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Business/Finance See other Business/Finance Articles Title: The Only Solution to Negative Rates The Only Solution to Negative Rates Boris Schlossberg | Wednesday, April 13, 2016 at 4:30 pm More than $7 trillion of sovereign bonds and notes are in issue at less than their face value. That means if you buy a German, Japanese or Swiss bond (some as far out as 10 years), you will actually receive less than you paid for it. Never mind interest payments. You won’t ever collect any of those. For bond investors, who at the very minimum are used to just getting their money back, today’s markets are a bewildering experience that frankly looks like confiscatory finance. But such are the times we live in, where the world’s central banks have been driven to zero and below as they desperately try to stimulate the G-7 economies. At no time in history have so many advanced economies flirted with the negative interest-rate policy. So far, the results have not been encouraging. Growth in G-7 has actually declined over the past six months, and all the easy-credit conditions have not spurred additional spending. Now come two titans of finance to explain why even free money can’t get the advanced economies out of their rut: Bill Gross – just one of the voices warning on negative rates. Just this week, Larry Fink, the co-founder of Blackrock, and Bill Gross, the legendary bond portfolio manager, have both warned that negative rates may actually be hurting growth. > Fink, in a letter to shareholders, said: “Their (central bank) actions are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less-liquid asset classes and to increased levels of risk, with potentially dangerous financial and economic consequences.” Yet in an even more damning insight, Fink states that negative yields may actually hurt consumption because investors must allocate more and more capital to extract yield. This makes eminent sense as lack of cash flow from investments has no doubt curtailed investor income significantly — perhaps even by 50% over the past few years. > Gross thinks that negative rates are actually a threat to the whole capitalist system. He told Barron’s: “When interest rates get to zero – and that isn’t the endpoint; they could go negative – savers are destroyed. And savers are the bedrock of capitalism. Savers allow investment, and investment produces growth. “Even in a negative-rate environment, as in Germany or Switzerland, banks and big insurance companies have little choice but to park their money electronically with the central bank and pay 50 basis points. But an individual can say “give me back my money” and keep it in cash. That’s what would make the system implode. I’m not talking about millionaires or Newport Beach-aires, but people with $25,000 or $50,000. Without deposits, banks can’t make loans anymore, so the system starts to collapse.” “Despite the warnings… the trend in negative rates is unlikely to reverse anytime soon.” Yet despite the warnings from Fink and Gross, the trend in negative rates is unlikely to reverse anytime soon. That means that blue-chip dividend stocks — which have already become de facto bonds — will only attract more capital and the whole structure of equity finance may change. Companies that have preferred to use their cash for buybacks rather than dividend payouts may be forced by activist investors to change their ways as yield becomes king and capital appreciation takes a back seat. So in our Alice in Wonderland world of finance, dividends may be investors’ only salvation. Poster Comment: Without deposits, banks can’t make loans anymore, so the system starts to collapse. This is what happened during the Great Depression in the 1930s. Banks could not make loans because they had no depositors. And we all know that the banks operate on a system called "fractional reserve banking". Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: BTP Holdings (#0)
People with surplus cash will have to become more savvy, invest in money-making equities, revenue-producing partnerships, family businesses.
We'll have to become our own bankers.
“The most dangerous man to any government is the man who is able to think things out... without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.” ~ H. L. Mencken
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