Vineer Bhansali at PIMCO argues that negative-yielding bonds act more like insurance policies than financial assets:
Indeed, negative-yielding bond markets tend to behave more like insurance policies than as investment assets. This is because, with a negative zero-coupon bond, a fixed income investor, like an insurance policy buyer, pays up front for protection-- in this case a premium-- for expected principal return in the form of a return of less principal at the negative rate.
In effect, Bhansali is redefining “interest” from a return on a capital investment to a hedge designed to reduce future investor losses.
This makes sense, but only in an environment where investors fear monetary debasement (or confiscation/taxation of cash simply held not for investment purposes). Glad to see a big bond outfit like PIMCO acknowledge what has been staring everyone in the face. When Austrians say this, they’re challenged with “where’s the hyperinflation?”
Bhansali also quotes Walter Block from an article way back in 1978:
A basic principle of Austrian economics is that the originary rate of interest (the rate of discount of future goods compared to the present, otherwise identical, goods) can never be negative. The reason for this arises not because capital is productive, nor out of man’s psychology. Rather, it is embedded in the very concept of human action.
This is not just semantics. Humans act both to improve their situation today and to provide for the future. Both lenders and borrowers (i.e. rational individuals) prefer present consumption to future consumption. The difference is the degree to which their preference matters to them today. So “interest,” properly defined, is the payment a lender demands in exchange for foregoing present consumption. By definition that payment is a positive to the lender. And note that Professor Block refers to the originary interest rate, which is different from market interest rates.
To quote Thorsten Polleit:
The originary interest rate is expressive of a value differential which results from so-called time-preference. The term time-preference denotes that acting man prefers an earlier satisfaction of wants over a later satisfaction of wants. Time-preference is always and everywhere positive, and so is the originary interest rate. This is, first and foremost, what common sense would tell us.
