"Zero Has No Meaning" Says Greenspan: I Disagree, So Does Gold

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Negative yields? Who cares says Greenspan. It's meaningless.

Negative Yields "No Big Deal"

Former Fed Chair Alan Greenspan sees No Barriers to Prevent Negative Treasury Yields.

Former Federal Reserve Chairman Alan Greenspan says he wouldn’t be surprised if U.S. bond yields turn negative. And if they do, it’s not that big of a deal.

“There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan, who led the central bank from 1987 to 2006, said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.”

Joachim Fels, global economic adviser at Pacific Investment Management Co., detailed earlier this month a view that there’s been a change in the fundamental economic theory of time preference that helps explain why people are buying debt with negative yields. He postulated that extended life expectancy and an aging population have caused people to value future consumption more than current spending.

Greenspan, 93, said he views Fels’s thesis as very plausible and also a reason why more debt has a yield below zero. He doesn’t think it will last forever.

Flashback August 4, 2017

Please consider Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble

In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.

“The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,” Greenspan said on “Squawk Box.”

Flashback July 31, 2017

Alan Greenspan told Bloomberg TV : "By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

Now it's "No Big Deal".

Alan Greenspan on "Irrational Exuberance"

On December 5, 1996 the Maestro warned of "Irrational Exuberance".

Click on the link for an amusing video.

By the year 2000 Alan Greenspan embraced the "productivity miracle" of technology and no longer saw any bubbles.

That's precisely when the technology bust started.

Negative Time Preference

As noted above, Joachim Fels, global economic adviser at Pacific Investment Management Co, suggests "there’s been a change in the fundamental economic theory of time preference that helps explain why people are buying debt with negative yields."

Time preference can never be negative. Never.

To believe in negative time preference is to believe things such as "It's better to have 90 cents ten years from now than a dollar today".

Yields are negative only because central banks manipulated yields negative. They would never be negative on their own accord.

Investors buy negative yielding debt firmly convinced central banks will manipulate yields even more negative.

Zero Does Have Meaning

Alan Greenspan is wrong. Zero is very meaningful with negative being even more meaningful.

It means central banks have hit a brick wall. They cannot cram any more debt into the system. There is no tolerance for paying interest.

That's the meaning, and the evidence is overwhelming.

  1. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  2. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  3. Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid

As Gold Blasts Through $1500 the implied message is that central banks are out of control.

Gold has the meaning of zero correct even if central bank clowns and analysts don't.

Mike "Mish" Shedlock

Comments (66)
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Herkie
Herkie

Zero does mean something, it is an admission of abject failure. Nominal has no meaning, REAL interest rates below zero mean as much as you hate the nuts with the cardboard signs predicting the demise of man, you should start prepping now.

Tengen
Tengen

Surprising that this old ghoul still has an audience. He'll only be remembered for "irrational exuberance", the Greenspan Put, and feigning wisdom with his unintelligible statements. He belongs in prison but since that won't happen, at least put him out to pasture!

For that matter, nobody ever needs to hear from Bernanke or Yellen again either.

hmk
hmk

This is why all the fed mandates should be eliminated. Their function needs to be relegated to its original intent: to be the lender of last resort in the event of a liquidity crisis. To think that ivory tower Phd's with no real world business experience, except Powell, can manage the largest economy in the world is utterly laughable.

Sechel
Sechel

Thought Greenspan discredited himself with irrational exuberance and doing nothing

Bronco
Bronco

2yr and 10yr inverted overnight

.... Mr Bullard .... paging Mr James Bullard ...........

Expat
Expat

Good thing we have a president who doesn't want more and more and more cuts to interest rates! Oh wait....we do. I wonder why? Could it be that his empire is built on debt?

everything
everything

Simple, negative yields are higher than inflation, the rich need vehicles/places to put their money, and to them it's not money, it's just wealth. Gold stands alone, we are in the midst of another pretty substantial gold rush.

Tony Bennett
Tony Bennett

"We are experiencing a bubble, not in stock prices but in bond prices"

...

Haha. Completely. Absolutely. WRONG.

And when (not if) rates go negative good luck getting yield to turn positive without a major purge of debt via payback/write down/ write off. Until the purge players will use negative rates to cram down the craw the last bit of debt possible.

avidremainer
avidremainer

We're in deep do-do aren't we? Up the creek. a hole in the canoe and no paddle in sight.

RonJ
RonJ

This is the man who in 2005, praised bankers for getting people into homes they otherwise could not afford. A few years later the housing market crashed, as bankers had gotten people into homes they could not afford.

Greenspan says Zero has no meaning.

Martin Armstrong: "These idiots fail to comprehend that negative interest rates have wiped out pensions.."

Bam_Man
Bam_Man

The sad fact is that there is already so much debt in the Global Financial System that it can never be repaid - even in nominal, inflation-depreciated terms. Unfortunately, in the credit-based fiat currency system that we have, new debt must constantly be issued to pay interest on previous debt. Now, the only way that can be done is at negative rates of interest. Nixon, Connolly and Burns knew in 1971 that this would eventually have to happen - hence the suspension of the Bretton Woods Gold Standard was referred to as "temporary". There were many high level discussions in late 1971 and 1972 about when to re-instate international Gold convertibility, and at what rate, but it never happened. I have a feeling those discussions will be resuming shortly.

Axiom7
Axiom7

Negative time pref of money is impossible. Negative yields in dollar-based securities are possible (and seemingly more likely every day). Thus, the dollar is no longer money.

If you agree with that, the curve inversion isn't signaling a recession, it is indicating the market's demand for debt (dollars) to fund assets (which are primarily debt) and an expectation of more QE to cover funding of those assets.

You can see that in strains in the money-market (EFF trading over the "cap", LIBOR (which is the funding rate outside the US/Fed banking system) vs EFF, dollar strength vs other debt currencies (EUR, GBP, CNY/CNH).

It is in parallel to and almost the economic equivalent of corporate stock buybacks, where a corp issues debt, buys back stock, raises shareprice - here the govt issues debt, buys back stock (treasuries) - so treasury prices go up.

What do you think? This is all very rough and sloppy logic. But these are weird times.

Carl_R
Carl_R

It only goes to show that if you prognosticate on the future of the economy enough, you will be completely wrong from time to time. Greenspan made many correct forecasts, and a fair number of wrong ones. The same is true of every economic forecaster.

Whisper2018
Whisper2018

I would say zero has more meaning than what Greenspan says.

AWC
AWC

I’ll take Liquidity Trap for $10,000. Alex.

abend237-04
abend237-04

Since WW11, junk bond defaults during recessions have peaked around 40%, with the resulting average haircut to bondholders of around 30%.

When ten year rates return to only 4.6% during this interest rate cycle, the capital loss to these government bondholders will approximate that of a junk bond default.

Since we enjoy reserve currency status, however, the world won't be using nasty words like sovereign default to describe the situation; Those are reserved for the likes of Argentina.

Casual_Observer
Casual_Observer

It may be just anecdotal but the nice niche American restaurant in my area is dropping prices with all kinds of specials and I live in a high disposable income area. We went there once and it was $15 for an Impossible Burger which sells for 1/3 of that at the nearest Burger King. The most popular health club now also has competition is becoming wary of losing customers and thus waiving all joining fees. If we do get a recession it will get ugly fast and you will see price cuts of all kinds along with a rise in unemployment. Looks like a 50 bps cut now being priced in.

njbr
njbr

This is the same guy who warned at the end of the Clinton administration that the biggest danger facing the economy was paying off the federal debt.

Mission accomplished--we're all safe now!

Maximus_Minimus
Maximus_Minimus

Greenspan advising on finance, to be followed by Fredo Corleone advising on crime prevention...

No. 26-30
caradoc-again
caradoc-again

Lagarde is on the same page.

Probably both read some wonk paper out of the IMF explaining why this is all ok, nothing to see here, move along.

God only knows where this ends or the pain caused to ordinary wage slaves, pensioners & youngsters starting out.

My hunch is banks collapse and stock and bonds collapse together and millions with 60/40 type portfolios are wiped out.

caradoc-again
caradoc-again

Question - where is the lower bound once through zero and what discipline enforces that lower bound?

In the absence of a psychological limit it must be limited by some really bad negative consequence that is only identified in hindsight, after the consequence becomes reality.

TCW
TCW

My take is if assets are depreciating, then the loss in savings (due to negative rates) over time doesn't matter, as everything stays relative.

Christian dk
Christian dk

O means Everything. That is Proof, that Central bankers are Clueless,Corrupt or the real Axis of Evil that has now conned the world for over a century. F.i.a.t money IS fake/counterfit money, that a Govern ment deklares Legal tender for paying Taxes. Ok, thats fine, I am very happy to pay my taxes, with fake money, BUT, I reserve the right of SAVING a dollar a day IN real money like Silver and gold. Below 0 interest rate is only possible because central banks are Monetizing debts and buying bonds of bankrupt governments. That is NOT a free market, but a Dick-tatorship.

The " FEDERAL" reserve is a corrupt CONstrut, that CAN be reversed IF/when the hacks in CONgress decide to do the EXACT same thing Wilson did in 1913. The FED clearly WANTS to create a re/depression every 7/9 years, so they can flip flop the "markets", buy low and the "save" the "Free market" Put the amendment of ABOLISHING the FED to Congress just before CHRISTmas and only inform those that will vote for the "Bill".

GOLD used to be 35$ oz and is NOW OVER 1500 us$/pieces of PAPER. WAKE the f...k up....Americans.... TURN off your T.V, and start THINKing.

Je'Ri
Je'Ri

Negative interest rates are how a government defaults without actually calling it a default.

What happened to the Alan Greenspan who said this?

"Anything that we can do to raise personal savings is very much in the interest of this country."