Back in antique ages, it was considered de rigueur for banks to offer some trifling consumer appliance as an inducement for placing depository funds with that institution. Receiving a toaster for opening a new bank account was simply expected–until digital clocks became even more enticing. Of course, one could also expect an interest return on deposits as well. The rate varying with the slope of the yield curve: lower rates for shorter maturities and higher one for longer. This representing the curve’s classical configuration. Though whether steep, flat, or inverted some reasonable interest return was forthcoming.
But that was monetary privilege and quite on the wrong side of history. With short money now yielding two basis points and the 10-year treasury at 200, squeezing return from modern debt instruments is like extracting courage from a conservative: We’re not yieldists! Though for all that, we Americans are comparatively awash in interest return. In Europe, you bring a toaster to the bank. For, to the astonishment of many, Germany has just successfully sold a tranche of sovereign debt at negative interest rates. Yes, you pay them to take your money. Now that’s a business model. From reading I have not been able to determine whether the bonds were sold with actual negative coupons or whether the yield was bid negative at auction, though either way investors of supposedly sound mind handed the German government 100 (in euros) with the solemn promise to pay back 99. Again, this is the business you want to emulate.
So why would ostensibly sentient investors purchase these investment vehicles? After all, simple cash offers a superior zero rate without the hassle. The answer is anticipation. The European Central Bank has pledged to quantitatively ease approximately 1.1 trillion euros, purchasing 60 billion/month in sovereign assets. So investors are now aquiring German bonds and suffering negative rates with the assurance that committed ECB demand will drive yields even more negative in the future. Thus offering them a tidy profit to sale. It’s like buying a 1996 Chevy Impala for $40 grand for no other reason than another’s promise to buy it later for even more. Rationale is found only in resolution.
As an aside, if you are curious about the purpose of the ECB.
The ECB’s main task is to maintain the euro’s purchasing power and thus price stability in the euro area.
Assignment: maintain euro purchasing power
Strategy: debase euro
Response from the Wharton School of Business:
I can understand the mirth. As the Euro has cratered in currency exchanges, one gets the distinct impression of intentional failure at the ECB’s primary task. Perhaps leaving such important chores to mere economics PhDs wasn’t the wisest course of action. Probably pipe-fitters and termite exterminators were more intellectually suited to comprehend the effects of currency printing on purchasing power. But what’s not yet done is done and I suppose the European people are just going to have to habituate themselves to inflation and tourists in equal magnitude. The euro will purchase much less as its weakness attracts strong currency visitors–a few of which may even leave at vacation’s conclusion.
So what will all of this mean? Wealth, or at least the perception thereof, has masked a great deal of the pain from Western dispossession. A loss of purchasing power and negative interest yields are going to pull back a corner of that mask for indigenous Europeans. Whether it reveals enough to alter attendance within the modern state religion is left to speculation. Though it will undoubtedly be more interesting than a free toaster.