Thread by @thibm_

Trying to make sense of negative interest rate policies––also called NIRP.

What's rational in paying someone to borrow money?

Yet, negative-yielding debt has spread to more than 30% of the world’s investment-grade bonds––uncharted territories.

Quick take on a brief dive 👇

Primer on negative interest rates: "a scenario in which cash deposits incur a charge for storage at a bank, rather than receiving interest income."

Here's the negative-yielding interest rate mechanism, explained very articulately by @markets

Central banks in Europe, Scandinavia, and Japan have tried NIRP.

No clear sign that this "unorthodox monetary policy tool" is working at boosting economic growth via spending and investment thus far.

The IMF published a blog post on "How to make negative interest rates work": blogs.imf.org/2019/02/05/cas…

First, they tell us that CBs––in times of economic crises––usually need to lower interest rates by 3 to 6 points to bring back growth.

Most countries today are under 2% already

The proposed solution to make NIRP work is to get rid of physical cash.

"Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive."

It's essentially institutionalized theft.

How, you may ask?

Introducing a dual currency system with e-cash and physical cash.

"E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money."

No escaping into actual cash

Before that dual currency system gets implemented, if ever, negative-yielding is still skyrocketing to multiple trillions of dollars.

Roughly $17T of government bonds worldwide, or 30% of the market, now trade at negative yields, with the majority in Europe and Asia.

Corporate debt is also turning to negative interest rates. An much faster than sovereign debt.

It rose from just $20B in January 2019 to pass the $1T mark recently: 50x in less than 8 months.

Most of that capital is used in stock buy-backs: paying out shareholders, driving share prices up of companies traded on indexes such as the S&P500.

"The level of buybacks to free cash flow hit 104% for the 12 months ending in the first quarter of 2019."

cnbc.com/2019/07/29/buy…

"Unless earnings growth accelerates materially, companies will likely continue to fund spending by drawing down cash balances and increasing leverage."

This mechanism is further widening the wealth inequality: making stocks holders cash out on overly-leveraged positions.

On top of this, pension funds that are targeting 6-7% inflation-adjusted returns have to allocate capital in riskier instruments to achieve their mandates. That leads them towards lower quality debt, taking more risk and volatility on their books.

Negative interest rates are tough for pensions who are trying to generate enough income from their assets to meet their liabilities.

With a large amount of boomers going to retirement soon, and unfunded liabilities of pension funds that are on the raise, NIRP is quite bad.

Have to go for now... this was a part I of X on my quest to demistify NIRP.

Anyone interested to share what they've learned, please do so! This is a rabbit hole I'm trying to understand from a first principles approach as it makes ZERO sense intuitively.

Oh, and buy bitcoin!