The German Federal Bank (Deutsche Bundesbank) regional branch in Hamburg. Photo by Stephan Mosel.
If someone asked you to lend them money and frankly told you that not only wouldn’t you get interest, but you would not even get all of your principal back, you would rightly think you were being offered a terrible deal.
Yet when Germany made this offer on its 10-year debt, many investors said “OK.”
Germany auctioned 10-year debt with a negative yield for the first time in mid-July. Switzerland has previously sold 10-year bonds with yields below zero, as has Japan, and various countries (including Germany) have sold shorter-term debt at negative yields before. But Germany’s 10-year bund is considered a benchmark for sovereign debt in Europe, and the sale represents the first time a eurozone nation has auctioned off 10-year debt with negative yields. Nor is this only a European problem; according to Bank of America Merrill Lynch, there is now about $13 trillion of negative-yielding debt worldwide, compared to almost none in mid-2014.
Yet despite the unattractive terms, there are still investors opting for sovereign debt over the alternatives. So what does it mean when investors hand their money to a government and say: “Keep some of it – just give us back most of it in 10 years?”
It either means that the central banks have placed such a heavy thumb on the scales of monetary policy that the scales’ readout is completely meaningless, or it means that savers have so abandoned hope for putting their money to work productively that they are willing to part with some of it just to park it someplace.
In the first instance, the effect is to siphon credit away from potential uses that could be economically productive, such as building factories or growing businesses, in favor of cheaply funding government operations like pensions or armies or health care. That might sound appealing – until you consider that without productive investments today, there won’t be a source of funds to meet these same needs tomorrow.
In the second instance, if investors lack hope and the expectation of future profits, then a society is basically hanging up a going-out-of-business sign and executing a clearance sale on itself.
There have been very few instances, at least since the Industrial Revolution, when people felt such pessimism for the future. We reached such depths in some places during the Great Depression. But there is no depression now. The unemployment rate in Germany hit 6 percent this spring, its lowest level since the country reunified in 1990 and among the lowest in Europe today. Germany’s factories are among the most productive and its workforce is one of the most highly skilled. The country’s gross domestic product is expected to continue to rise, as the country’s economy demonstrated “impressive” performance at the start of this year and seemed largely unfazed by the turmoil following the Brexit vote in June.
In other words, Germany has given its investors every reason for optimism, much more so than many other countries. Yet even in Germany, enmeshed as it is within the European Union and the eurozone, there is such pessimism that investors are effectively willing to pay the Berlin government just to keep their money for a decade.
As Jordan Weissmann wrote for Slate in response to Germany’s debt sale, “What we saw in Germany Wednesday is basically a big vote of no confidence.”
The situation speaks to the overarching failure of the EU. The union was supposed to be a free trade zone, but in fact it has become an overregulated economic fortress that has shielded the Continent from competition. Rather than grow strong and lean, European business is so anemic and flabby that investors literally cannot find better things to do with their savings than to give their government part of it.
It will take time for the results of widespread negative yield sovereign debt to become clear. But odds are that this episode will not end happily.