In desperation | Will liabilities become "assets"?

In September 2019, U.S. President Donald Trump suggested via Twitter that the Fed cut interest rates from zero to negative territory to refinance the US government's current $ 23 trillion in debt and extend its maturity date.

The idea of ​​stimulating growth with zero interest rates is tempting.

Especially when the accumulated debt is huge, almost all markets rely on changes in the Federal Reserve's monetary policy.

But, for populist reasons, emergency measures that worked temporarily after the 2008 crisis could have a disastrous impact on the global financial system.

"I don't understand anything," Alice said. "It's really confusing!
The Queen explained, "It's just that you're not used to living upside down." "At first, everyone was dizzy …
Lewis Carroll, Alice in the Mirror, 1871.

Negative interest rates are a relatively new phenomenon in central bank monetary policy. Since 2008, many central banks have reduced interest rates to zero and close to zero to help themselves overcome the effects of the global economic crisis. But this policy does not help everyone.

In developed countries, for years, the European Central Bank, the Bank of Japan, and the national banks of Denmark, Sweden, and Switzerland have introduced negative interest rate policies, and economic growth remains extremely low.

Under this policy, credit institutions are obliged to pay interest to deposit funds in central bank accounts, including excess reserves. The financial authorities believe that in this way, banks may be forced to increase lending to the economy and population and weaken the exchange rate, thereby providing a competitive advantage for exports.

But this policy has unexpected side effects: first, government bond yields in many developed countries become negative, then corporate bond yields go into negative territory, then loans are offered at negative interest rates (including mortgage rates), and finally negative. Deposit interest rates have emerged.

The total transaction volume of more than 100 European companies' bonds has exceeded 1 trillion euros, and their yields have been negative. Companies (not only in Europe) have incentives to increase their debt (now quasi-assets), as well as buy back shares from the stock market in lieu of expensive equity that requires dividends, additional interest income on debt capital.

The world of finance based on interest on loans has turned around. If debt interest is paid for the debtor rather than the creditor, and the holder pays the debt additionally, the debt will become a new source of income.

It turns out that in this "blank" financial world, people with increased debt are more creditworthy than those with savings losses.

Companies with good credit ratings can now be borrowed, not because they need financing to grow their business, but simply because it has become a new principle of “reasonable” financial behavior, even as the amount of world debt has reached an astronomical figure of $ 247 trillion .

However, only companies with high credit ratings have the opportunity to borrow at negative interest rates. But how does this assess the credit quality of borrowers? Will the credit assessments of companies that have large amounts of free funds and have to pay banks to keep the funds in their settlement accounts be affected?

Although bankers and many politicians in European industrialized nations see negative interest rates as catastrophic and condemning the eurozone's death, Christine Lagarde replaced Mario Draghi as president of the European Central Bank She immediately supported the negative interest rates she imposed.

When asked about the impact of negative interest rates on savers, Ms. Lagarde said they should consider making the situation worse if the European Central Bank cuts rates not so sharply, and also said that people should have a higher savings rate Happier because they have jobs.

Understandably, the threat of a recession and a new round of economic downturn is real. Only an incredible soft monetary policy still supports the entire economic and financial structure to some extent. In its semi-annual report on the state of global financial markets, the IMF accounts for 40%, meaning that corporate debt in eight major countries (US, China, Japan, Germany, UK, France, Italy, and Spain) accounts for almost half. If the recession is half what it was a decade ago, it will be impossible.

Does all this mean that the debt bubble has an opportunity to expand indefinitely? Is there a limit between the negative interest rate policy and this gap?

In mathematics, there is the concept of "disclosure of uncertainty", that is, the calculation of the function limits given by the formulas, these formulas have no meaning because of the limit values ​​of the formal parameters.

The $ 17 trillion negative return debt debt we see in 2019 is clearly not the limit of that argument. But the meaning of the loan itself has lost its meaning. Capital owners and creditors, including banks, cannot make loans indefinitely and suffer losses forever. Sometimes refusal to refinance at negative interest rates. Crazy experiments will end, and then the financial world will shake.

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