You know a financial crisis is around the corner when interest rates on all government bonds are negative. This happened in the Netherlands this week, when the coupon rate on every duration of government bonds turned negative. It means that if you buy a Euro worth of 30-years government bonds you will get less than one Euro back in 30 years. That’s not good news for investors, but they still buy these bonds simply because they think it’s less risky than buying other investment instruments. They prefer to get a small negative return, but one where they know they will get their money back (assuming governments never default on debts, in my opinion a big IF in the high debt world we live in), to investing in other assets that may give even lower returns.
But what does this mean for consumers who take out loans? Well, if you are in Denmark and you are looking to get a 20-year fixed rate mortgage, you can now get one where you pay 0% interest. So you borrow $100,000, you pay no interest and after 30 years you pay back $100,000. Crazy? Yes, but it gets even better. For a 10-year mortgage you can actually get a -0.5% rate, meaning that you borrow say $100,000 but after ten years you only have to pay back $95,111. In reality it is a bit more complicated of course, with some additional costs and monthly payments, but you get the gist.
The only reason this is possible is that investors (who underwrite these mortgages) are willing to accept negative returns, because they see no better investment opportunities. Investors are scared of the current situation in the financial markets and think it might take a very long time to improve.
If I would live in Denmark I would not hesitate to apply for a mortgage at these rates: you get free money and because of negative rates it is likely that the demand for homes will go up, leading to future higher housing prices at the same time. This has not happened before, it is the new economic reality. Central banks now have even less tools to play with, so to me it is clear how this will end.
This really shows a global currency crisis is on the way. Many countries will go bankrupt. I hope China can better weather this crisis. But massive devaluations of the Yuan is inevitable amidst escalating tensions with the US and due to the need to recapitalise its banking system at some point. Of course, other countries will also try to devalue their currencies but how long can this go on??
It will be interesting to watch how countries will devalue their currencies and which ones will devalue first. Eventually they will all devalue against Gold and Bitcoin.
It’s hard to say who is in worse situation than who.. I like to think that Europe and the US are in a equally bad situation. China may be marginally better, at least its stock market is already close to a bottom despite a property bubble and its productivity growth is still quite high. Currency devaluations will only push dollar (in the short term), gold and bitcoin prices higher.