
A Black Hole Engulfing the World's Bond Markets - igravious
https://www.bloomberg.com/news/articles/2019-07-13/the-black-hole-engulfing-the-world-s-bond-markets-quicktake
======
pcprincipal
Related story - my first job out of school was in investment banking. My desk
worked on some esoteric securitization products (basically bonds backed by
aircraft and shipping container leases) where all issuance had basically
disappeared when I started, which was right after the 2008-9 crisis. These
products generally were in the A/BBB area, and generally had traded like high
yield bonds before the crisis. When I first started, we struggled to find
investors and were generally seeing 6-8% yields on some small deals. By the
time I left three years later, yields were getting down to the 4% area,
issuance sizes had tripled and new paper was routinely 3-4x oversubscribed. I
have some friends who still work there and tell me not only have yields kept
coming down, but lower quality leases are being thrown into securitization
pools. I 100% agree on all the comments here saying the big story is lower
rates driving people into riskier investments. When the next crisis hits,
people will talk about how negative rates forced people to reach for junk
companies and questionable securitization paper.

~~~
nostromo
Yes, but... isn’t this basically a bunch or rich folks saying “I was forced to
take risks with my money because treasury bonds barely pay anything!”

My gut response is that, yes, if you’re buying risk-free treasuries, why
should you get a return above inflation at all? Rewards and risks should be
commensurate.

~~~
klenwell
According the Planet Money's Giant Pool of Money, which I've come to realize
is a superb postmortem on the 2008 financial crisis, this is exactly what
happened:

 _Adam Davidson: All right. Here 's one of his speeches that really drove that
army of investment managers crazy.

Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative
stance of policy for as long as needed to promote satisfactory economic
performance.

Adam Davidson: You might not believe me, but that little statement, that is
central banker's speak for, hey, global pool of money, screw you.

Alex Blumberg: Come on, that's not what he said.

Adam Davidson: It is. I speak central banker. Believe me, that's what he said.
What he is technically saying is he's going to keep the fed funds rate--
that's when you hear, the fed interest rate-- at the absurdly low level of 1%.

And that sends a message to every investor in the world, you are not going to
make any money at all on US Treasury bonds for a very long time. Go somewhere
else. We can't help you._

[https://www.thisamericanlife.org/355/transcript](https://www.thisamericanlife.org/355/transcript)

To the question: why should you get a return above inflation at all?

I guess one way of looking at it is: do you want to treat low-risk returns for
conservative investors as a sort of public utility guaranteed by the
government? Or do you want to put it in the hands of private industry?

~~~
tomjen3
If the US can sell treasuries at rates not much above inflation, then it is
because they are not loaning enough -- is there really no bridges or other
infrastructure that could benefit the economy if they are built?

~~~
maxander
Check out the price tags on most infrastructure projects these days. As badly
needed as they are, the US government currently doesn’t have re ability to
execute them for less than the mid-horizon returns, if that.

~~~
jchanimal
Much of the infrastructure we need is self-financing. Eg bike lanes, transit
etc. increase tax base and keep money in the local economy, while increasing
foot traffic and retail sales. There’s no reason curing the 20th century’s car
hangover shouldn’t be profitable.

~~~
abakker
If this were true, they would be easier to get done. Borrowing money to
finance is fine, but a lot of these projects have to borrow a vet long way in
the future, and the longer the term of the loan, the more interest rates eat
into the real return from the project.

Secondarily, many prospective borrowers of these projects are already in debt,
and have cash flows which are not growing fast enough to borrow more.

~~~
chii
> real return from the project.

why should a gov't project need to have any real returns? Social returns is
enough. If the city is nicer to live in, if the businesses thrive because of
increaed foot traffic, lower car accident rates, cleaner air etc.

~~~
Armisael16
The city has to pay the money back at some point. This either requires higher
tax rates, reduced services, or a larger pool of money to tax. The first two
are quite unpopular.

------
MrRadar
This story somewhat reminds me of The Giant Pool of Money[1], a landmark This
American Life story on the origins of the 2008 financial crisis (remarkably)
reported in the early-middle stages of the crisis (May 2008). One of the
things it points to as fueling the sub-prime mortgage crisis was an
impossible-to-meet demand for mortgages to be bundled in to CDOs which lead to
mortgage lenders lowering their standards to increase supply to try to meet
the demand. Why was the demand so high? During the early-to-mid 2000s the
global money supply had basically doubled (the titular Giant Pool of Money)
and that new cash needed somewhere "safe" to be parked and CDOs were the
highest-yielding "safe" investments.

That pool of money hasn't gone away and the lesson investors seem to have
learned from the financial crisis is that the only truly safe investments are
government bonds issued by major governments. The demand that drove mortgage
lenders to make (in hindsight) irrational decisions to increase supply seems
to have shifted over to those government bonds. Because the supply of bonds is
fixed by politicians the market is responding as it needs to match demand with
supply: lowering rates (effectively increasing the "price" of the bond), even
below 0, to lower demand to meet the available supply.

[1] [https://www.thisamericanlife.org/355/the-giant-pool-of-
money](https://www.thisamericanlife.org/355/the-giant-pool-of-money)

~~~
dnadler
Government rates are set by the market at auction. The government does not set
the rate of their own bonds, they just offer to sell a certain amount, and the
auction determines the rate.

In the US, the Federal Reserve sets the Federal Funds rate, which is (supposed
to be) determined independent of the federal government.

The reason rates are low is because there is a lot of demand, and participants
are bidding down the price as they compete to acquire the bonds.

~~~
MrRadar
Thanks for the correction, fixed.

------
1e-9
I think many people don't understand how negative rates are possible because
they are used to having FDIC insurance for their bank account. The issue is
that an entity with billions of dollars to protect (such as a pension fund)
cannot rely on the FDIC because of the $250K insurance limit. There are not
enough banks in the US to spread billions of dollars across, $250K at a time,
even if an entity was willing to manage 10's of thousands of bank accounts. A
government bond is generally the safest alternative. When demand for the
safest level of protection is high, an entity might be willing to pay for the
protection because market conditions make them unwilling to accept greater
risk. Personally, I believe this is the main reason for very low rates right
now. The big fixed income entities expect an economic downturn. It's just a
question of how many months away it is.

~~~
ncallaway
This really helps me understand the institutional desire to purchase bonds
even at a negative rate (especially when combined with legal requirements
around holding safe asset classes).

It seems relatively obvious in hindsight, but I was still having a little
trouble getting my head around it until I read this.

Thanks!

------
nshepperd
> More than a decade on from the credit crisis, inflation is still scarce,
> with wages increasing only modestly despite large drops in unemployment. The
> ECB, for example, isn’t expected to get to its close-to-2% inflation target
> over the next decade, according to a market-derived measure.

I find it baffling how everyone talks as if inflation is some incomprehensible
force of nature out of anyone's control, even though it's actually trivial to
cause inflation by printing money and buying assets.

Then the article links to
[https://www.bloomberg.com/news/articles/2019-07-05/germany-s...](https://www.bloomberg.com/news/articles/2019-07-05/germany-
s-tight-purse-strings-are-a-worry-when-borrowing-is-free) which states that
Germany is being _paid_ to borrow money but refuses (against the advice of
economists) to actually do this and invest in anything? What?

Why does it seem like nobody (with the relevant authority) is willing to do
anything but stand around in paralysis worrying?

~~~
efficax
> I find it baffling how everyone talks as if inflation is some
> incomprehensible force of nature out of anyone's control, even though it's
> actually trivial to cause inflation by printing money and buying assets.

But that is literally the mystery about the contemporary economy. The Fed has
been printing money like mad with "quantitative easing", with extremely low
interest rates, and Congress helping them along with massive tax cuts, but
this is having basically 0 impact on inflation rates. We're printing money
like mad and it's seemingly having no effect on prices.

~~~
marvin
I'm no economist, but shouldn't it work nicely to just print money and pay it
out equally to all citizens? Why hasn't anyone tried this yet?

~~~
H8crilA
This is called "QE for people", or "helicopter money", and economists know
about this idea. It's still deep in the fringes, but in my opinion we can see
this happen within our lives.

[https://en.m.wikipedia.org/wiki/Helicopter_money](https://en.m.wikipedia.org/wiki/Helicopter_money)

~~~
thoughtstheseus
A lot of ideas remain on the fringes for laymen until they are used.
Quantitative easing like in 07/08 was discussed during the Great Depression.

------
nostromo
It’s insane to me that you could buy a 10 year treasury around 1980 that paid
17%.

That’s more than double the long term stock market return, and it’s
(basically) risk free.

~~~
chiph
The 1973 oil crisis (and paying for the Vietnam War, etc) had kicked off a
cycle of inflation that didn't really end until after the early 1980's when
Paul Volcker (Federal Reserve Chairman) shrunk the money supply and raised
interest rates. The prime rate hit 21% in 1982.

Dad was getting phone calls just begging him to refinance his 3.5% mortgage to
current rates. "We have a low-low 18.5%!" Nope.

~~~
b_tterc_p
I’m curious what they said in the phone calls? I’m not sure what they could
possibly do to sound compelling apart from perhaps just hoping your dad was
aggressively financially illiterate?

~~~
onlyrealcuzzo
Hello, uh, Mr. Doopler, I see that your current rate is 3.5% on your house.
Did you know that at Bank Super Cool we're offering rates as high as 29.7%,
and as you know, bigger is always better. PLUS if you refinance today, we're
giving away FREE POPTARTS! Whaddya say, Mr. Doopler?

~~~
user5994461
Not sure why you're getting downvoted. They absolutely do that. If you were in
person, they would even show you a great chart with their returns and the
normal returns so you can see how how much better than the average they are!

------
tedsanders
Contention: The cultural assumption that saving ought to be rewarded is
misguided.

Reasoning: When a bank lets you transform production today into future
consumption, it's performing a valuable service for you. Storing your value
takes work and the bank deserves to be paid for that service. However,
historically, they charged a negative price for this service (positive
interest rates), because this service allowed them to make even more money
letting other people transform their future production into present
consumption. But as fewer people need to borrow and as more people want to
save, the market clearing price of savings is approaching and in and cases
overshooting 0%.

Extrapolation: There's a fair chance this will be a big deal in the history
books we write a century from now. Today's bond prices are telling us that the
world is changing. We are going from a world of relative growth, where we
needed to delay consumption to juice investment, to a world of a relative
stasis, where consumption and investment are in equilibrium. Everyone who said
interest rates would bounce back to "normal" after the Great Recession has
been wrong. This may be the new normal.

~~~
nautilus12
Could this actually just be a biproduct of large generations that don't
prioritize investment yet?

~~~
nickjj
I don't pay too much attention to this type of thing but I think it might be
related to wages not going up but the cost of living skyrocketing.

For example people in their late 50s and early 60s might have been making
let's say $30,000 back in the 1980s and 1990s and now today the same exact
type of job pays the same 30k salary except the cost of living is crazy high
now compared to back then.

Back then they had money to spare for investments but that same salary today
means you're probably in debt.

------
aj7
In other words, billionaires/oligarchs have sequestered so much cash that it
has outrun investment opportunities. What does that tell you about the theory
that tax reduction spurs investment?

~~~
Inthenameofmine
It's more like a heart attack. There's plenty of blood, but the circulation to
the heart itself (the people, ie demand side) has stopped. The doctor is
pumping ever more blood into the patient without fixing the clogging to the
heart itself.

Helicopter money which deletes loans (meaning it would not punish people who
did not borrow) would be a far better strategy in this case, and lead to both
inflation and deleveraging at the same time, something which is impossible
with other methods.

~~~
killjoywashere
Wait, for those of us who aren't borrowing, how the hell is inflation not a
net penalty?

~~~
mrrrgn
I guess it's not a penalty if you are able to invest the money you get from
the helicopter drop in assets, or a sweet gaming rig, while other people are
just paying down debt?

~~~
killjoywashere
On the theory that everyone gets cash, and for those with debt, the cash goes
to the debt first, sure. But If I'm reading the proposal correctly, the
argument is to just drop money into the debts. Suckers who lived responsible
lives up front are left in the dust. This seems ... not healthy for society in
the long term.

------
roenxi
The interesting part of this story will be looking back on it in ten years. We
are either looking at a situation that is surprising but healthy, or a
situation that is verging on being a crisis a very long time coming. So far so
good, but I don't like it.

~~~
refurb
The biggest risk with TARP was inflation. You throw that much money into the
economy and normally inflation goes up. Some assets have gone up, but
generally inflation is low.

So one of two things will likely happen:

1\. Economy will go into recession, feds can’t drop interest rates much more
(they are already low), so recession hits hard.

2\. Inflation skyrockets and the fed starts cranking up interest rates in an
effort to control it. Economy stops growing but inflation continues (hi
1970’s!). People bitch because their paycheck stays the same but he price of
milk doubles.

~~~
amiga_500
> Some assets have gone up,

Land prices are not included in inflation stats. The cost of carry is, as
mortgage payments, however that is simply the cost of money. And rates are at
all time lows.

The difference between 7% rates where your mortgage takes up most 50% of your
wages and 2% rates where your mortgage takes up 50% of your wages is that it's
far harder to pay off your mortgage in the latter case.

You cannot attain financial freedom. This means ultimately you cannot refuse
to work, even if compensation is poor (low wages, stuck low).

There is inflation. It's being used to force us to work, and the precariat
cannot bargain for more of their surplus value.

~~~
skybrian
As I understand it, housing is included as rent or "imputed rent". But, this
is the price people actually pay for housing and home owners have it locked in
whenever they bought, which could be decades ago. So, inflation lags the
market rate for housing.

Or in other words, many people aren't paying market rate and it brings the
average down. This isn't what you experience if you need a place now, or
bought recently. Inflation is an average and most people aren't average. (Just
like nobody has 2.2 kids or whatever.)

~~~
amiga_500
No that's just the price it would cost you to rent it back to yourself. It's
not the land price. So even if it tracked rent, by being marked to market, it
still wouldn't reflect the additional money creation forcing land prices up.

------
skybrian
Seems like it comes down to some investors preferring safety so much that they
will pay for the privilege?

One possible arbitrage here might be for the governments themselves to issue
more debt and invest it? (Essentially, this is a government bank.)

But, the market seems to be saying that there are too few good investment
opportunities. Maybe consumption should be higher? A UBI scheme might do it.

~~~
roenxi
Possible but highly unlikely; they could literally keep money in a sack under
their bed and get better returns. Not much difference between a sack under the
bed and a bank account if you don't tell anyone about the sack.

I'm guessing it probably either speculators buying bonds assuming that they
can be onsold to a central bank, or people who are forced to buy for whatever
reason (eg, maybe some savings schemes are forced to put x% into government
bonds). I've bought bonds exactly once on the assumption that I could on-sell
them for a profit when government lowered interest rates. People like me don't
have any impact on the market, but if the incentives make sense at the small
level maybe it works out the same on the large.

~~~
adventured
> Not much difference between a sack under the bed and a bank account if you
> don't tell anyone about the sack.

They could hardly be any more different. If one person beyond yourself knows
about it, then you're in trouble. One fire or disaster and it's all gone. If
it's a smaller sum, you're FDIC insured against loss in a bank account, which
again makes the point about just how different the scenarios are. If I feel
like it I can safely protect $1 million via four distinct accounts under the
FDIC at no cost. The Fed will go back to zero rates at some point to stimulate
the US economy. Even when that happens, I'm essentially paying a small
insurance fee (inflation vs zero rates) per year to guarantee the safety of
the $1 million. That is ultimately far safer than managing it under my
mattress. And cheaper, if I need any guaranteed security for the mattress.
It's also easier to move at low concern (whether that's to shift it into an
investment account or move it to another bank). If it's under your mattress,
every move is a high risk for exposure; every person you let deep into your
life creates some risk of theft (eg non-malicious gossip).

~~~
demosito666
Why not just put it into a bank deposit then? This has positive rate and won't
burn as well.

------
seibelj
With negative interest rates, it truly will make financial sense to put all of
your money under the mattress, so to speak.

In reality, keeping liquid cash will no longer make any sense whatsoever, and
further push all other assets up in value, property and equities for example.

~~~
solotronics
I still don't fully understand negative interest rates. So banks then have a
negative penalty for holding cash?

~~~
quaquaqua1
When sums of money are sufficiently large (millions or billions of USD), it
sometimes makes sense to secure a very small loss (0.5% per year) than to park
it in an account or fund or etc which could have a positive or negative yield
(maybe you win maybe you lose).

Also, to the original commenter, I will never put all my cash under the
mattress. One break in and it's all gone.

I currently have all my cash parked in a 1% interest checking account with
strong protections and fringe perks.

I am content with taking an extremely small loss on inflation while I wait for
the market to eventually tank. It's been longer than I expected (2 years
already), but I do not ever shed a tear over the what, $16,000 in pretax
capital gains I theoretically could have made?

~~~
akozak
Why not at least buy a 1yr CD? Rates were around 2.5% last I checked.

~~~
astura
My money market account pays 2.5% interest. SoFi Money is at 2.25%.

[https://www.doctorofcredit.com/high-interest-savings-to-
get/](https://www.doctorofcredit.com/high-interest-savings-to-get/)

------
dehrmann
In other news, the S&P 500 and Nasdaq closed at record highs on Friday. The
obvious explanation for both is there's a lot of money looking for somewhere
to park, driving asset prices up and bond yields down.

There's either something not captured in inflation numbers, or most of the
stimulus money just got invested and not spent.

~~~
dgudkov
>There's either something not captured in inflation numbers

My pet theory is that real inflation is higher than the official one, and is
around 4-5%. The cause of the inflation is a _gradual loss of quality_
basically everywhere except high-tech.

When the official inflation rate is calculated the basic assumption is that
each item (which price is compared YoY) is exactly the same as it was last
year. In another words, it assumes that its _quality_ remains constant.

However, it's not always true (I believe it rarely is). Sometimes quality goes
up (e.g. due to the Moore's Law in high tech). Sometimes quality goes down
(e.g. due to cheaper food ingredients). When quality goes down but price stays
the same, the official inflation would be 0%, but the real inflation would be
greater than 0%.

I'm not aware if there is any way to account the change of quality in the
inflation calculations. I suspect it's just not possible and therefore any
published price-based inflation rates are bogus.

------
andrewflnr
I'm sure this is a hugely ignorant question, so I'm asking honestly...

> Some funds track government bond indexes, meaning they must buy the bonds
> regardless of the yield.

Well, that looks like the problem, to me. How about don't do that? Just choose
to invest in literally anything else that doesn't have a known negative ROI.

~~~
BenoitEssiambre
Because the private markets aren't offering many assets that compare well
against these bonds if you take into account returns, risk and liquidity.

BTW this is normal. Historically, negative real returns on stores of value
were the norm. Before financial systems existed, almost all investments had
negative returns if you didn’t put work and energy into them. To store value,
you had to accumulate stuff, buildings or land. Most options either had high
maintenance costs, were subject to risk of damage from natural causes and
theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free,
liquid, positive real returns has been difficult for most of history. This
just reflects the natural laws of thermodynamics that tell us that everything
tends to decay without a constant supply of work and energy. In general, most
things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of
unprecedented demographic and technological growth, positive risk free real
returns were easy to find. The recency effect probably explains some of the
confusion people have about this. It is possible that under favorable
conditions, wealth can have positive returns and even compound into very good
long run returns but it is not a guarantee and there is nothing natural about
it. It may not continue forever, particularly amidst an aging and retiring
population in a world no longer as rich in easy to exploit natural resources.

While people are used to get negative returns on short term purchases, you buy
fresh vegetables at the supermarket, even if they degrade over time, many
can’t seem to accept the normalcy of negative returns on longer term assets.
In nature, squirrels’ nut caches have a certain percentage of losses from
theft and spoilage. Real returns tending towards the negative is natural even
if they can seem unusual for humans just out of the 20th century.

More here "The World Deserves a Pay Raise"
([https://medium.com/@b.essiambre/the-world-deserves-a-pay-
rai...](https://medium.com/@b.essiambre/the-world-deserves-a-pay-
raise-302f25efd82a))

~~~
selestify
> This just reflects the natural laws of thermodynamics that tell us that
> everything tends to decay without a constant supply of work and energy.

"Decay" is very subjective. The laws of thermodynamics only tell us that
entropy (an objective quantity) must increase over time, but it does not tell
us how it increases or whether this increase is desirable or not. Life itself
exists only because the combination of life + the environment creates more
entropy than just a lifeless environment. Yet few would describe life as a
"decay" of physical elements into self-replicating structures.

This is not to say that the phenomena you describe doesn't exist, it's just to
say that the laws of physics at the scale of statistical mechanics are far
removed from high-level processes at the scale of human society.

------
bsaul
Since we're on HN : does this mean good news for start up creators ? Is this
the best time to actually raise a lot of investor money ?

------
chiefalchemist
Gain via interest is a function of inflation. That is 4% interest in the
context of 5% inflation is a 1% loss.

Long to short, in the context of deflation (and associated financial
uncertainty) these bonds would be good to have. With the bond curve currently
inverted and to many a recession eminent, if the "smart money" is holding
these bonds then please sign me up.

~~~
kurthr
Exactly, just because rates/inflation are low doesn't mean you can't have a
bubble burst and a recession. It is just that the policy response is more
difficult, because there is no room to maneuver on bond rates... nominally the
only response is more (unbacked) currency issuance... which will cause
inflation even without growth or requiring new loans.

------
igravious
I want to give a shout out to Max Keiser and Stacy Herbert over at “The Keiser
Report” on RT at
[https://www.youtube.com/watch?v=u3ojPk8CQns](https://www.youtube.com/watch?v=u3ojPk8CQns)
for pointing me towards this eye-opening Bloomberg article. Even though the
Bloomberg article is titled “The Black Hole Engulfing the World's Bond
Markets” I decided to editorially change the headline to the more meaningful
and less metaphoric “The time value of money has essentially disappeared”. I
know this is usually against the spirit of HN but I hope you understand why I
did it.

This is what's in the episode.

“In this episode of the Keiser Report, Max and Stacy discuss the mainstream
financial press turning to the metaphors and analogies the Keiser Report
started using a decade ago about the obvious blackhole of debt that would put
central bankers into a quicksand of negative rate policy trap. A full 25% of
global sovereign debt is now negative yielding with a whopping 85% of German
debt negative. This means that the time value of money has disappeared, hence
a fundamental law of monetary physics has been broken. So, what is next? They
look at the historical break from gold which had provided an anchor to time
value, and how that hurtled us over the debt event horizon and into a negative
yielding world. They also look at a recent exchange between a CNBC host and
the treasury secretary on bitcoin and the dollar.”

------
raintrees
I think they are coming to the wrong conclusions. They lost the plot at 7, so
8 is based on bad data.

If the Time Value of Money has disappeared, then I suggest it is the money
that is not worth the time. We have many historical case studies that show
what happens on a broader time scale when a society's money is debauched.

Time is the one true scarcity we all face. I am working at using it wisely...
What have I got to lose? :)

~~~
Dylan16807
> If the Time Value of Money has disappeared, then I suggest it is the money
> that is not worth the time.

What a baffling statement. "If my money can't spontaneously create new money,
then why should I try to earn any?" If anything, lowered time-value increases
the importance of trading time for cash. And value being too stable is the
opposite of being debauched.

~~~
raintrees
Money is a tool we use to facilitate trade. Price assignation has been
distorted by "corrective action." Traditionally, bonds would be purchased as a
hedge/guarantee of future value, and not to be charged a loss of that value
instead.

Anecdotally, I am slowly raising my service prices as my costs rise. To me,
this is evidence that my dollar (I'm in the US) is not going as far as it used
to. And yet costs in a healthy financial system should normally be driven
down, by typical Austrian Economic thinking.

As I posted elsewhere, my observations are for a different time scale than
bonds are usually measured against. Sorry for the confusion. :)

I have been spending too much time thinking macro...

~~~
benj111
"Anecdotally, I am slowly raising my service prices as my costs rise. To me,
this is evidence that my dollar (I'm in the US) is not going as far as it used
to. And yet costs in a healthy financial system should normally be driven
down, by typical Austrian Economic thinking"

I don't think that's correct. You're referring to competition and
efficiencies, not inflation.

"The Austrian school believes any increase in the money supply not supported
by an increase in the production of goods and services leads to an increase in
prices"

[https://www.investopedia.com/articles/economics/09/austrian-...](https://www.investopedia.com/articles/economics/09/austrian-
school-of-economics.asp)

------
jotto
Can someone explain the basics? Why buy a bond if it loses money? Why not hold
cash?

~~~
dawhizkid
Bank accounts are only FDIC insured (or equivalent) up to some limit. If you
have hundreds of millions and would otherwise stuff that in a bank account
buying bonds are a safe alternative to get around that limit.

~~~
why_only_15
That doesn't really make sense, because if you have hundreds of millions of
dollars you can just hold the money yourself.

~~~
Dylan16807
Vaults cost money. Insurance costs money. And it's still not quite as safe.
The ability to hold the money yourself acts as a soft cap on how negative
rates can be, but that cap is not at 0%.

------
a-dub
So this still continues because it's seen as short run volatility where the
cost of rebalancing and trading out is higher than the expected loss? Or is it
seen as a stability measure that protects investments in other asset classes?
Or are a lot of investors/managers just asleep at the switch (organizational
lagress, internal politics, laziness). Or is it simply market inefficiency?

It is difficult to wrap my head around why price discovery is totally failing
here...

------
turbinerneiter
Which of these are true:

* companies are seeing record profits * profits are paid out to shareholders * or used to buy back shares * but not reinvested * ROI on capital is high * ROI on work is low * governments are not investing * nations have high depts

Apple and the likes are stashing enough cash on island to fund Apollo over and
over again.

Take Musk away, who is investing in expensive, risky stuff with actual
potential to change things?

I firmly believe that the tax evasion schemes we are suffering from today are
making capitalism less innovative. Usually, you would have to invest your
profits in growth or the tax man would take it away (and spend it). Now you
can just park it on an island and use it as security to lend money against,
which you can use to buy back shares.

~~~
adventured
> Take Musk away, who is investing in expensive, risky stuff with actual
> potential to change things?

Your point is mostly valid, however there are others.

Gates & Buffett will ultimately pour a collective ~$300 billion into education
and health. That includes attempting to wipe out various diseases entirely and
eg inventing new ways to deliver vaccines cheaply - just about as important to
humanity as most anything else we could be doing. Gates is also putting
billions into new high-risk energy technology over time, far more than Musk
put into starting SpaceX and Tesla.

Jeff Bezos will probably put tens of billions into space over decades,
ultimately far exceeding the investment scale of Musk in that arena (whether
he'll have results worthy of that investment, is yet to be decided).

Paul Allen - his estate now - has and will put considerable resources into
researching the brain over time. Beyond that he put hundreds of millions of
dollars to work in other high- risk scentific endeavours that may yield large
results over time.[1]

Eli Broad has poured immense resources into the Broad Institute (a billion
dollars inflation adjusted), a partnership between Harvard and MIT that has
already made a huge impact by blazing the path re CRISPR. The Broad Institute
is one of the premiere scientific institutes on the planet.

Larry Page is putting resources into flying vehicles. Not a huge amount of
money based on his $55b net worth; non the less an interesting technology
pursuit that could make a dent in our transportation systems.

Sergey Brin - on a personal mission - is attempting to combat Parkinson's,
which afflicts 10 million people around the world. If his funding makes a
difference in curing Parkinson's, it'll be a big deal and it's certainly a
high-risk pursuit.

Sean Parker has been funding some of the first attempts at getting into trials
with CRISPR. The definition of high-risk with the potential to change
everything, not to mention very expensive.

MacKenzie Bezos, in her declaration in relation to the Giving Pledge, has said
she'll give until the $40 billion is gone. Who knows what good she may
accomplish, probably in areas of education, health, equality. She seems to be
a very smart woman, so I would suspect she'll do something meaningful. That
type of investing is typically high-risk and with the potential to change
things.

Gordon Moore has spent his retirement figuring out ways to give away his
(formerly) $20 billion fortune.[2] Including pushing $1.4 billion into science
grants and $1.5 billion into environmental conservation efforts (I consider
that arena to be high-impact, even if it's not as sexy as a starship). He has
put $200 million into the Thirty Meter Telescope.

[1] [https://www.philanthropy.com/article/Paul-
Allen-s-2-Billion-...](https://www.philanthropy.com/article/Paul-
Allen-s-2-Billion-in/244805)

[2] [https://www.moore.org/programs](https://www.moore.org/programs)

~~~
CryptoBanker
Even 10x this is still a drop in the bucket of the entire market...

------
whatshisface
> _Banks see their margins squeezed. They’re earning next to nothing from
> lending but still need to offer depositors a rate above zero to keep their
> business._

I disagree. If every bank offers negative interest then savers will have no
choice: and if that's what the market says has to happen, it will happen.
Negative interest has happened before in history.

~~~
Uehreka
What if consumers decide at that point to withdraw their money and keep it in
a safe at home?

~~~
gruez
[https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-
nega...](https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-
interest-rates-work/)

tl;dr: by unlinking the value of cash vs electronic money, and manipulating
the exchange rate.

------
diminoten
So can someone explain to me how these high-yield savings accounts are playing
into this?

I read somewhere that these savings accounts are basically loss leaders and
don't actually matter much cost wise to the banks offering them, but if I can
park my cash in a 2.4% APR savings account, why would I ever buy a 6 month
treasure note that's at ~2%?

~~~
lh7777
I don't if/how the banks make money with high-yield accounts, but you might be
better off with treasury bills if:

1\. You're in a high income tax state -- interest is taxed as income but
t-bill yields are exempt from state taxes.

2\. You have more than the $250k FDIC limit (although that limit is per bank,
so you can safely exceed it by opening accounts with multiple institutions).

3\. You expect interest rates will decrease in the future and want to lock in
your rate for a certain amount of time (of course, a high-yield CD would do
the same thing, potentially at a better rate).

------
chiefalchemist
> "That means investors effectively pay the German government 0.2% for the
> privilege of buying its benchmark bonds;"

Is this statement accurate? I mean, if this is a traded bond then the German
gov is out of the picture, sans the pay out at the end.

The beneficiary (?) of this under water situation is the seller, not the gov
who floated the bond.

------
parsimo2010
I didn't read the whole article (out of free articles on bloomberg and I'm not
going to jump through hoops to get around the paywall), but it seems like the
premise of the article doesn't match the title here.

It's not that TVM has disappeared, it's that people's evaluation of market
risk has changed. It has always been the case that people are willing to
accept a lower return for lower risk, and that will always continue to be true
for rational people. Government bonds used to be the second lowest risk
option- the absolute lowest risk used to be cash in a mattress (or a safe/bank
vault), which returned zero percent (or just slightly below zero if you have
to pay for storage). If a bond yield is negative it's not that TVM is suddenly
wrong, it's that enough people seem to think that bonds are lower risk than
holding cash.

Another option is that enough people think that the only alternative to stocks
is bonds, and they forgot all about cash, causing bond yields to dip below
cash yields. I doubt that enough people are dumb enough to forget about the
cash option, so I don't really think this is the case.

I personally think it's silly to think a government bond would be lower risk
than keeping my money in a safe, but think about the market movers (investment
funds). You can't keep a billion dollars at your house, so you probably have
to keep it at the bank. A negative bond yield indicates that you think the
government is less likely to disappear than a bank, which at least makes some
sense.

~~~
igravious
A number of points here.

Cash in a safe appreciates or depreciates relative to the current deflationary
or inflationary environment. Imagine if you had $5,000 right about when Nixon
ended convertibility of US dollars to gold† and announced wage/price controls.
Back then that could have bought you a decent piece of land or a good chunk of
a house depending on where we're talking about. How far does $5,000 go now?
Wouldn't get you in the door of a university for a year.

A follow on point is. Who says what that CPI is? Looks like it is near enough
the same people who control the money supply. That's an actual problem.

The quote that I lifted from the article refers to an actual thing:
[https://www.investopedia.com/terms/t/timevalueofmoney.asp](https://www.investopedia.com/terms/t/timevalueofmoney.asp)
The whole thinking behind TVM is that you have _positive_ interest rates. If
you enter a negative interest rate environment you break TVM, which is about
as fundamental a law/rule you can get in monetary theory. “The world now has
$13 trillion of negative yielding bonds”: [https://www.axios.com/negative-
yielding-bonds-europe-japan-4...](https://www.axios.com/negative-yielding-
bonds-europe-japan-4e72a748-a617-4316-87a6-db64f0bd3440.html)

So yes, it _is_ that the TVM is disappearing.

† an event which is correlated with what is happening now, some would even say
it caused it:
[https://www.federalreservehistory.org/essays/gold_convertibi...](https://www.federalreservehistory.org/essays/gold_convertibility_ends)

~~~
lottin
For money to have a positive time-value it means that people prefer having any
amount of money now over having the same amount of money later, all else
equal. It is very hard to argue that this is not the case, because if you have
the money now, you can have it later (by not spending it), but also you can
spend it now, whereas if you don't have it now and only have it later, you
have it later but you can't spend it now. Therefore having it now is always a
better alternative, again, all else equal. Negative interest rates can be
explained by other reasons that do not imply money having no time-value.

~~~
ekimekim
> if you have the money now, you can have it later (by not spending it)

I think this is where your argument breaks down. As pointed out by many other
comments, there is non-zero cost and/or risk to ensuring that if you have
money now, that you will still have it later. Matresses burn, stashes get
stolen, vaults or insurance cost money. FDIC is limited.

------
EGreg
Does that mean more capital will enter non perishable commodities (like gold)
and cryptocurrency?

------
viburnum
Kind of weird that people expected to get paid simply for having money in the
first place.

~~~
whatshisface
When you loan money you risk it. Unless you are under the FDIC insurance
limit, the bank is allowed to lose your money by lending it out wrong. FDIC
insurance is actually a progressive redistribution program because people with
more money pay into the system without receiving proportional protection.

~~~
dbancajas
is FDIC per person or per account? Can I claim 4 FDIC insurance claims for 1M
total net worth for example?

~~~
akiselev
Per [1]:

 _" The standard deposit insurance coverage limit is $250,000 per depositor,
per FDIC-insured bank, per ownership category. Deposits held in different
ownership categories are separately insured, up to at least $250,000, even if
held at the same bank."_

[1]
[https://www.fdic.gov/deposit/deposits/faq.html](https://www.fdic.gov/deposit/deposits/faq.html)

------
tamaharbor
When I see a headline like this, I know it is time to sell bonds.

------
drchewbacca
Hypothesis:

1\. Advances in fundamental science are what ultimately dictate the growth
rate of an economy. For example when you discover quantum mechanics you can
make lasers, circuit boards and therefore computers which boosts everything
enormously.

2\. The more science you have done the harder it is to do more. You can only
discover a truth once. For example discovering new elements is extremely hard
now compared to when Hennig Brand discovered phospherous in his urine.

Consequences:

1\. When a society gets the scientific method right it goes through an S shape
curve (logistic curve), where science accelerates for a while and then
plateuas out.

2\. When you hit the plateau of the curve the maximum growth rate of the
economy becomes very limited, it's just not possible to have new ideas which
are worth developing very fast.

3\. Human labour still provides a surplus so what you get is more and more
resources piling up with nowhere to invest them. Look at Apple's $245bn cash
pile, if they had new ideas they would put that money to use.

This will cause bond yields to fall to almost nothing and loads of money to be
pumped into any startup with a vague hope of accomplishing something.

If we are in this situation it would also mean that the 08 crisis is not
needed to explain the slowing growth in the world, things are slowing because
we don't have many new ideas.

Common objections:

1\. But what about X invention that happened in the last few years? Invention
still happens on the plateau, just slower, NN's, crispr, exoplanets,
smartphones are cool, they're not relativity, quantum mechanics,
electrification, aeroplanes etc.

2\. Scientific progress is exponential! : Accurately fitting a curve to a
logistic curve gives you an exponential up until it shifts on you and starts
slowing.

3\. China and India are still growing strong. : Essentially they are still
deploying the previous discoveries. China's growth is slowing over time
precisely as it has less and less discoveries to deploy.

More to read:

DOE finds it can't get supercomputers like it used to.

[https://www.nextplatform.com/2019/05/06/doe-on-collision-
cou...](https://www.nextplatform.com/2019/05/06/doe-on-collision-course-with-
end-of-moores-law/)

[https://www.theatlantic.com/science/archive/2018/11/diminish...](https://www.theatlantic.com/science/archive/2018/11/diminishing-
returns-science/575665/)

[https://slatestarcodex.com/2018/11/26/is-science-slowing-
dow...](https://slatestarcodex.com/2018/11/26/is-science-slowing-down-2/)

~~~
NTDF9
This is false. There is a LOT of work to be done. A lot of houses can be made
out of better material. A lot more books can be produced. A lot of drainage
and clean energy systems can be built.

But why aren't they? Surely not because the science of it doesn't exit.

It's because the printing of money has inflated the bare necessities of
humans. Housing, food, education have become crazy expensive. Heck, even a
simple iPhone cable is expensive.

All these expenses impede progress.

