is NOT a free market, but a Dick-tatorship.
The ” FEDERAL” reserve is a corrupt CONstrut, that CAN be reversed IF/when the hacks in CONgress decide to do the EXACT same thing Wilson did in 1913.
The FED clearly WANTS to create a re/depression every 7/9 years, so they can flip flop the “markets”, buy low and the “save” the “Free market”
Put the amendment of ABOLISHING the FED to Congress just before CHRISTmas and only inform those that will vote for the “Bill”.
GOLD used to be 35$ oz and is NOW OVER 1500 us$/pieces of PAPER.
WAKE the f…k up….Americans….
TURN off your T.V, and start THINKing.
My take is if assets are depreciating, then the loss in savings (due to negative rates) over time doesn’t matter, as everything stays relative.
Question – where is the lower bound once through zero and what discipline enforces that lower bound?
In the absence of a psychological limit it must be limited by some really bad negative consequence that is only identified in hindsight, after the consequence becomes reality.
A case of “scream if you want to go faster”.
Ordinary people are hostage to those in charge, their ideas & priesthood/wonks.
None of them can lose, we all will.
Possible answer – link to upfina.com
Lagarde is on the same page.
Probably both read some wonk paper out of the IMF explaining why this is all ok, nothing to see here, move along.
God only knows where this ends or the pain caused to ordinary wage slaves, pensioners & youngsters starting out.
My hunch is banks collapse and stock and bonds collapse together and millions with 60/40 type portfolios are wiped out.
Greenspan advising on finance, to be followed by Fredo Corleone advising on crime prevention…
Greenspan the economic fool. The man is an idiot.
This is the same guy who warned at the end of the Clinton administration that the biggest danger facing the economy was paying off the federal debt.
Mission accomplished–we’re all safe now!
Greenspan is a fool.
Sorry, but the Fed has absolutely no clue. A bunch of nit-wit academics that have no business venturing out into the real world. They belong on campus, sheltered from reality.
Yield curve inversion means nothing when the Fed are the ones causing it. Inversion had meaning when prices were market determined, but they aren’t anymore
I don’t disagree with you but there will be on structural change in the power of the Fed and markets look to the Fed. We have a bank-driven economy. Main street will be the last to know but the first to feel it just like in every other down cycle.
Major banks are doing mass layoffs as we speak, and the people remaining at the banks are all to familiar with what QE/ZIRP did to the JGB market.
Its not a bank driven economy — the banks are bust.
Its a zombie driven economy — the companies (big and small) that should have been cleared out in 2008 are still being propped up by some clueless academics at the Fed.
We (in the USA) like to make fun of the State Sponsored Enterprises in Russia and China… and yet we have a long list of them here in the USA. Defense contractors, farms, utilities, FNMA / FHLMC and the entire business of “college” (football, backetball, research grants, etc) are all essentially state owned enterprises. Shale oil drillers exist because of Fed funding, they don’t cover expenses. Amazon makes money from its AWS service (the pentagon and CIA contracts) and from the USPS shipping subsidy, the e-commerce part barely breaks even. Google started with a DARPA research grant to Stanford.
And the money center banks…
It’s a lending driven economy. That is what a bank does. Your posts literally contradict themselves. On one hand you say there will be parts of the economy that dont have layoffs or go into recession on the other you say everything is being propped up by banks. You cant have it both ways. It is a banking driven economy and has been since the tech bust in 2000.
It may be just anecdotal but the nice niche American restaurant in my area is dropping prices with all kinds of specials and I live in a high disposable income area. We went there once and it was $15 for an Impossible Burger which sells for 1/3 of that at the nearest Burger King. The most popular health club now also has competition is becoming wary of losing customers and thus waiving all joining fees. If we do get a recession it will get ugly fast and you will see price cuts of all kinds along with a rise in unemployment. Looks like a 50 bps cut now being priced in.
“ugly fast”
…
Spot On.
Last go round I heard – over and over – “it was like a light switch” describing drop in activity. I expect an even quicker drop this go round due to unsoundness of “recovery” (not income driven, but massive increase of debt).
Even now we see more data saying the corporate tax cut resulted in actually corporate debt being used for buybacks to the tune of around 80% leverage. To me since 2017, the boom in debt has been bigger. The corporate bond market is set to rollover in 2020 and they will need interest rates around 0% to avoid a catastrophe.
David Rosenberg
@EconguyRosie
Definition of a low quality GDP report was front and center with the release of today’s NY Fed credit report — over 80% of the household spending gain was financed by debt.
Since WW11, junk bond defaults during recessions have peaked around 40%, with the resulting average haircut to bondholders of around 30%.
When ten year rates return to only 4.6% during this interest rate cycle, the capital loss to these government bondholders will approximate that of a junk bond default.
Since we enjoy reserve currency status, however, the world won’t be using nasty words like sovereign default to describe the situation; Those are reserved for the likes of Argentina.
Ten year rates will never return to anywhere near 4.60% during the remaining life of this monetary system. The current cycle could very well be the last before reset.
I would say zero has more meaning than what Greenspan says.
It only goes to show that if you prognosticate on the future of the economy enough, you will be completely wrong from time to time. Greenspan made many correct forecasts, and a fair number of wrong ones. The same is true of every economic forecaster.
Plenty of examples of what he got wrong, too many to list actually.
Remind us again the one Greenspan got right? I don’t count him realizing that he would get a lucrative pension paid for by taxpayers — all the federal bureaucrats figured that out. Sure, Time Magazine claimed Greenspan “saved the world” but they forgot to admit he was saving it from Greenspan’s own earlier mistakes, and he just put the cost on the national credit card which he doesn’t pay.
Greenspan is a parasitic self promoter who never did anything good for this country. Please stop making excuses for him
“if you prognosticate on the future of the economy enough, you will be completely wrong from time to time.”
Just like forecasting dice throws, roulette and lottery numbers.
Negative time pref of money is impossible.
Negative yields in dollar-based securities are possible (and seemingly more likely every day).
Thus, the dollar is no longer money.
If you agree with that, the curve inversion isn’t signaling a recession, it is indicating the market’s demand for debt (dollars) to fund assets (which are primarily debt) and an expectation of more QE to cover funding of those assets.
You can see that in strains in the money-market (EFF trading over the “cap”, LIBOR (which is the funding rate outside the US/Fed banking system) vs EFF, dollar strength vs other debt currencies (EUR, GBP, CNY/CNH).
It is in parallel to and almost the economic equivalent of corporate stock buybacks, where a corp issues debt, buys back stock, raises shareprice – here the govt issues debt, buys back stock (treasuries) – so treasury prices go up.
What do you think? This is all very rough and sloppy logic. But these are weird times.
“Negative time pref of money is impossible. Negative yields in dollar-based securities are possible (and seemingly more likely every day). Thus, the dollar is no longer money.”
…
You are conflating money with non money assets. A dollar in your pocket today will still be dollar in your pocket next year. How much you can buy with it will change. The bond market – aka the smart money – senses deflation (asset bubble bursting … which will ripple out into CPI land).
I agree it was a bit sloppy so here are some clarifications:
I define money as is a commodity for settlement of trade and commerce. A good money is also a good store of value. The primary value of money comes from its value in settling and denominating trade and investment.
A bond is an asset like stocks, real estate, commodities, consumer goods, inventory, etc.
In the USA we settle commerce with dollars. We also settle our bond market with dollars and calculate a “yield” based on dollars per time unit.
Traditionally this yield represented the compensation for time preference, expected inflation, etc. However that presupposed a limited supply of debt capital (as you’d have under a gold standard or bitcoin). Since our dollar is effectively just a debt, there is no limit on debt creation besides imagination and the Fed.
So in that case where debt growth equals money growth, the “yield” as calculated becomes an irrelevant statistic as a proxy for time pref + exp inflation. Instead the price of a (default risk free) bond will be a function of expected money growth. Thus negative yields are rational but also no longer tie to historical measures of the cost of time preference.
I know in clarifying I’ve gotten more sloppy. Sorry.
“Thus negative yields are rational but also no longer tie to historical measures of the cost of time preference.”
…
You need to consider capital gains on those bonds in addition to interest coupon. As yield drops capital gain piles up. A 30 yr bond issued a few years ago with say a 4% coupon. With 30 yr yield @ 2%, investors today would pay dearly (nice premium over issue) for the rights to a 4% annual payout for decades to come.
If capital gain > negative interest … rational investment.
So what’s the hard limit to negative?
Where’s the bottom once through zero?
Where will it stop if capital gain > neg rate?
I think there is no limit in that case until something breaks – banks fall-over?
Ideas?
But that just makes the purchase of negative yielding bonds a speculation i.e. a ‘greater fool’ trade. There is nothing rational about that from an investing perspective. Investing and speculating are not the same thing. And as for the risk of ‘deflation’, how stupid do you need to be to believe that. At worst, we will experience a sharp asset deflation (totally expected and necessary given the scale of bubbles) and any negative impact on CPI will be fleeting at best, given that excess capacity will be taken out in the wash. And I certainly won’t be holding my breath for half-price healthcare and tertiary education. Whatever happens, the policy response will be aggressively inflationary, so fears of deflation are delusional at best.
If you expect the Fed to do more QE then NOT buying the negative yield is the ‘greater fool’ trade – that is how crazy the dollar has gotten as a currency.
2 things
You are contradictory. “negative impact on CPI will be fleeting at best” does not square with ” fears of deflation are delusional at best”.
“policy response will be aggressively inflationary”. Now, that is a real laugher. Pray tell, what do you think central banks world wide have been trying to accomplish the past 10 years?
Deflation at hand.
Yes that is exactly my point. If you know the Fed will QE and credit expansion will continue, you are buying the bonds for cap gain NOT for interest. Thus the yield calculation becomes irrelevant to your investment decision – the decision comes down to an expectation of debt money growth – not the real rate, not inflation.
According to my hypothesis.
Thus negative yields are just a vestigial statistic and aren’t relevant to the investment decision into bonds (stocks, real estate).
The sad fact is that there is already so much debt in the Global Financial System that it can never be repaid – even in nominal, inflation-depreciated terms. Unfortunately, in the credit-based fiat currency system that we have, new debt must constantly be issued to pay interest on previous debt. Now, the only way that can be done is at negative rates of interest. Nixon, Connolly and Burns knew in 1971 that this would eventually have to happen – hence the suspension of the Bretton Woods Gold Standard was referred to as “temporary”. There were many high level discussions in late 1971 and 1972 about when to re-instate international Gold convertibility, and at what rate, but it never happened. I have a feeling those discussions will be resuming shortly.
This is the man who in 2005, praised bankers for getting people into homes they otherwise could not afford. A few years later the housing market crashed, as bankers had gotten people into homes they could not afford.
Greenspan says Zero has no meaning.
Martin Armstrong: “These idiots fail to comprehend that negative interest rates have wiped out pensions..”
We’re in deep do-do aren’t we? Up the creek. a hole in the canoe and no paddle in sight.
“We are experiencing a bubble, not in stock prices but in bond prices”
…
Haha. Completely. Absolutely. WRONG.
And when (not if) rates go negative good luck getting yield to turn positive without a major purge of debt via payback/write down/ write off. Until the purge players will use negative rates to cram down the craw the last bit of debt possible.
Simple, negative yields are higher than inflation, the rich need vehicles/places to put their money, and to them it’s not money, it’s just wealth. Gold stands alone, we are in the midst of another pretty substantial gold rush.
Good thing we have a president who doesn’t want more and more and more cuts to interest rates! Oh wait….we do. I wonder why? Could it be that his empire is built on debt?
Washington DC is built on debt and corruption. It was so long before Trump got there. Trump is just more of the same
2yr and 10yr inverted overnight
…. Mr Bullard …. paging Mr James Bullard ………..
This is why all the fed mandates should be eliminated. Their function needs to be relegated to its original intent: to be the lender of last resort in the event of a liquidity crisis. To think that ivory tower Phd’s with no real world business experience, except Powell, can manage the largest economy in the world is utterly laughable.
Surprising that this old ghoul still has an audience. He’ll only be remembered for “irrational exuberance”, the Greenspan Put, and feigning wisdom with his unintelligible statements. He belongs in prison but since that won’t happen, at least put him out to pasture!
For that matter, nobody ever needs to hear from Bernanke or Yellen again either.
He will be remembered for his doublespeak blabberish with which he fooled smart congressmen, afraid to interject a supposedly superior mind, and thus admitting their ignorance on the camera. In hindsight, it was good entertainment, but this continuation is a farce.
Zero does mean something, it is an admission of abject failure. Nominal has no meaning, REAL interest rates below zero mean as much as you hate the nuts with the cardboard signs predicting the demise of man, you should start prepping now.
“It’s the end of the world as we know it, and I feel fine???”
Definitely a symptom of MMT going as far as it can possibly go. Without central banks buying everything they can get their hands on, there would be no negative yielding debt. There’s no rational reason for it to exist.
Yeah there is, it’s called collateral. Institutions dont buy UST to earn interest, they buy them to balance the risk weighting on their balance sheets and so they can use it as safe collateral to secure low interest funding.
The amount of economically illiterate on this page really baffles me at times.
Taunton,
why cant they use cash as collateral to secure low interest funding? Would seem to make more sense to me as cash is the more liquid asset, and at negative yields it has a better rate of return.
Cash that earns 0% obviously has a higher return than anything with a negative yield. DUH!
No wonder you are so easily baffled.
Negative yielding bonds are a good speculative bet if interest rates go even more negative. If that happens, the yield drops (i.e. price goes up) for a nice profit. It hard to do math in times of financial insanity.
Much like miami condo flipping was a good bet IF condo fliipping continued in a straight line forever.
But thousands of empty condos that “owners” couldn’t afford to keep (they HAD to flip) made no economic sense.
Bonds that guarantee a loss are the same. You must find a bigger sucker to take them off your hands, because they don’t make any sense
“To believe in negative time preference is to believe things such as “It’s better to have 90 cents ten years from now than a dollar today”. Sadly it might be if shadow inflation gives you 25 cents on your dollar in ten years. A new f150 or a year of private college just might be chipping away at 95k. But just think of of how that new auto financing option of 240 months zero down is going to sound in car commercials.
Why would you want 90% of 25 cents on the dollar? That same inflation is also going to decimate the value of your negative yielding bonds.
All I meant was 90 cents on the dollar is going to look down right savvy compared to what inflation is going to do your dollar.
They are both losses. Your bonds lose value to inflation also, so you don’t get 90 cents at maturity. You get 0.25 * 0.90
mudpuppet is on the right track: neg rates anticipates/fears deflation; and preps for that deflation
Pensions, Social Security, and savers may disagree that negative yields matter.
Pushing on a string?
I had two thoughts reading this post.
(1) Who let this corpse speak?
(2) Contrary to the lies your econ professor told you, the US government has defaulted before and it will default again. Greenspan is just sending out a warning to the finance community to unload all that worthless “debt” onto the public before the default happens.
FDR defaulted on all US debt during the depression. For propoganda reasons, the media was told to call it a restructuring or gold devaluation. Whatever label one uses, debt holders got 50 cents on the dollar for the debt they had before the default.
Nixon defaulted on foreign holders of US debt (and indirectly on domestic holders) when he reneged on Bretton Woods valuations. It took a year or two of chaos to compute the damages, but roughly speaking debt holders got 50 cents on the dollar once again.
I don’t want to exonerate Bush, Clinton or baby Bush (all helped making a mess) — but Obama more than doubled government debt while GDP increased only ~33%, while spying on opposition parties, promoting corruption at all levels, and dramatically worsening racial relations. While Obama pretended to be running a tight ship, Trump is being a bit more “honest” (note the airquotes) in that he admits to running trillion dollar spending deficits. He hasn’t done a thing to fix the problem, but he admits that there is a problem — for whatever that is worth. It won’t avoid the need (as in requirement) to default again.
No one in their right mind would buy debt from someone who is devaluing the debt as you are negotiating (e.g. buying Treasuries with yields below CPI yoy). But if the suckers…. I mean stupid public… I mean people who believe a massive debtor is going to run deflation…
If suckers are willing to buy debt that is depreciating as they submit their buy orders, the Treasury might as well fleece them for as much as possible
Obama added 6.8 trillion over his EIGHT years. Of course, he also inherited Bush’s financial meltdown and recession. Trump is on track to add $6.2 trillion in first FOUR years. Oh, but Trump admits that he is financially incompetent so that makes it all right.
I don’t defend Obama or the Bailouts or his increase in military spending, etc., but glossing over Trump’s financial performance is just bias.
Check your math boy. Obama started with just under $8 trillion in debt, and finished with over $18 trillion. He added more than $10 trillion across 8 yrs.
Yes, baby Bush gave Obama a running start for the first year of his administration, and Obama gave Trump a running start for his first year. And Trump has done absolutely zip to control spending in his 2 and change years.
But learn some math and stop making racist excuses for Obama. You wouldn’t set the bar that low for a white president — if you let Obama shoot from the kiddie free throw line, you are a racist. Hold Obama to the same standards as any white president and call Obama the corrupt and epic disaster that he was.
Trump has screwed up plenty, and he isn’t done yet.
Greenspan, a textbook example of a anachronism, is that guy still allowed to speak and does someone pay attention ? When I am 103, at the old people’s home and in the dementia department most likely, I wont give a damn about 0% or even -50%(never say never), in the meantime however I would ve liked to enjoy a humble 3 or 4% on my savings, without having to run financial risks in a increasingly complex, deceptive, misleading and blatantly manipulated investment environment….
So, if we take all of Greenspan’s wealth and money and gave him back zero, it would mean nothing.
Good to know.
But Mrs Alan Greenspan might not like that.
And yet, Mrs Alan Greenspan for many years “reported’ that we must take people’s Social Security so that they have “skin in the game” and her husband promoted the anti reality that Social Security and Medicare causes deficits.