Politics Magazine

Deflation Causes Negative Interest Rates?

Posted on the 09 February 2015 by Adask

Negative Interest Rates Confuse [courtesy Google Images]

Negative Interest Rates Confuse
[courtesy Google Images]

Negative

“Economic madness continues nonstop. In the race for safe havens, Nestle’ bond yield has fallen below zero.

 “Nestle’s short-term euro-denominated bond yield has fallen into negative territory, possibly marking the first time in history that a corporate bond maturing in more than a year has had a negative yield.

“Yes indeed folks, you can now pay Nestles for the privilege of lending it money.”

 

Get that?  If you lend euros to Nestle’, they’ll only accept your loan if you pay them for the privilege of lending them your currency.

Nestle’s new policy isn’t exactly a first.  Several European banks have already imposed negative interest rates on bank depositors.  But Nestle may be first major corporation to issued bonds with negative interest rates.

Of course, on the face of it, paying negative interest rates sounds nutty.  But are negative interest rates really evidence, as Mish Shedlock said, of the “Privilege of Lending Gone Mad”?

I don’t think so.

I suspect that negative interest rates anticipate deflation.  Just as inflation allows borrowers to repay their debts with cheaper dollars, deflation requires borrowers to repay their debts with more expensive dollars.

Thus, if you lend currency to Nestle during a period of inflation, Nestle will repay its loan with currency that has a diminished purchasing power. For example, in an era of inflation, I could lend $1 million to Nestle’, and when Nestle’ repaid the $1 million, it might only have the purchasing power of $900,000.  By means of inflation, I (the lender) would lose $100,000 in purchasing power, and Nestle’ (the borrower) would be gain by $100,000 in purchasing power.

On the other hand, if I loaned $1 million to Nestle’ during an era of deflation, Nestle’ would be forced to repay that loan with currency that was “more expensive” (had a higher purchasing power) than the currency originally borrowed.  I.e., when Nestle’ repaid the loan in three years, the $1 million they borrowed might have $1.1 million in purchasing power.  Result?  Due to deflation, I (the lender) would gain an unearned $100,000 in purchasing power and Nestle’ (the borrower) would lose $100,000 in purchasing power.

Nestle’ didn’t get to be one of the world’s greatest corporations by playing the fool.  If Nestle’ sees that we’re entering an era of deflation, Nestle’ will not accept loans that will cause them to lose purchasing power.

Therefore, to offset the possible losses incurred by the borrower (Nestle’) due to deflation, Nestle’ is imposing a negative interest rate.  Nestle’ is charging interest on the money it borrows because Nestle’ anticipates deflation, economic depression, and being forced to repay whatever currency it borrows with “more expensive” euros, dollars, etc.  Nestle’ is charging a negative interest rate to offset the losses in purchasing power they might otherwise suffer due to deflation.

Negative interest rates sound nutty, alright—but they make perfect sense in our brave new world of fiat currencies, economic depression and monetary deflation.

About these ads

You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Congratulations Kris Barclay, Emerging Artist Showcase at Boots & Hearts 2018

    The 2018 Boots Hearts Emerging Artist Showcase, presented by Chevrolet Canada took over the Front Porch Stage to kick off the four-day country music festival... Read more

    The 17 August 2018 by   Phjoshua
    LIFESTYLE, SELF EXPRESSION
  • Friday Q&A: Sesamoiditis and Yoga

    Friday Q&A: Sesamoiditis Yoga

    Q: I've been recently diagnosed with sesamoiditis. My normal dynamic sequence of standing poses and sun salutations is awkward and/or painful so I've mainly... Read more

    The 17 August 2018 by   Ninazolotow
    FITNESS, HEALTH, HEALTHY LIVING
  • The Mourning Hills (2014)

    Mourning Hills (2014)

    Director: R Todd Campbell Writer: R Todd Campbell (Screenplay) Starring: Chelsea Bryan, Carol Jean Wells, Joe Fredo, Eric Gebhardt, Isabella Handley, David... Read more

    The 17 August 2018 by   Newguy
    CULTURE, ENTERTAINMENT, MOVIES
  • Video: Racing Across South America on a Bike

    A couple of days back I shared videos of a bikepacking journey across South America. (Part 1 and Part 2) But for a completely different way to bike across that... Read more

    The 17 August 2018 by   Kungfujedi
    OUTDOORS
  • FREEBIE: Save on Advair & Other GSK Meds (US)

    FREEBIE: Save Advair Other Meds (US)

    Sign up and receive money-saving offers and tips to help manage your asthma.You may be eligible for a coupon to help reduce the cost of ADVAIR. Read more

    The 17 August 2018 by   Catherine Mcdiarmid-Watt
    FAMILY, FINANCE, SHOPPING
  • Pink and Blue Babble Boxx: Products for Mama and Baby

    Pink Blue Babble Boxx: Products Mama Baby

    This post is sponsored by BabbleBoxx.com. Anyone else love trying new products?! I love hearing about new things and even more so when they’re things I... Read more

    The 17 August 2018 by   Thesamanthashow
    LIFESTYLE, SELF EXPRESSION
  • Airbus A350-900, Asiana Airlines

    Airbus A350-900, Asiana Airlines

    @ San Francisco, CA June 2018 This Asiana A350 is on final approach to SFO after a long flight from Seoul, Korea. Asiana has been operating the A350 since... Read more

    The 17 August 2018 by   Htam
    PHOTOGRAPHY, SOCIETY

Magazines