February 29, 2016

The Central Bankers' Greatest Blunder Yet: Negative Rates = Deleveraging

In a world which has long since crossed the monetary twilight zone of negative rates, and which is spiraling ever deeper into NIRP, below we present some quite fascinating observations on debt, NIRP and how the latter leads to the deleveraging of the former, and thus encourages global deflation - something which in retrospect will be (and in many cases already has been) seen as a central bank fatal flaw, and confirmation said central bankers have zero understanding of the process they have unleashed.

From HSBC's Anton Tonev.

Negative rates = deleveraging

  • Negative interest rates on developed world sovereign bonds could reduce debt burdens and may be a market solution to overleveraging

  • While the side effect of extreme money creation is inflation, the side effect of extreme debt creation is deflation

  • We argue that the need for further deleveraging may be a reason why negative interest rates persist in sovereign bond markets

Bonds and deleveraging

While conventional theory suggests that central banks set base interest rates and that negative rates are a result of low inflation and slow economic growth, we suggest there may be an alternative explanation. Drawing on historical and cultural analogies, we view negative rates as a possible market response to the growing levels of debt and inequality in income and wealth.

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