Opinion

Winter is coming, and so is an uncharted economic abyss: Neil Macdonald

Governments have printed unimaginable amounts of money, inflating the money supply, since 2008. A bank in Denmark just offered the first negative-yield mortgage. Another recession is inevitable. What will we do this time?

The economic situation scares me. But then, I'm not an economist

Governments have printed unimaginable amounts of money, inflating the money supply, since 2008. A bank in Denmark just offered the first negative-yield mortgage. Another recession is inevitable. What will we do this time? (Mark Blinch/Reuters)

Some economists seem to think that only a credentialed economist has the right to be utterly wrong about an issue of economics. Their contempt for amateurs — columnists with broad audiences, for example — would sear the lungs if inhaled.

So, because criticism just makes me feel so terrible, let me phrase a whole set of nagging worries as questions. Can we agree there are no stupid questions? Probably not. But let's try anyway.

Question No. 1: How in heaven's name did we arrive in a world where you must pay someone to borrow your money, and what does that mean to the punters? Like, um, me?

At the moment, there is more than $14 trillion US in negative-yielding debt extant in the world, meaning money is not just cheap, it's on sale at a loss. 

Let's put that sum in perspective: Canada's GDP in 2018 – the entire economic output of a G7 country – was about $1.7 trillion US. Fourteen trill is a huge chunk of global wealth.

Governments, many of them European, are actually offering — and investors are buying — bonds that are worth less at the end of five or 10 or even 30 years than their purchase price.  

Negative-yield mortgage

And a bank in Denmark is now offering a negative-yield mortgage. Jyske Bank will lend customers a ten-year fixed-rate mortgage with an interest rate of -0.5%, which means those borrowers will actually pay back less than they borrowed.

As for the punters, some have pensions, private and public, which, if this trend continues, will be forced to severely reduce their payouts. Some have RRSPs and other savings, which are subject to the same market forces. The expectation my generation was raised on was that prudence and parsimony would result in a nest egg later in life, which someone would pay to borrow, which would help fund your retirement. Now, apparently, we will have to pay someone to "hold" our money for us.

Bloomberg, the financial news agency, moved an explainer piece on all this last week, which suggested that this is all perfectly normal. 

Relatively flat economic growth in the developed world, explained the explainer, combined with ever-increasing concentration of wealth, has left rich people and companies sitting on vast piles of cash for which there is weak demand. 

The rules of economics being what they are, theorized the author, it only makes sense that financial institutions would begin charging to store this surplus money. After all, if you own something really expensive, don't you have to pay to store it safely? A safety deposit box costs money, doesn't it?

What the explainer avoided was where a lot of this money came from in the first place. Which brings us to Question No. 2: Governments have printed unimaginable amounts of money, inflating the money supply, since 2008. That must have consequences for the punters, right?

In early 2008, before the criminal greed of America's mortgage and investment bank industry nearly destroyed the world's economy, the balance sheet of the U.S. Federal Reserve stood at about $870 billion.

(Speaking of 2008, there is no better example of economists being wrong. Larry Summers and Alan Greenspan, two economists who rose to manage much of the American economy, not only didn't see the subprime crisis coming, they both fought successfully against regulation of derivatives, which are essentially bets on the rise and fall of asset values. Wall Street's creation of ever more insane derivatives basically caused the meltdown while regulators looked the other way.)

Then-Fed chair Ben Bernanke and his fellow governors, desperate to avert complete disaster, plugged in the money-printing machine (actually, money printing is done electronically, with a few computer keystrokes). 

The Fed balance sheet is now at nearly $4 trillion.

The European Central Bank began printing money in 2015: $2.6 trillion Euros over four years, or about 7,600 Euros for every person in the currency bloc. Japan, the UK and Switzerland have all done the same in differing amounts. The technical term for it is "quantitative easing."

The central banks have used the oceans of new money to buy bonds from their own debt-addicted governments, with the intended result of lowering the cost of borrowing and encouraging risk-taking, which is at least one explanation for the nosebleed stock market levels nowadays, and the staggering levels of household debt here and in the U.S.

But there is serious pressure to do even more. Which brings us to Question Number Three: Winter is coming, and so is another recession. It is inevitable; 10 years have passed since the last one. What will we do this time? And…the punters.

One thing central banks won't be able to do this time is lower interest rates significantly. As negative rates are already here. U.S. President Donald Trump, judging by his weekly rants about the incompetence of Federal Reserve Chairman Jerome Powell, whom Trump appointed, seems to think monetary policy should be in the hands of politicians like him. (Now that would be a confidence-inspiring move, wouldn't it?). Trump thinks cutting U.S. interest rates even further is just the ticket.

Other politicians, on the left, are promoting Modern Monetary Theory, which posits that governments can print unlimited amounts of money without inflationary consequences. Some even want central banks to just start sending cheques to every household.

(Actually, Trump is right over there with the leftists, if you think about it: pro-spending, pro-debt, and pushing for even looser monetary policy).

And of course the central banks are increasingly shackled by the fact that citizens and governments owe so very much; at this point, having helped create this mess to save us all from the earlier mess, they haven't much choice but to leave interest rates where they are for many years to come.

This much is absolutely true: we are in unknown territory, out past the "here be monsters" sign. None of us has any idea how this will turn out, economists included. As we saw in 2008, the collateral damage when things start to go badly can be devastating. Personally, I have a bad feeling about it all, but then I'm not an economist.

I'm with Bruce Springsteen, also a non-economist, who once put it this way: "Blind faith in your leaders … will get you killed."

By "you," he did not mean the top .5 per cent, with their insider information and high-speed trading algorithms and political influence and vast, expanding piles of cash. They'll be fine. When Donald Trump, a member of that cohort, said in 2015 that the system is rigged, he was right, just not in the way he meant.

This column is part of CBC's Opinion section. For more information about this section, please read our FAQ.

Clarifications

  • A previous version of this column suggested that Jyske Bank was the first bank to offer a negative-yield mortgage. In fact, similar types of mortgages have been offered before.
    Aug 13, 2019 11:40 AM ET

About the Author

Neil Macdonald

Opinion Columnist

Neil Macdonald is an opinion columnist for CBC News, based in Ottawa. Prior to that he was the CBC's Washington correspondent for 12 years, and before that he spent five years reporting from the Middle East. He also had a previous career in newspapers, and speaks English and French fluently, and some Arabic.

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