You Can’t Trust Crazy. Or Can You?

This is the ballad of a newsletter writer …

A song of why thinkers get paid to think, writers paid to write.

This is a cry out to the flock that seeks greener pastures, but is reluctant to be shepherded there.

For it is the job of a shepherd to craft a line that’s going to get the sheep safely and efficiently to pasture.

To be sure, the shepherd analogy loses relevance when the “sheep” possess a conscious, rationale mind just like the shepherd.

This is where trust comes into play.

I may be crazy, but can you trust me not to lead you astray? For instance …

Negative Interest Rates Are Good for the Economy

That was the headline of my latest Global Resource Hunter monthly piece.

The opening line that followed?

“Just not this economy”

The claim in those two lines, one would think, should be further explained in the text that followed. Indeed, I believe I demonstrated a cogent, explanation for why negative interest rates are not good for today’s economy but could prove beneficial in a system that’s been drastically reconfigured.

Yet one of my sheep (if I may be so bold to assume shepherdship) wanted nothing to do with the idea.

For he thought my claims would lead him straight to the same old desolate wasteland of an economy rather than new, fulfilling pastures. To wit:

Negative interest rates are good? Then why is Europe & Japan in the dumps?

Here I thought that you guys were different, but such nonsense has turned my stomach.

Cancel my subscription & credit my acct. I expect a confirmation of the cancellation too.

I responded to him privately. Something along the lines of:

Indeed, there are many challenges in re-calibrating the system as I described. But at the very least, I thought my piece WAS different.

I mean, where have you read someone condemn central bankers, centralized government, capitalist excess, corporatist control, a misguided money system, a culture of separation and debt as well as environmental negligence … all in one place?

Those are the things that turn my stomach.

Oh yeah — I also told him:

Japan and Europe are not in the dumps because they have negative interest rates; they have negative interest rates because they are in the dumps. And if you read my entire piece, you’ll realize that negative interest rates — as being favored by central banks around the world right now — are not the ultimate solution because exorbitant debt levels restrict growth potential (and thereby restrict the velocity of money and credit moving through the system.)

This sheep thinks he knows of greener pastures somewhere.

Oddly enough, he thinks the same old drumbeat that only calls out central banks for abnormally low interest rates and extraordinary monetary policy is the way to those pastures.

Nah.

Hey, I’ll plead guilty; I’ve beat that drum plenty of times because in our current system that sort of policy reaction breeds unintended consequences.

I realize that. And I acknowledge it.

For if ZIRP or NIRP have any credibility in an economic system, that system cannot be underpinned by debt that is underpinned by money that is underpinned by a growth-at-all-costs mentality.

It is that mentality that accommodates the justification for interest rates.

But that mentality has run its course.

Charging interest (however high or low) on borrowings that cannot generate growth and/or are aimed at servicing existing debts is a losing battle. The best it can do is grow wealth inequality by rewarding capital holders and encouraging wealth accumulation at the expense of debt holders.

I mean, Bill Gross was on the record last week spouting off about how negative interest rates turn assets into liabilities.

$11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective.”

It’s fairly logical on the surface.

If we are “penalized” for accumulating and holding assets, why would we seek them?

But it might not be true anymore.

And here is what’s hard for most to wrap their minds around: why are bonds even considered assets to begin with?

Simply because they’re notorious for kicking off a yield and retirement accounts beckon for steady, stable ROI? (Forgive me: I’m in my thirties and a traditional retirement is likely not in the cards for me!)

This is where, if the thinking changes and the culture of debt has been addressed with a jubilee or something, zero or negative interest rates shouldn’t matter to “asset” holders. For holders of bonds and yielding assets first and foremost are seeking return on their money. The merit of the underlying asset is relevant only so far as the bond holder can be reassured the principle will be returned.

The investor doesn’t so much expect the borrower to generate utility for the public interest as much as he expects the borrower to reward him and only him for use of the capital that he perceives as belonging to him and only him.

Again, guilty as charged, your honor.

But should we not at least have this conversation?

Is this not a different way of looking at things?

I mean, central bankers argument for negative interest rates hinges entirely on perpetuating a culture of debt. Who wants that besides those getting rich off others’ debt bondage?

On the other hand, a worthwhile argument for negative interest rates hinges on sustaining a system that doesn’t encourage debt based on the conventional purpose of money that isolates us.

For in isolation we defer blame — we externalize costs, for instance — and we force further apart the gears of sustainability. That is, we divide society. And last time I checked, our politicians don’t need any helping dividing.

Am I crazy?

Well, maybe.

The ideas that go hand in hand with the system I’m hinting at will necessarily require a major transformation of mind, money and value.

The thing is, if we don’t want to be plagued by a worsening cycle of booms and busts, we need to do something. We can suffer the abruptness of financial crises, or we can exercise some self-regulating measures that reconfigure the system.

You’re gonna have to trust me on this!

Do right,

JR

Your thoughts on “You Can’t Trust Crazy. Or Can You?”

  1. War bonds evolved in Europe, back when Mercantilism viewed wealth as something acquired, rather than created. Kingdom A sought to tax the citizens of Kingdom B, by invading Kingdom B and carving off a piece of it. King A issued a war bond to investors, promising to pay them the proceeds he gouged out of the citizens of Kingdom B. If he won the war, the investors got paid…or not.
    The bond investor who bought war bonds, usuallly did so, if he had reason to believe that King A wanted more wars to seize more land, and would pay off these bonds so he could borrow more money for the next war.
    If King A simply changed his mind about the war, kept the money, and refused to honor the bonds, the bond investors would lose their investment…but would probably never make another loan to King A’s kingdom.

    Now that capitalism has come into existence, and there are numerous ways to invest money, that do something productive and supply more people with the means of a healthful lifestyle, investors need to recognize that investing in kings’ wars with war bonds, is counterproductive. If my factory in Kingdom B is making parts essential to my global widget business, why would I benefit from lending money to King A? For King A to pay back the funds he borrowed, with interest, he’d invade kingdom B and steal my factory, and probably damage it, and at the same time, interrupt my supply of widget parts. After he’s done ripping me off, he could repudiate the bonds, paying me nothing, and then charge me a higher price for the widget parts that King B’s citizens used to make, in the factory I used to own, that King A stole. It doesn’t take a genius to figure out, that lending money to King A is the stupidest decision I could possibly make!

    So, yes. It makes a great deal of sense, to repudiate the idea, of a loan that pays interest, with funds acquired for a counter-productive purpose.

    The Bretton Woods agreement that ended the currency war of 1919-1937, defined the World War II Allied powers the “United Nations”. A subsequent conference in San Francisco gave those powers the UN Charter. Every nation who join the UN, must agree to repudiate wars of agression. Boundaries between member nations are permanent, says the Charter.

    Obviously, the UN Charter isn’t working.

    As long as investors are dumb enough to invest in debts, that can only be paid off by stealing from other investors, wars will continue under other names. Currently fashionable are the surrogate powers like ISIS and Al Qaeda, which borrow no money and have no debt, who actually start the shooting, but force the stock and bond markets into upheavals, from which their financial backers profit by having inside information about planned terror attacks.

    The fact that 28 pages of testimony to the 9-11 Committee ended up under seal. because of a threat by Saudi Arabia to dump T-bills and collapse $700B of bomds, speaks volumes. The Wahhabi fundamentalists whose oil billions paid to create ISIS and al-Qaeda, could not afford the risk of public exposure, because billions of people worldwide, think the 9-11 attacks were wrong and would refuse to trade with those billionaire terrorism backers.

    Bond market reforms that require the bond writer to disclose the source of the income by which the bond is to be paid, are an excellent idea. Investors could have the choice, to dis-invest in tyranny and oppression.

  2. So, would a Jubilee year be in order to reset all the debt levels? Negative rates would make holding debt a bad idea so why not just reset all the debt levels to zero and restart from there. If you are trying to eliminate the debt levels by making it shrink with negative interest rates, why not reset all the world’s debt levels to zero.

    I am not talking about picking and choosing whose debt is eliminated and whose is not: all of the debt is reset. Yes, some are going to be hit hard by this, but you do not give a junkie more drugs in the hope that they will stop. The pusher is responsible too for the situation. The lenders made bad choices and now it is time to pay or we continue down the same path. I think the central banks are slowly coming to the realization that the debts needs to disappear, why else would negative interest rate even be attempted.

    Why not set seven year periods where all debts have to be paid back or on that seventh year the debt goes bad. Savers would get a decent return; loans would only be made to those who can pay back with in the time limit; those that are lending money get a decent return too.

    So who do you think is crazier now?

  3. Wow, J.R.!
    You write esoterically and wax eloquent. This article and the one from 7/29/16 on Turkey’s dilemma blow my mind. If I am hearing you correctly about INVESTOR driven reform of the financial system to diminish or even eliminate the convoluted ridiculously leveraged derivatives which have contributed to, if not solely caused, the debt culture and transfer of wealth culture and globalization culture and every other kind of menacing culture you can think of.

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…