econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 16 September 2016

Unprecedented Global Bond Bubble Threatens Holders Of Cash

from Money Metals Exchange

-- this post authored by Stefan Gleason

As big as previous real estate and stock market bubbles have been, the current global bubble in government debt dwarfs them all. Not only is it far bigger in size and scope (some $60 trillion in sovereign bonds now trade globally); it is also unprecedented in character.

The world has rarely seen a bond bull market that is not only 36 years old, but also shows few signs of ending. And never before in recorded history have interest rates gotten so low across the board.

How much lower can interest rates go? Conventional wisdom once held that rates could only get as low as 0%. WRONG! In the current crazed central banking climate, yields on cash can move below zero, and they could stay there for longer than anyone can possibly imagine.

Negative rates - where lenders pay interest to borrowers - are a strange-but-true phenomenon in Japan and throughout much of Europe. They aren't confined just to overnight rates set directly by central banks. They have spread across the yield curve to afflict the long-term bond market as well.

The Fed Is Speaking Warmly about Imposing Negative Rates in America

The U.S. Federal Reserve is now contemplating a negative interest rate policy even as it jawbones about raising rates. At its August Jackson Hole gathering, Fed officials listened to economist Marvin Goodfriend make the case for negative rates (and another draconian measure, as I'll explain in a moment).

War on Cash

"It is only a matter of time before another cyclical downturn calls for aggressive negative nominal interest rate policy," he said. The U.S. economy is overdue for a recession, and when the one hits, Goodfriend suggests the Federal funds rate will be dropped to as low as -2%.

Goodfriend is no friend to holders of cash. Not only does he want to penalize savers; he also proposes eliminating coins and paper notes from circulation.

After all, if your bank account "pays" negative interest, holding physical cash under your mattress would give you a higher yield. So central bankers would rather see cash be eliminated to prevent you from pulling it out of the bank.

Fed Vice Chairman Stanley Fischer said in a recent Bloomberg interview that negative interest rates "seem to work". While he denied that the Fed has any immediate plans to pursue a negative rate policy, he sure sounded favorable to the concept.

There Is Still an Escape Hatch to Sound Money

There is an escape hatch for those who fear being trapped in a negative yield regime. Hard assets, including physical precious metals, have no interest rate attached to them.

Putting aside capital appreciation qualities, a gold coin with a 0% yield also offers a superior yield to any currency instrument with a negative rate affixed to it. Gold and silver are normally seen as more attractive forms of cash when cash instruments yield less than the inflation rate (i.e., negative real interest rates). But in a negative yield environment, precious metals also have the advantage of sporting nominally higher yields.

Many economists, who assume that markets are efficient and that investors make rational choices, remain puzzled as to why negative yielding bonds have attracted nearly $16 trillion in inflows globally. The standard models for evaluating bonds assume that a bond must offer at least some nominal yield above cash to make it more attractive than simply holding cash itself.

Logically, there shouldn't be any demand for negative yielding bonds under any circumstance. Why would investors in a free market wittingly pursue sure-fire losses? And yet, today, there is enormous demand for bonds that promise to pay back holders less than the principal they invest.

It's important to recognize that negative yields are being imposed on markets by central banks. Many institutional investors such as commercial banks, pension funds, and insurance companies are effectively forced to own government bonds regardless of what they yield.

Then, speculators come in who don't care about logic or sound fundamentals, but only care about chasing extant trends. Continuation of this trend seems likely when we have central banks willing and able to create unlimited amounts of currency to buy bonds. This trend begets followers, and followers exacerbate the trend - often to the point of "irrational exuberance", as Alan Greenspan once put it.

Don't Bet against the Government Bond Market

Bond market speculators can potentially reap capital gains even on bonds that carry negative yields. If future bonds get issued with rates that are even more deeply negative, then the values of all previously issued bonds will keep climbing.

The U.S. Bond Bubble Grows

Given that rates in the U.S. are still positive, the bond bubble could get much bigger before it bursts. U.S. Treasuries with yields of 1%-2% may be historically low, but they look fat and juicy to Japanese and European investors who get literally less than nothing on bonds in their home markets. In other words, the government bond market still looks like a raging bull.

Before you go chasing after capital gains in Treasuries, however, consider the risks of owning bonds at today's ultra-low yields. You could subject yourself to massive real losses over time if inflation rates perk up. Even nominal capital gains in bonds could prove to be illusory in real terms.

Gold and silver are premier assets to hold if you are concerned about negative real interest rates. Precious metals markets offer no guarantee of inflation-beating returns in any given year, of course. But if you're thinking 30 years out, would you rather put your trust in metals - or in a bond issued by an over-indebted government that promises to pay you a historically low yield?

Although low to negative interest rates could persist for years, odds are the current low-yield craze won't last a full 30 years. Therefore, at some point down the road, today's buyers of 30-year bonds will likely wish they had parked some of their savings in physical precious metals instead.


About the Author:

Stefan Gleason

Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, TheStreet.com, Seeking Alpha, Detroit News, Washington Times, and National Review.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Metals Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Precious Metals


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Are You Feeling the Economic Surge?
Big Mess in Italy
News Blog
How Much Money It Costs To Make Money
Multiple Jobs Needed To Make Ends Meet
The Final Crisis Chronicle: The Panic Of 1907 And The Birth Of The Fed
Is There A Gender Wage Growth Gap?
Moving Averages Can Identify A Trade
Infographic Of The Day: Hobbies That Will Make You Money
Earnings And Economic Reports: Week Starting 05 December 2016
Early Headlines: Green Pty Cancels - Then Appeals PA Recount, IRS Serves Summons On Bitcoin Co, Most Mfg Jobs Lost To Automation, 2017 US Hosing Outlook And More
The Smartphone Market Is Not A Two-Horse Race
Italy's Referendum: What's At Stake And What You Need To Know
There Were Over A Million Casualties At The Somme
The Best Countries In The World
What We Read Today 03 December 2016 - Public Edition
Investing Blog
How To Invest When The Fed Destroys Capitalism
Technical Thoughts: Manage Risk
Opinion Blog
Why Did Trump Win? A Different Perspective, Part 3
Jobs Without Disruptions Through Concordian Economics
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
02Dec2016 Market Close: WTI Crude Climbed Back Up To Previous 51 Handle, US Dollar Index Trading At The100 Level, Oil Rig Count At 10-Month High
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved