“Of course there are true copper bottomed mistakes, like spelling the word “rabbit” with three m’s, or wearing a black bra under a white blouse, or, to make a more masculine example, starting a land war in Asia.” — John Cleese
We all make mistakes, but some are bigger than others. An example of a serious one that’s both potentially catastrophic and easily avoided is to lend money for long periods during a time of rising debt and financial instability. Who, for instance, would commit capital for 30 years to Italy by buying that country’s long-dated government bonds? “No one” is the sane answer, yet those bonds do find buyers.
Even higher on the crazy scale is the following:
Ireland Sells First 100-Year Bond, Staying on Comeback Trail
Ireland sold its first so-called century bond, less than three years after it regained economic sovereignty by exiting an international bailout program.The nation’s debt office sold 100 million euros ($113 million) of the securities at a yield of 2.35 percent. By contrast, investors are demanding a yield of 2.66 percent to lend to the U.S. government for 30 years.
With the nation in the midst of commemorating the centenary of the 1916 rebellion that eventually led to Ireland’s breaking from the U.K. in 1922, Ireland is seeking to lock in lower borrowing costs amid the European Central Bank’s unprecedented stimulus. Last year, Mexico sold the world’s first 100-year government notes in euros.
The sale “is both a testament to the restored confidence markets have in Ireland’s creditworthiness, as well as a sign that duration- and yield-hungry investors are looking to extend to the max along the curve,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.
Irish borrowing costs have plunged since it exited an international bailout at the end of 2013, aided by a recovering economy and ECB President Mario Draghi’s pledge to do whatever it takes to save the euro.
The yield on Ireland’s benchmark 10-year bonds peaked at 14.2 percent at the height of its crisis in 2011. The yield on the securities has since fallen to below 1 percent and was at 0.73 percent as of the 5 p.m. London close.
The ECB has begun a second year of buying sovereign debt, part of a stimulus plan that includes imposing negative deposit rates for banks, which have served to crush yields across the eurozone. In Germany, bonds maturing in as long as eight years have yields below zero.
Supply Target
In December, the debt office said it would seek to sell 6 billion euros to 10 billion euros of bonds in 2016. Wednesday’s sale was by private placement through Goldman Sachs Group Inc. and Nomura Holdings Inc.“This ultra-long maturity is a significant first for Ireland and represents a big vote of confidence in Ireland as a sovereign issuer,” Frank O’Connor, the Dublin-based sovereign issuer’s director of funding and debt management, said in an e-mail statement.
A few questions
If you’re a “yield-hungry” investor, what do you gain with a bond that returns 2.35%? By any historical measure that’s ridiculously low. The average bank savings account had a higher return for the 50 years following WWII.
And since institutions like pension funds and insurance companies as well as individual retirees have based their plans on projected returns two or three times this high, owning such bonds doesn’t make these entities any more viable. So let’s go with “who the hell knows?” as the only reasonable answer to the above question.
Meanwhile if you’re “duration hungry” how does locking in a low rate for a longer time help you match your book — that is, line income streams up with obligations so that when the latter come due the former are guaranteed to be there? What obligations both run for a century and can be predicted with anything other than simple extrapolation (which is to say pure guesswork)? The answer is that there are none. Sure, pension funds and insurance companies might need to pay out benefits in 2116 but they also might have long since been replaced by an artificial intelligence that meets the needs of its human slaves without recourse to archaic concepts like money. So planning for something that distant and nebulous is silly.
And the big one: Who in their right mind would tie up money for five years in this world, let alone 100? Here’s a chart of the dollar’s value over the previous century:
Remember that this is the best currency. Most others have lost even more value. And this decline happened when global finances were far, far stronger than they are today. Had you bought 100-year bonds in, say, 1920 you might still be getting paid, but in 95% cheaper dollars. And your principal would be so diminished as to be hardly be worth considering.
Going forward, even economists who think the global financial system is fixable define the fix as a burst of inflation that allows debtors to pay their interest in cheaper currency. A 4% inflation rate achieved through sustained currency devaluation would make today’s 100-year bonds the Platonic ideal of a bad investment. And that’s the best case scenario — all the others involve extinction-level events for financial assets.
One good thing about all of this is that at least some people in this world are thinking long term, as in they think civilization may actually still be around.
Another thought is that the people who would buy long-term bonds may think interest rates will stay low or even negative forever. After all, if it’s too hard to raise rates now, when and how could it ever be easier later?
The last time 100-year bonds ( British consols) were offered, they were backed by gold, not card stock. When Britain abruptly abandoned the gold standard in 1931, it triggered the Great Depression: Americans, seeing what ha happened began demanding gold for their dollars, and as the banks had only $40 in gold for every $100 on loan, they began failing one by one. Yet today the idea of 40% gold-backed currency is utterly fantastic- the sheep-like masses now accept currency backed just 3-5% by paper, and the house of cards is subject to collapse at any time.
John,
I didn’t think anyone else was aware of that Cleese quote, which has always been one of my favorites. It’s just a single line in a speech he and his company, Video Arts, filmed, packaged, and sold called “The importance of Mistakes: adventures of Gordon the guided missile,” which I happen to own.
It’s so obscure. How in the world do you know it? What a hoot.
The analogy he crafts is of a guided missile, which is never exactly on course and therefore is constantly course correcting … until it hits its target. Such a great speech and a terrific analogy that carries trenchant message that’s really stuck with me for over 20 years. Highly recommended.
My question is… When do we hit ‘Peak Insanity’?
I keep thinking, “Any day, now,” but we keep breaking new records on insanity. Just as trees don’t grow to the sky, the Crazy Scale can’t go too far off the page.
So, where does it end?
With a ‘Land War in Asia’?
Actually… I think that it might.
John Little
omegashock dot com
Dead broke Dick and Dead broke Jane both need money. They agree to lend to each other with no intention of ever paying it back in their lifetimes. They each hold the agreement as collateral and their respective banks print up the cash and give it to them.
I think the idea is genius.
Within the U.S. there is a debt free money already available that circumvents bank lending, it’s called “legal tender”. Legal tender is not borrowed, loaned or spent into circulation and the only legal way it gets into circulation, is by your demonstrated productivity and public demand for the medium.
Another interesting thing, neither the Fed or the banks possess the legal authority to create money, and they don’t. What they do create is asset backed, debt based credit, which is not designated or acknowledged in law as being a money, or a currency, or a medium of exchange, with the only legal aspect associated with it, residing in the debts incurred with its use.
You see, ours is a Legal Tender Monetary System. This means that our money is not defined by Ludwig von Mises, John Maynard Keynes, Murray Rothbard, Joseph Salerno, Paul Krugman, Mike Maloney, Peter Schiff, Ron Paul or any other talking head. Nor is it defined by Austrian Economics, Keynesian Economics, Monetarist Economics, Capitalist Economics, the Federal Reserve, the U.S. Banking system, conventional wisdom or what people may use. It means our money is defined by law. And nowhere in law does it designate or even acknowledge Fed and bank generated asset backed, debt based credit as being a legal tender, or money, or currency, or a medium of exchange, it is 100% debt.
The legal tender in use today is provided as a duty an obligation of the U.S.G., born from the outlawing and confiscation of gold as money back in 1933. People with and without bank accounts, turned in their gold property and received the legal tender as replacement property. The legal tender system today is an extension of that time. That time has obscured the legal tender’s gold origins, existing as the people’s property first, makes it no less our property in the present, and the banking system’s legal obligation to provide either upon demand or over time, the fruits of our labor as represented by those deposit accounts, our legal tender property. It was our money first.
People are confusing a means of payment, the transfer of a debt obligation (credit), for the medium of exchange, what is owed as payment (an asset). By legal definition United States coins and currency, including Federal reserve notes, are legal tender money, a medium of exchange by law. Checks as well as debit cards, credit cards, money orders, etc., are a means of payment, referred to as a generally accepted (institutional) arrangement or method that facilitates delivery of money from one to another. Payment has not been made unless or until actual money proper has changed hands. All credit is debt outstanding.
All you’re doing when you use a debit card (credit) to make a purchase is, transferring your obligation to pay the vendor, to the bank, payment has yet to be made. The bank deducts the amount from its debt to you, as represented by your account with them, and adds that amount to the debt it owes to the vendor, as represented by his account with the bank. There was no money or currency of any type, digital, electronic or otherwise, used or exchanged in that transaction, just a transfer of an obligation to pay, which has yet to be met.
The notion that we’re using ‘digital money’ or ‘digital currency’ or ‘digital dollars’ as a medium of exchange is nothing more than a trick of the mind, a figment of our overactive imaginations, a deception, it’s how we rationalize the transaction, and it’s how the banksters get away with stealing our labor and wealth.
…..
The “Money Multiplier” theory, is pure fiction.
The Bank of England Corrects a Widespread Myth
https://billtotten.wordpress.com/2014/04/04/the-bank-of-england-corrects-a-widespread-myth/
Does the Money Multiplier Exist?
http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf
Here’s a good explanation on how pseudo-loans are actually created.
Basics of Banking: Loans Create a Lot More Than Deposits
http://www.cnbc.com/id/100497710
Banks are not intermediaries between borrowers and savers, they originate pseudo-loans as deposits, irrespective of credited savings accounts or current reserves held.
Banks do not loan money.
Working Paper No. 529: Banks are not intermediaries of loanable funds
http://www.bankofengland.co.uk/research/Pages/workingpapers/2015/wp529.aspx
Legal tender money (cash) is not borrowed or loaned into circulation.
Banks do not loan money.
How Currency Gets into Circulation
https://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html
Applicable Laws and Information.
Federal Reserve Act, Section 16
http://www.federalreserve.gov/aboutthefed/section16.htm
Legal Tender Status
https://www.treasury.gov/resource-center/faqs/currency/pages/legal-tender.aspx
Legal tender Law
https://www.law.cornell.edu/uscode/text/31/5103
Now, we can observe in the Treasury’s Legal Tender Status, (a brief synopsis of the Federal Reserve Act) that the Fed must pay for the production of FRN notes, and post collateral of equal value to the notes it issues into circulation. (The Fed assets used as the collateral mentioned, have changed to Mortgage Backed Securities and Treasuries.) Also noteworthy is that member banks must buy the notes at face value from the Fed by drawing down their accounts with the Fed and that, Federal Reserve notes represent a first lien on all the assets of the Federal Reserve banks and on the collateral specifically held against them.
Taking that into consideration along with congress’s right to take possession of the notes and collateral upon the dissolution of the Fed, we can infer that, the Fed does not own the legal tender Federal Reserve notes. Combine that with the New York Fed’s explanation of how FRNs get into circulation, we can also infer that FRNs are neither borrowed, loaned or spent into circulation.
From this, we can objectively conclude that Federal Reserve notes are a debt free legal tender currency, issued into circulation through the Fed and the banking system, in compliance with their legal obligation to supply that money property, as represented by the credited deposit accounts, to the account holders upon their demand.
As I cannot prove a negative, the next three assertions require a little bit of effort, they require disproving.
1) There is no law anywhere that grants to the Federal Reserve or the banking system the authority to create money, and they don’t.
2) There is no law anywhere that designates or acknowledges the debt based credit generated by the Fed or the banking system as being a legal tender, or money, or currency, or even a medium of exchange.
3) The only legal validity given to the debt based credit, is held by the debts incurred with its use.
If the banking system collapsed tomorrow and all debt based credit !POOF!ed out of existence, all debts will still be valid and collectible even though the debt based credit used to create and service them, no longer exists. See: 1930’s Great Depression. 2007-10 Credit Collapse.
The takeaway from all of this should be the realization that, there are two Federal Reserve administered systems in operation and running concurrently within the U.S.:
1) The legal tender monetary system.
2) The Fed and Banks’ asset backed, debt based credit system.
Currently, there is only $1.45-Trillion in U.S. legal tender money in circulation around the globe, all the rest is Fed and bankster generated asset backed, debt based credit, not money.
In today’s market I would not even buy a 7 day bond.