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It’s irrational to lend money and pay for that privilege

“Germany sells Five-year Debt at Negative Yield for First Time on Record,” screams the article in the Wall Street Journal. “Move reflects plummeting borrowing costs across Europe,” the subtitle states.

Germany was able to sell $3.72 billion of five-year bonds at a negative interest rate of 0.08 percent. In essence, those who lent Germany this money were willing to pay the German government for the privilege of the government holding the investor’s funds for five years. The move reflects, in reality, that investors are more concerned about the return of principle than the return on principle.

The German negative interest rate comes on top of similar negative interest rates in Denmark, Switzerland, Finland and Japan.

The disastrous consequences of the current economic policies allow negative interest rates to occur. Negative interest rates are a clear sign of an impending deflationary spiral.

The extraordinarily cheap monetary policy of the ECB, Bank of Japan, Bank of England and, most notably, the Federal Reserve have set the stage for one of the greatest economic catastrophes in history.

While the stock market in the United States is continuing to benefit from this cheap money, it will not be able to sustain such levels for much longer. Whether the market will continue to benefit from a negative interest rate environment is very similar to the skepticism that was rearing its head at the beginning of the real estate debacle in 2008 and the dotcom bubble in 2000.

The concern is not whether the stock market will burst, but when.

It is irrational to lend money and pay for the privilege of doing that. It is the economic equivalent of “no-doc” loans and negative amortizing mortgages of 2007.

When the ECB attempted to raise interest rates in 2011, the European economic results were disastrous and were immediately followed by frequent interest rate cuts, to the point where negative interest rates are now the European norm. The European economic slowdown that followed from a one-half of 1 percent interest rate increase has shocked the free world.

At the current time, the Federal Reserve in the United States is contemplating raising rates due to perceived improving economic conditions in the United States. The impact of raising these rates is unknown since the United States may be the world’s last safe haven. A potential consequence, though, is that the impact of raising rates could be quite a shock to the economy.

Just as the housing market and the dotcom stocks became overinflated, the stock market is displaying similar overvaluations due to the “free money” Federal Reserve policies since 2008.

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