A few days ago the European Central Bank suggested that it was about to cut interest rates.

This planned cut is happening at a time when Denmark is offering to lend money at MINUS 0.12% for a ten-year mortgage.

In other words, the bank would PAY YOU to take out a loan.

Switzerland is even deeper into negative interest rates (NIRP) and has promised to cut rates further if the ECB cuts again.

NIRP turns all of the rules of capitalism on its head.

People aren't supposed to get paid to borrow money. At some point you could simply stop working for a living and just borrow money for a living instead.



Some civilizations, like the early Roman Catholic Church and Islam, were opposed to charging interest, but negative rates just didn’t happen, as far as Sylla knows, until the modern era. Now 14 European countries, including France, Germany, the Netherlands, and Spain, have negative interest rates on their two-year bonds. And the negative interest rate virus is spreading to emerging European markets such as Poland, Hungary and the Czech Republic.

Amazingly even junk bonds are going negative. Junk bonds! They are called junk because they are expected to default. They're often called "high yield" bonds, but that no longer applies.



There are about 14 companies with junk bonds worth more than €3 billion ($3.38 billion) that are trading with negative yields, according to Bank of America Merrill Lynch. They include telecom giant Altice Europe NV and tech-equipment company Nokia Corp.

Believe it or not, NIRP is not a net good thing for banks because it means that banks are charged a fee for parking their reserves with the central bank.

So why is this happening?

It's a direct side-effect of central bank QE following the 2008 crash. They printed money out of thin air and bought financial instruments.

The thing is, they've bought so much that they are running out of quality financial products to buy.



Because of specific bond issue limits, Jefferies International estimates the ECB may have as little as three months’ worth of German bonds to buy for QE at the current monthly rate of 19.6 billion euros.

The Bank of Japan is in even bigger trouble.

The BoJ is a top 10 shareholder in 90% of Nikkei 225 companies, and owns between 70% and 80% of the ETF bond market in Japan. There simply isn't much left to buy.

That's the immediate reason for why we are here.

However, if you step back, there is a Big Picture explanation for how we got here and what it means.

For that I leave it to economist Michael Hudson.



Debts that can’t be paid, won’t be. That point inevitably arrives on the liabilities side of the economy’s balance sheet. But what of the asset side? One person’s debt is a creditor’s claim for payment. This is defined as “savings,”...

The new fallback position to keep the increasingly zombified U.S. and Eurozone financial markets afloat is to experiment with negative interest rates. Writing down savings by a few percentage points helps bring the glut of creditor claims marginally back towards balancing bank deposits with the ability of debtors to pay. But such marginal moves are rarely sufficient.

At some point there will be mass defaults on this debt, and that is the Achilles heel. Our currency is debt-based. If the debt can't be paid then the currency is flawed.



“The best way to destroy the capitalist system [is] to debauch the currency.”

- Vladimir Lenin

Many Americans, especially those on the left, have an irrational aversion to owning gold. So here is an extremely easy way to understand the counter argument.



The plunge in interest rates across the developed world is giving gold a fair tailwind as well. Who cares if it doesn’t pay interest? Trillions of dollars of bonds in Europe now actually have negative interest rates. By that measure, a cynic might say, gold’s 0% coupon looks like a bargain.

It doesn't require being cynical. It only requires being able to do basic math:

0 > negative.

Gold has now risen 11% in the past two months, and 15% over the past year.

That’s more than the S&P 500, +0.03% or the Nasdaq, -0.44%.