Gold News

What Price a Kiss?

And what value money that pays less than zero...?
 
DO the FEDS have a still-untapped aquifer of cash and credit they can pump dry? asks Bill Bonner in his Diary of a Rogue Economist.
 
Short-term interest rates are already as low as they've been. But could they go lower?
 
Yes on both counts...
 
Ask your spouse: "What will you give me if I kiss you?" If the answer is nothing, you have established the value of your kiss: zero.
 
But suppose the answer comes: "If you take out the trash, maybe I'll let you kiss me."
 
Now, the value of your kiss is even lower – below zero. You have to add something to it to make it acceptable.
 
Likewise, it appears that lenders – mainly in Europe and Japan – must add something to their money each year in order to persuade the government to take it.
 
We have already been humbled and flummoxed by zero-percent interest rates. Even when we are in our cups...or deprived of oxygen...they make no sense.
 
How could something simultaneously have no value – or less than no value – and still be worth anything?
 
Money has got to be worth something, right?
 
Then how could it be lent out for nothing...or less than nothing?
 
Let's take one example. Earlier this month, the Swiss government sold 378 million Swiss Francs ($354 million) of bonds. Those that mature in 2025 carried a yield of MINUS 0.055% before accounting for inflation.
 
Does this mean what we think it means? That the value of the money lent is less than zero?
 
So, if you have a million Francs' worth of 10-year Swiss bonds, what is it really worth?
 
Well, if you had to pay a mortgage of 2%, you wouldn't have an asset, but a liability.
 
So wouldn't the portfolio of Swiss bonds also be considered a liability, not an asset? And if it were a liability to you, wouldn't it have to be an asset to the Swiss government?
 
So, let's get this straight: The borrower gets an asset. The lender gets a liability.
 
In what kind of a universe does that happen?
 
In a negative interest world, money has no meaning. You could build automobiles that don't run...airplanes that don't fly...or computers that can't add.
 
It would make no difference. You could stay in business for an eternity as long as lenders were willing to part with their cash for no return.
 
Attentive readers will realize that we do not live in a zero-interest world. We live in a world of flesh and blood. We live in a world where cash, kisses and credit still count for something.
 
And in this world, you still have to pay for what you get. But little by little, day by day, the world we live in gets stranger – thanks to this funny money system.
 
And little by little, the more curious the financial world becomes, the more people want to hold on to cash to protect themselves.
 
One of the strangest things to happen recently was that the government of Switzerland, of all places, has refused to allow big depositors to withdraw cash.
 
According to Swiss news website Schweizer Radio und Fernsehen in mid-March:
"The Swiss National Bank confirms that hoarding cash to circumvent negative interest rates is not welcome. The National Bank has been recommending that banks with cash demands [...] act restrictively."
And comments former banking insider Frances Coppola at Forbes:
"The monetary policy of the last few years has been hampered by the supposed existence of the 'zero lower bound' at which (it is assumed) everyone would opt for physical cash instead of bank deposits and bonds [...]
 
"But if investors simply cannot obtain large amounts of physical cash because banks won't issue it to them, the slightly-below-zero lower bound cannot bind. In which case negative rates could be very negative indeed and no one would be able to do much about it."
We have been predicting a "run on the Dollar". Now, the Swiss are leading the way. Keeping you from holding cash appeals for governments for three reasons:
  • It is hard for them to control, track and tax.
  • It is fast becoming irrelevant as new technologies make electronic transactions easier. (Think Apple's new iPay mobile payments system.)
  • As long as you can hold cash, you can escape the feds' fantasyland. If you can stay in cash, they can't enforce negative interest rates. You can just take your cash and hold on to it – paying nothing for the privilege.
Following the Charlie Hebdo attacks in Paris, France is planning to limit cash payment to €1,000 ($1100). The logic being that the attacks were funded with cash...
 
Meanwhile, Citibank's chief economist Willem Buiter has recommended taxing cash (a form of negative nominal interest rates). And J.P.Morgan Chase has sent letters to customers, telling them it will no longer allow cash to be stored in safety deposit boxes.
 
In the US cash is not yet illegal, but it is suspect.
 
Show up with a large amount of cash at a bank...and you will likely have some explaining to do. Let the police find it on you in a routine traffic stop...and they are likely to confiscate (thanks to the Justice Department's Civil Asset Forfeiture rule).
 
It is just a matter of time before holding cash becomes illegal in the US too.
 
Will that be enough to raise liquidity levels and asset prices?

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

 

Market Fundamentals