“Positive anything is better than negative nothing.”

– Elbert Hubbard

“Once you replace negative thoughts with positive ones, you’ll start having positive results.”

– Willie Nelson

If you have any doubt that we’ve wandered into a new and unexplored economic universe, consider this number: $12.6 trillion. That’s the face value of government and corporate bonds currently trading worldwide with nominal yields below zero.

Note that word trading. These bonds are in fact trading. Liquidity has not dried up. An active market exists for negative-yield bonds. Buyers haven’t gone on strike, and sellers aren’t desperately dumping the bonds. This is weird. None of it should be happening. Plainly, however, it is happening.

Have traders and investors lost their minds? No. They are making the most rational decisions they can in an increasingly irrational world. And therein lies the problem with negative interest rate policies, or NIRP, as we now call them (not so fondly).

We don’t have infinite choices. Our decisions spring from the alternatives available to us. When all the alternatives are bad, any choice we make will be bad, too. Today we will start a two-part series on how central banks and specifically NIRP are hurting the global economy. First, a little background.

The Price Of Liquidity

What is an interest rate? You might describe it as the price of money, or in investment terms it is the price of liquidity. You don’t have cash now, but you expect to have it in the future. If a lender believes your expectation is plausible, you can borrow the cash now in exchange for promising to replace it tomorrow. But you don’t just replace what you borrowed. You add an additional amount to compensate the lender for giving up liquidity on that money. That additional amount is what we call interest.

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