No less than six sovereign borrowers are now paying negative nominal interest rates on their 2-year borrowing in euros. In other words, they are making money by going into debt. In real terms, medium-term U.S. TIPS and British index-linked gilts have had negative interest rates for several years. Contrary to the views of the happy Keynesians around us, this is very dangerous indeed. If negative interest rates were to persist, the world's stock of capital would eventually disappear. Without capital, we'd be back up the trees.
You don't even have to be a decent credit risk to borrow money at negative interest rates in euros—France's 2-year bond yield has just turned negative. Since France hasn't balanced its budget since 1969 and is enduring a prolonged period of stagnation caused by having one of the world's largest public sectors, to rational investors it ranks as a credit with substantial risk. Of course, today's bond-market investors aren't rational; their brains are fogged by six-years-and-counting of monetary "stimulus."
Negative interest rates are damaging for savers, who can't earn a return on their money without taking undue risks. However, over time they are even more damaging to the financial system as a whole because they reduce the capital stock outstanding, thereby de-capitalizing the economy. If risk-free interest rates are minus 1% in real terms, then after a year the capital stock is 1% smaller than it had been a year earlier (absent substantial net new savings). Of course, some investors have earned positive real returns by taking risks, but over the business cycle as a whole, those returns will disappear, as the risks turn out to have been misguided.
This post was published at Prudent Bear
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