All over the world now you can enjoy the privilege of buying government debt that pays you a negative yield. In effect, you are paying a small premium to the issuing government for the privilege of carrying their debt. This is, let’s just say, an unusual condition.
In Switzerland your bank will charge you money for holding large deposits. Chase is trying to start doing the same in the US.
Why is this happening? There are lots of theories, but as is so often the case in economics no one really knows with confidence. Why would people buy bonds that pay a negative yield? A couple of potential reasons stand out.
First of all, a lot of investors are effectively forced to purchase treasury bonds because of the low risk. Even at a small loss, they may be more desirable than placing a billion dollars of employee pension money in relatively risky stocks. Second, and more worrying, is the possibility that these bonds are still a good deal. The negative yield is only negative if inflation hits certain targets. Many investors are betting on deflation, which would increase the value of those bonds. Which brings us to the final concern.
What the hell has happened to inflation? The standard explanations related to government austerity and the overhang from the financial collapse are growing a bit thin. We’ve been carrying an effective zero-interest rate in the US for six years now without reversing the trend. All the while economic growth has returned to near-90’s levels.
There’s another possibility – that an innovation economy carries with it inherent deflationary tendencies. It’s the same dynamic that capitalism has produced for almost three hundred years, but on a steeply accelerating curve. It replaces productive work with automation at radically lower overall costs while delivering much more concentrated profits. One way to create an apparent deflationary scenario is to suddenly take half of a state’s money and give to a handful of people. If that’s what’s happening, then setting central bank interest rates at or below zero will actually make it worse.
We don’t really have an established program for coping with such a scenario. Our generation’s Keynes has not yet emerged and if he does show up, he probably won’t be an economist. In the meantime we’ll keep treating this new condition with the old medicines and hoping for the best.