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

CBC News
Winter is coming. Neil Macdonald CBC News | James Alexander Michie

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)

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

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 №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 №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.)

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Source: Neil Macdonald | CBC News

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