More on Negative Interest Rates

The LIBOR interest rate (London Inter-Bank Offered Rate) is the international interest rate which is used for many international loans and mortgages, including adjustable rate mortgages. The concept behind its creation and application was to create an international securitized mortgage and debt market.

At present, in some currencies the LIBOR rate is negative! With the Euro LIBOR set at -0.39% and the Swiss Franc LIBOR at -0.72%, a few adjustable rate mortgage holders in Euope are getting PAID for having mortgages!!! The banks behind those mortgages got hammered by their own fine print because they couldn’t perceive of a world with¬†negative rates.

Negative interest rates are extremely unsustainable. They forecast a recession if not a depression for Europe, and they will possibly eventually destroy the European financial institutions caught up in this situation. They depress business growth in many sectors of the economy by taxing cash reserves. And, as suggested by those negative mortgages, they may be fueling an asset bubble in real estate and stocks. Imagine: it is actually less expensive in some places in Europe to load up on debt and buy something than it is to save. Astonishing.

Meanwhile the stock markets are rising, possibly fueled in part by those lower and negative rates. We are making money in our portfolios, and the world seems balmy. We are mere spectators to this negative interest rate insanity. We might as well watch and savor, as though observing the phenomena of the moment: a comet, an unusual rainbow, or an exotic wine. This season will pass, and one way or the other we will want to remember that we were here when the financial system inverted upon itself.

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