Question of the Day: "What does zero interest mean?"
"News Flash: the central bank cannot print wealth...
"What does this really mean [then when the interest rate on the 30-year Treasury, or arguably the 10-year], gets to zero?
"What does zero interest mean? It means there is no demand for credit by businesses that justifies [them] paying more than zero... If businesses had opportunities to profit at higher rates, they’d take all the credit they could get at those rates. But ... debt capacity aside, what would they put the cash to?
"No, buying their own shares, or speculating on other assets, does not count.
"What does zero interest mean? It means cash borrowed at zero is expected to generate a marginal return. And that means all the cash borrowed previously, at higher rates, is generating submarginal returns. Those capital assets are being churned. That is, competitors buy bigger machines, build bigger hotels, or more glorious restaurants simply by dint of borrowing cheaper. And the process has culminated in a market interest rate of zero. Zero means: 'here, take this cash and use it for free. Yeah, no, we don’t expect a return.'
"When there is no return on lending, that is a sign that there is little to no return on anything that can be financed by borrowing. One necessitates the other. We encourage you to stop here and think about this. It is a critical point.
Getting back to the problem of all the borrowing incurred at a higher rate, well much of it can be refinanced at lower rates or at the then-current zero rate. But that does not fix the problem of a restaurant that looks dated, with middling finishes and cheaper materials that now competes against an opulent Dining Palace. Customers prefer the latter, and no amount of refinancing can fix that problem.
"Large corporations might borrow to refurbish and remodel their stores. This piles more debt on top of the old debt, which they cannot retire. They cannot operate the perfectly good old restaurant, so they go deeper into debt to rebuild it into something that can be operated. It may pay the debt service (hah!) payroll, food ingredients, etc. But it cannot amortise the debt.
"And that brings us full circle. At zero interest, the debt has become so heavy it cannot be lifted. The force that would lift it is: return on capital. And it is precisely RoC that has been atrophied by decades of force-feeding capital to businesses. During this long process, the demand for capital picked up, only with each downtick in interest rates.
"And finally the end is reached. Zero interest. In physics, there is a construct of infinite mass and zero volume. It is called the singularity.
"A black hole."
~ Keith Weiner, from his post at Monetary Metals on 'The Economic Singularity'
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1 comment:
How to destroy capitalism? Establish a system in the name of capitalism that destroys capital ever so insidiously. Then blame capitalism for the eventual collapse. Ingeniously evil.
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