The End of History

Italian government bonds edition...

SEVERAL everyday expressions usually turn out to be premature, writes Bill Bonner in his Diary of a Rogue Economist.

"This is the end of history..."

"I'll never leave you..."

"Now, I think I've seen everything..."

But that last one is what we found ourselves saying last week. Not out loud. We just moved our lips in mute amazement.

Last Tuesday, the Italian government sold a 2-year note yielding MINUS 0.023%. We don't know what is more preposterous: that the Italians were able to borrow money at a negative nominal interest rate or that the press reported this transaction with a straight face.

It should have provoked howls of laughter, withering scorn, and unvarnished derision. But here at the Diary, we will not point the finger and chuckle. We will not invoke our usual tone of sarcasm. We will not damn the whole thing to Hell with loud and blustery cussing.

Instead, we'll take the high road; we just want to know what it means. But before we get to that, let us pick up the news. Here's the latest, from Bloomberg:

"Federal Reserve officials pivoted toward a December interest-rate increase, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its 'next meeting' on Dec. 15-16 as it discussed lift-off timing in a statement released Wednesday in Washington, preparing investors for the first rate rise since 2006."

That word, 'pivot' has become the latest fad verb. It seems to mean "move" or "go toward". You can use it in practically any setting.

Investors pivoted toward higher stock prices last week, with yet another increase in the Dow. You might tell your husband that you're pivoting toward buying a new Tesla. And we pivoted back to France last week...after a few days in Ireland.

It is a gray day in Normandy this morning. But the leaves have pivoted to such glorious shades of orange that the effect is a profound and melancholy splendor.

But let us pivot back to our subject for today.

A negative nominal interest rate – meaning a negative rate before you account for inflation – implies an odd world...

...maybe even a world that cannot really exist.

To lend at less than zero suggests you believe the present value of money is less than its future value – in other words, deflation. And you must assume that the risk of default or inflation is near zero.

This allows the Italian government to go out and build roads or pay pensions with money that cost them less than nothing.

How long this will last, we don't know. But as long as rates remain below zero (and they could go lower!) money is not just free...it's a cost not to borrow!

Imagine you are buying a house. (Now, you can see the mischief afoot!) If lenders are willing to grant a loan at a negative nominal interest rate that's secured by nothing more than the full faith and credit of the Italian government, then lenders should surely be willing to extend credit to you against the value of your house.

That would leave you with a curious mortgage – one that pays you interest. At the Italian rate, a $1-million house would come with an extra income of about $19.16 a month.

This raises profound metaphysical issues. If a mortgage carries negative interest, it implies that the house (an equal capital value) also has negative value.

After all, you have to pay someone to live in it. And if houses are worth less than nothing, we have to wonder what a car is worth...or a diamond ring...or a luxury cruise?

Does that mean that money has no value? Or even negative value?

After all, you can no longer give it to someone in exchange for a positive interest payment. Now you must pay him to store it for you, as though it were furniture that won't fit in your house. You don't like it anymore. But you don't have the heart to throw it away.

And if money has no value, what happens when you hire, say, a gardener to pull out weeds? Should you pay him? Or should he pay you? How many hours should he have to work for you before you consent to take his money?

The whole thing is so contrary to nature we gasp when we think of it. We are flummoxed.

But you are a smart person, dear reader: Maybe you can figure it out for us.

This is all prelude to taking up the strange case of Sweden. All we know about Sweden is what we learned by watching the movie The Girl with the Dragon Tattoo.

And all we learned from that was that Swedes tend to be murderers, sadists, lesbians, and pock-marked wimps.

Maybe that accounts for the torturous financial system the Swedes are creating. Reports Business Insider:

"Sweden is shaping up to be the first country to plunge its citizens into a fascinating – and terrifying – economic experiment: negative interest rates in a cashless society.

"The Swedish central bank, the Sveriges Riksbank, on Wednesday held its benchmark interest rate at -0.35%, the level it has been at since July.

"Though retail banks have yet to pass that negative rate on to Swedish consumers, they face increased pressure to do so as long as the rates remain where they are. That's a problem, because Sweden is the closest country on the planet to becoming an all-electronic cashless society."

Remember, Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATMs from rural areas, annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: "If you have to pay in cash, something is wrong."

A resistance is forming, and some people are protesting the impending extinction of cash. Björn Eriksson, former head of Sweden's national police and now head of Säkerhetsbranschen, a lobbying group for the security industry, told The Local, "I've heard of people keeping cash in their microwaves because banks won't accept it."

Alert readers will recognize this negative interest story as one we have been following. We believe it won't be long before we have negative rates in the US, too.

The feds will pivot to even stricter controls on cash to gain more control over the economy and practically unlimited power to tax and spend – without congressional approval.

Sweden is ahead of the US feds on this one. We can only hope it goes far ahead, fast, and blows itself up before the US pivots down that path, too.