Think back. Many Mish readers been trading for 10 or 20 years. A few have been trading for 30 or more years. What was it like the last time German 10-year bond yields went negative?
That is sort of a trick question. Most likely you were not alive, no matter how old you are.
As translated from Spanish, my friend Guru Huky posted the answer on his blog today: And the last time the German bond stood negative was …. surprise surprise.
German 10-Year Yield Since 1807
Yesterday the yield of German bonds entered negative territory. Some will think that all is well and that falls within what could be considered normal, but that there is nothing like taking a look back.
The last time the German bond slipped into negative return was between 1922 and 1923. At that time in Germany succumbed to hyperinflation which left without any value to German bonds yields marked not simply because nobody bought them for those two years.
Unless you are at least 94 years old you were not born yet. If you are 100 years old and have a memory of German bond yields at age six, I salute you.
This is precisely how distorted thing are. A currency crisis awaits. What shape it takes and where it strikes is still unknown.
When the Fed talks of “uncertainty” this is what they really imply.
Mike “Mish” Shedlock
The US government and EU governments cannot pay interest on sovereign debt. Consequently central banks manipulated interest rates below market rates to a payable level. This is a currency crisis. Capital is mis-allocated willy nilly into $60/bbl US shale oil wells, Chinese ghost cities, solar electric power, corn ethanol fuel, windmills, remedial reading college degrees, immigrant bastard subsidies, and fast trains to nowhere.
KozJam (@KozJam) said:
Jack, you mean “wind turbines” not “wind mills” … !!!
Note that “wind mills” in Holland are for “milling” grain.
Mission Accomplished said:
Thanks for sharing your important insight.
It also came in handy to bankrupt pension funds. Next, they are going after your social security.
Let me take the opportunity to remind “them” that 40% of households in the US are armed and are also tired of their shit. Nothing to lose is also an import concept that “they” failed to grasp.
It’s not just the governments that can’t pay interest. Many corporations would go belly up if interest rates were set by supply and demand instead of CB policy.
… and they knew that going in. It’s all about the CEO’s bottom line and get out before it collapses. Virgin Island beaches forever after.
That is an interesting list of projects built via “easy money.” Reading it over for a second time this morning, reminds me of FDR’s CCC and other make work programs of the 1930s (before my time).
Here’s my question: Could this all be part of the FED “jobs mandate” in the USA? Perhaps similar in China, to head off rebellion? FED at least would leave a paper trail somewhere. It would seem reasonable that they follow the only guidelines they know for an economic depression, the Hoover-FDR jobs policy (also playing out in minimum wage mandates) of the 1930s.
This is giving me a bad case of déjà vu, which is good!
BTW, from what I have read of the period Guru Huky refers to: holders of bonds and currency got wiped out; those with real estate got bought out at fire sale prices by those with foreign currency; and stocks inflated along with the currency, being perhaps the best of the paper assets.
Thomas Malthus said:
Amazing — we will get to see this again soon – everywhere!
Note to self: buy gold – put in steel box — dig hole — bury at night – go to sleep – inform two people where x is in case of being run over by a bus
Ah right — already done….
It ain’t over til Merkel sings.
And on the ground level things are getting worse… Fro normal folks it raise in utility bills and the rest. I just got letter that my electricity bill is going up again. The salaries can’t keep up with all kind of things becoming more expensive. Public transport – which admittedly is quite good in some parts – is looking a raise of 5% and that is just one of the things becoming to cost more.
I think what the image suggests is spot on. Unemployment and especially that of the young people is on the rise and they would welcome anyone giving some hope for their future.
I see a storm in the horizon. It won’t be any different this time either.
This makes no sense to me. Negative total returns, as the bonds were worthless. But not negative interest on the bonds. I can only see negative interest rates if you are adjusting for inflation; but that is not the standard headline calculation, for the most part. Negative interest rate in nominal terms implies people bought the bonds like they are buying negative yield bonds today. But was the German government selling negative interest rate bonds back then? A person would want a high interest rate in those times, to compensate for inflation. Perhaps an imprecise memory from back then?
Guy found an abandoned safe with the old German bonds. Worth about $10 each to collectors for a 50,000 mark bond from 1922.
German interest rates back to 1815 article, with graph:
“You may have noticed the odd gap in the graph around 1920. That’s because I axed the yield data around the hyperinflation of 1922-23, which rendered Germany’s bonds worthless. And it’s not just me. The irreplaceable survey of interest-rate history, the appropriately titled A History of Interest Rates, also leaves those years out. “Unfortunately, no bond yields at all were computed by the sources quoted for the inflation years of 1922 and 1923, no doubt because of the chaotic state of the market and the currency,” the authors wrote. Rates stabilized a bit in 1924, where the series picks up.”
It is a tricky one and (am in ‘deep study’ of the event, so will follow up if I reach any further conclusion)…
The notional value of Tbills at the time returned to their existing market value at any point in time, after the Reichsbank refused to discount them in 1922. So existing Tbills had a current value of whatever the market would take them at in exchange for cash, with the Reichsbank offering a big fat 0. Understand that in mathematics 0 may be understood as infinity by some. By that official valuation you are fully negative. It really is the expression of the complete disconection of a fiat currency, given that its meaning solely exists by government mandate, without which it cannot be enforced, and so offering no value to government debt, such as did the Reichsbank, effectively took away the principal enforcement of meaning of the currency.
As a cash substitute, so, where future worth at redemption would be close to zero ( toilet paper), the only possible Tbill nominal value exists in the present market value , and rapidly decreasing. Look at what people were doing at the time, they were borrowing cash at high rates to invest in assets that would inflate, while redeeming the loans for cents when due.
Tbills, being a cash substitute, will have been used in this way. So in effect owners will have been paying with paper worth only current market value, not future return. Those accepting them for goods or hard assets would have in the moment of exchange bought that paper at a negative rate. How or why? Because its market value, also based on the notional figure printed on it, was guaranteed to be less at future exchange – a calculated guaranteed loss. Yet people surely traded paper the whole way down.
Now before you berate me for confusing notional and real values etc., ask yourself which one is… for real, and which one is imagined. Notional return becomes real only when payment has been fully settled. The rest, is make believe, like bankers writing each other notes… ‘ you’re great’…. ‘ x100’… quaint, but without meaning except where the rubber hits the road.
So I’ll transfer this to modern policy, where in fact the modern day ‘Reichsbank’ remains committed to nominally honouring government debt, as well as supporting its ‘worth’. This is the safe haven backing that brings yields down to negative in several countries… you will get your cash, you may store your cash here at a slight cost.
Does this not ring a bell somehow, a central bank behind a move into surreal valuations? That instead of ‘ no confidence’ this time it is ‘ so much confidence it is worth paying for’ ?
You see, the EU is many countries, and now they may close the window to one at a time while adjusting it to suit, the others are ‘great’.
Just until one country turns round and bites.
And we will find out once again that without the cooperation of nation and government, the value of a dependent fiat is completely unknown, even worthless, whatever reality works it out to be, one little step beyond what it was controlled to be… and you can be sure control is its end, its maxim stares you in the face, fiat – it shall be done.
Data you are quoting is in error.
The authors excise the 1922-23 data because there were no bond transactions
Michael Green Ice Farm Capital
If “no bond transactions” means no government bond sales, this means “no interest rates,” period. Neither negative nor positive interest rates (with respect to government bond issuance in those years).
In a strange way analogous to Bolshevik Russia, where free market is just wiped out. Though just temporary for this one market in Germany.
I had another look at this Canadian Broadcasting Corp. article, and they had an interactive feature that let you zoom in close on a 50,000 mark bond issued in August 1922 with coupons that could be clipped (but were not). Apparently by the time of the renewal coupon for 1932, the currency used for the bond issue was defunct and had been replaced (rendering the bond and coupons worthless). So, for at least 7 months into 1922, the German government was issuing bonds with positive interest (coupons are proof). Coin and currency dealers selling to collectors probably know the whole story of German bonds month by month for the years in question. Thus, a dealer could assemble an interest rate chart for the bonds (at issue date) for the time period, and settle the question. At least, that’s my guess.
The CBC article does not preclude bond sales throughout 1922 and into 1923, though noting: “By 1923 Germans were using the banknotes as wallpaper.” So, it is hard to imagine bond sales at that point in time. You would really need a month by month chronology to parse this one.
Many years ago I was taking a train across the Andes Mountains in South America, and was thrown together with an old Chinese (Taiwan) man who was telling me stories about going to school in Germany during the hyperinflation, as he was pointing out to me all the hidden smuggling (Argentine-Bolivia border) going on (invisible to me, until I was directed to watch closely). Anyway, he said as a student he would take a wheelbarrow full of German marks into a coffee shop where they had a price board where the coffee price numbers were constantly updated. The price of a cup of coffee could double if you took too long to drink it, he said. No doubt he was a living a good life converting Chinese currency into German marks. During World War II and after, he said he worked in Morocco building air bases for the USA, and had lots of stories about how those building contract scams worked.
My question is if interest rates fall and we see any significant inflation, what will prevent people paying off their debts or simply refinancing to a negative rate. Can banks survive either zero consumer debt or actually paying interest on our debt?
There will never be a loan originated at negative rates. The negative interest isn’t really negative interest. It just works out that way because the bonds are trading for much more than their original cost. I.e if I loan someone $100 and expect to be paid back $110 with interest, someone buying my loan for $120 will effectively be getting negative interest.
This is just theoretical, at this point, as negative interest once were. Let’s say the FED laid out a future path where interest rates would get more negative and currency becomes more deflated in the future. In that scenario, you would originate loans at negative interest rates and as a bank benefit by being paid back in more valuable (more deflated) currency.
Jon Sellers said:
Government bonds in fiat currencies aren’t really loans anyway.
Tim Wallace said:
Life control takeover by government even more? Destroy currency so that EVERYTHING must be paid with cards – and TRACKED by the government. The plan must be for ALL of us to be given cards to pay for everything while we get paid nothing.
“… without any value to German bonds yields marked not simply because nobody bought them for those two years.”
Not sure what that means. Did the rates actually go negative? Or were they simply deemed to be negative because nobody bought the bonds?
The sum of interest payments and payback of principal at maturity is less than it would cost to purchase the bonds at what they’re currently trading at.
Obviously this is the result of governments buying their own bonds. No sane person would ever loan their own money at negative rates.
I expect this to be the new normal. People will stop loaning money to governments. The gov will just print whatever they need.
I also don’t see brexit happening. Either the results will be fixed so the election results are to remain or they’ll just pretend they’re going to exit and never actually exit.
Parlament member shot about an hour ago…. 52 year old man yelling, “Britain first”.
Germany and Japan are net creditor nations, so the fact that their government bonds trade at slightly negative yields is not a major international problem.
The major international problem will arise when US government bonds begin to trade at negative yields. And they eventually will.
You cannot look at history and predict the future in this case. Why? Because all currencies are now fiat. There is no basis for determining insolvency. If the governments and the banks continue propping each other up and printing continues with a wink wink on each side, then it goes until a true safe haven appears which does not exist. Please do not say gold because the world went off the gold standard years ago and now keep it for the same reason people buy it. Can you guess? You buy it hoping it will be the safe haven that doesn’t exist. It is all a mirage. I would rather have a year of food than a bunch of gold.
Anyone who ever believed that Government debt is a “safe haven” is an imbecile.
Governments ALWAYS default on their debts, either through inflation or outright failure to pay.
ALWAYS. There are no exceptions, EVER.
Jon Sellers said:
The United States has never defaulted on its debt. EVER.
So what IS default? The failure to repay all of the debt or just a portion?
Governments, like we see in Venezuela today, are printing madly to prevent this “default” yet every person’s savings, every government bond is now virtually worthless….but still no default.
If the US government simply proceeds to print its way from default, devaluing currency and bonds, the currency represents, is that not a default?
Or is it like our recession/depression….it doesn’t exist until an economist or government spokesman tells us so.
Jon Sellers said:
The United States doesn’t just print money. That would have to come from the Treasury. The Federal Reserve can print money, but it has a limited set of things it can exchange that money for. All of the money it has printed sits in the reserve accounts of the big banks, which are held at the Federal Reserve. And it traded that cash for Treasury bonds, which sit at the Federal Reserve.
Nothing has entered the economy, which is why all of this is so ineffective. And the Treasury will always meet its obligations because it will print the money to do so. But every bit of that money will come right back through either taxes or bond sales.
In the U.S. system, inflation is not possible from printing money. Inflation has to come from wages rising faster than productivity in an environment of poor profitability. Companies would have to raise prices and workers would have to have the incomes to pay the higher prices. That’s what happened in the ’70s.
@JonSellers — you seriously need to check your warped history. This blog isn’t read by clueless academics with no real world experience — you are going to get caught lying.
The US had at least two outright defaults: FDR defaulted during the depression. Nixon defaulted in 1972. Kennedy did a partial default, as did LBJ (before Nixon just threw in the towel).
This doesn’t consider at least one decade (1972-1982) when Treasuries failed to pay enough to compensate for inflation (a technical default) or the most recent 8 years when Treasuries failed to pay enough to keep up with inflation. I don’t care if your left wing college professor wants to bicker about nonsense — the same entity that was issuing the debt was also responsible for the currency. It was a technical default.
Just because a college professor claims Treasuries are risk free does not make it so. If you are able to think for yourself, such a ridiculous claim should make you question the assertion long before you write something stupid in a blog comment
Yancey Ward said:
I have long pointed out that in the limit of full monetization, government bonds and cash are completely identical, and cash doesn’t pay interest, so neither will bonds that still exist. With central banks slowly getting into the purchase of other financial assets, the yields on those should also eventually equal those on cash.
Bingo! And when the average duration of govt debt instruments falls below the commercial terms of payment (e.g. Net thirty days) the payment system freezes up because being an unsecured creditor for even thirty days is a non starter. Basically banks dual role as operators of our payment system and as lenders/creditors is finally revealed. Up till that point banks can obscure this reality and can create new money through the act of lending with no one the wiser. Currency crises are nothing more than the realization your civilization is running a Ponzi scheme through its payment system.
Jon Sellers said:
Government creates and spends money. Then it must absorb it all back. That is done either through paying taxes or trading cash for bonds. Which one you do shows you where you are on the power curve.
Yancey Ward said:
There is no “must” in this regard. History is pretty damned clear about where this eventually ends up. I guess one can “hope” for a reversal, but it not happening is almost a foolproof prediction.
That’s true. But banks create money too. Lots of money. Our problem is way more bank created money is disappearing (without CB price supports real estate and financial assets would be free falling now) than government printing is creating more. More important the money banks have created went into house flipping, stock buying, student borrowing, and general consumption, rather than capital spending. So productivity falls while wages stagnate. So it’s a Second Great Depression world wide. Meanwhile Krugman preaches that banks don’t create money and banks are not the source of our trouble. Really?
Huge amounts of bank debt needs to be written off as unpayable because that’s what it is. Government needs to then recapitalize our busted banks because that’s what they are. This will require vast money printing by government but at least the payment system will survive and banks and markets will properly function again. Painful for everyone but mostly for financiers and rentiers. If we fail to do this a disorderly banking system collapse and currency crisis is baked in.
Jon Sellers said:
100% correct. But today’s problem is bigger: the bankers control the government through bribery. So the government cannot perform its regulatory function.
And I really, really hope the feds have a plan to step in and take over banks if they do blow again, instead of just handing them a wad of cash. I can’t imagine they’d be stupid enough to let a currency crisis happen.
@Yancy Ward — I tried to click “Like” on your comment, but apparently there is some sort of an issue with my computer and/or Mishtalk…
Its almost offensive reading stuff that JonSellers writes. I guess he has his freedom of speech, but it doesn’t make his miseducated nonsense any easier to read
This is all about capitalizing debt, not paying it down or writing it off. Governments print money for banks to allow them to carry bad debt and continue accumulating more. Even when the institution is allowed to fail like Lehman or countrywide, someone stepped in to absorb the debt and the government printed enough money to make it possible. Big dogs do not lose money, only little dogs.