Commercial Loans and Fun Blog

The Age of Disappearing Income and Falling Commercial Loan Rates

Posted by George Blackburne on Fri, Oct 4, 2019

Falling Rates-1I have an exciting story for you today about the darkest hours of the Great Recession; but first some background.  

Something really-really weird is happening in finance.  Interest rates just keep falling, and this affects us in the commercial loan business.  This is actually quite positive for you and me.

I have written to you several times about how there are more than $16 trillion in Japanese and European bonds now selling at a negative yield.  Can you imagine loaning $1,000,000 to the German Federal government, receiving no interest payments for ten years, and then only getting $970,000 back at the end?  It seems unimaginable.  Somebody pinch me.  This can't be real.  


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Interest rates in the United States resumed their downward march this week.  Ten-year Treasuries are known as the long bond (even though the U.S. Treasury also sells a 30-year bond).  Yields on the long bond, after rising sharply three weeks ago, are once again approaching just 1.5%.  

I predicted three months ago that ten-year Treasuries would fall below 1% within two years.  Yields on the long bond may break below 1.0% even sooner than that - on their way down to negative yields.    (The yield on the long bond was just 1.54% as of yesterday's close.)

You might think that the reason why interest rates are falling is because of the Fed.  You're on the right track, but the central bank that is really stirring the pot is the European Central Bank ("ECB").  The population of Europe is old, and it is shrinking.  Most countries in Europe are desperate for workers, and Sweden, Germany, and Norway are actively recruiting them.


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Because the counties of Europe are withering, at least in terms of reproduction, the ECB must constantly inject fresh Euros into the EU economy; otherwise, the European money supply would contract like a black hole.  Without Central Bank intervention, the money supply in Europe could easily shrink by 40% in less than six months.  We saw this happen in 2008, at the beginning of the Great Recession.

My Exciting Story:

Our Fed Chairman in 2008 was Ben Bernanke, and he was an absolute hero.  By quickly injecting $4 trillion back into the U.S. economy, Ben replaced the $4 trillion that had disappeared from our money supply when U.S. banks stopped lending.  

At one point, the commercial paper market had completely frozen up.   Commercial paper is those 30-day IOU's issued by giant corporations to pay their bills.  The Big Boys use commercial paper market, rather than borrowing from banks, because it is cheaper.


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During the darkest hour of the Great Recession, investors stopped buying commercial paper.  Suddenly General Motors, General Electric, Ford, John Deere and the other big corporations didn't have enough dough to make their payrolls.  Millions of workers would have to be laid off, with no warning and no severance pay.  Literally, the world was in danger of ending.

In stepped Big Ben, the superhero, with his hair (if he had any) and his cape blowing bravely in the wind.  "The Fed hereby guarantees all commercial paper!" he boldly announced.  Confidence was instantly restored to the commercial paper market.  The financial world was saved,  Widows and frightened kittens were rescued.

But here's the thing.  Neither Big Ben, nor the Fed, had no the legal authority to make that announcement or to guarantee that debt.  Big Ben saw what needed to be done, and he just did it.  Swish.

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Closing In On My Point:

In order to prevent the entire money supply of Europe from contracting into a black hole (the multiplier effect working in reverse), the ECB has been forced to constantly inject new Euros into the European economy.  Many of these Euros end up in the hands of old gomers like me, and we hoard our savings because we are close to retirement.

Now old gomers are not going to keep one million Euros stuffed under their mattresses, so they take their cash down down to the bank and try to deposit it.  "No, thank you," says the bank.  "We have more than enough deposits right now.  We don't have any place to invest them."

In fact, there are so many banks bidding to own German, Danish, Dutch, and Swedish treasury bonds, they have bid up the prices of the bonds so high that the yields are negative - say, a negative yield of 0.15% annually.


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Now back to our desperate old gomers.  "You simply must take my cash, Mr. Banker.  If bad guys learn that I am keeping one million Euros under my mattress, they will break in and kill me!"  So the banker says to the depositor, "Okay, we'll accept your deposits; but we are going to charge you a negative yield of 0.5% per year."  In other words, the old gomer is paying the bank one-half percent per year to hold his cash.

Then the banker invests in bonds with a negative yield of just 0.15%, and the banks profits off the 35 basis-point difference.  A basis point is 1/100th of one percent.

Finally My Point - Phew!

European investors are going to keep buying U.S. Treasuries because our yields are positive.  This will keep driving down U.S. interest rates for the foreseeable future.  Sure, we'll have some periods when interest rates will spike back upwards; but the long-term trend for interest rates is still downwards.


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We are living in an Age of Disappearing Income.  I like that term - the Age of Disappearing Income.  I didn't invent it, but it is very apt.  Pretty soon retired investors will not be able to find any safe investments with a positive yield

Why This is Great News For You and Me:

Interest rates on commercial loans have fallen so far that most commercial property owners would be crazy not to refinance right now.  If you use, you can get a ten-year commercial loan with a yield of just 4.09% to 4.84%.

The danger in waiting for even lower rates is that we are headed for a garden-variety recession.  During recessions, commercial property values fall and commercial lenders cut their loan-to-value ratios way-way back.  Right now the porridge is just right.  Climb out of that comfy, perfect bed and apply for a commercial loan using right now.


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Topics: falling interest rates, commercial loans, age of disappearing income

Commercial Loans and Why Interest Rates Are Falling Like a Rock

Posted by George Blackburne on Fri, Aug 2, 2019

Population declineThe ten largest economies include (1) the United States; (2) China; (3) Japan; (4) Germany; (5) United Kingdom; (6) India; (7) France; (8) Italy; (9) Brazil; and (10) Canada.  I was personally surprised to see that the economies of both Brazil and Canada made the top ten.  

Most of these economies are shrinking in population, and this is extremely deflationary.


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Why is a shrinking population deflationary?  In order for the money supply of a modern economy to grow, its banks need to make new loans.  In order to make new loans, banks need borrowers.  If the number of potential borrowers is shrinking, eventually the country's money supply - and hence inflation - will shrink.

Why is deflation so bad?  A little bit of deflation is not terrible.  It makes the dollars of working Americans go further.  For example, if the price of a new bike for your kid falls from $70 to $62 over two years, that is surely not a bad thing.

But there is a dark side to deflation.  For one thing, deflation makes it harder to make the loan payments on your existing debt.  For example, if your mortgage payments are fixed at $2,000 per month, and the prevailing wage rate is falling at 2% per year, you could be in for a world of hurt if you have to change jobs and accept a new one at the lower wage rate.


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The second problem is that deflation slows an economy because people postpone their purchases.  For example, why buy a new car for $50,000 this year when the price will probably fall to $46,000 next year?  Why not just postpone your purchase until next year?  If enough Americans delay their purchases of a new car, the automotive industry will soon tank and tens of thousands of workers will be laid off.

Lastly, significant deflation usually comes with a contracting economy, layoffs, falling demand, and job insecurity.  Deflation can easily become self-feeding.  

This is so important that I am going to say it again.  Deflation can easily become self-feeding.  A modern economy can quickly cycle down the drain.


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So the cycle goes as follows:  

People stop having children.  The number of potential borrowers shrinks.  As the number of potential borrowers shrinks, banks make fewer loans.  The money supply then contracts, and a wave of deflation sweeps the country.  As deflation washes over a country, it becomes harder for borrowers to raise the dough to make their loan payments.  As more borrowers start to default, the banks get frightened and stop lending; but they keep gathering in their loan payments.  Because the Multiplier Effect works in reverse at the rate of 20:1, for every $1,000 received in loan payments that is not immediately recycled back out into a new loan, a whopping $20,000 get sucked out of the country's money supply.

Then you REALLY have deflation, like we had in 2008, when at least four trillion dollars was destroyed.  Yes, money can be destroyed.  How else do you think the Fed could have injected $4 trillion into the economy without creating horrible hyperinflation?  


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The U.S. used to be the one shining star in terms of population growth.  Most of this population growth came from immigration.  The U.S. birth rate is not large enough to replace itself.  With the U.S. now preventing migration from the south, the population of the U.S. will soon start to decline.

Even China, which has lifted its One Child Policy, is shrinking.  The cost of education is high in China, so the typical Chinese family is saying, “Naw, no thanks.  One child is enough.”

Adding to this deflationary trend is the graying of each of the top ten economies.  Over a billion retired folks across the modern world are saying, “I’m done.  Take my life’s savings and give me an income.”


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The problem is that there is FAR too much savings, too little growth potential, and not enough workers to do all of the work.  The young people are saying, through their lack of loan demand, “We don’t need your stinky money, old man and old lady.  We’ve got more than enough money to do what we want.”

There is too much saving retirement chasing too few borrowers.  Therefore, the price (interest rates) must come down.

Grasp this concept:  There is now almost $11 TRILLION dollars invested in bonds, CD’s and business loans with a negative yield.   Most of this is in Europe and Japan.  Did you know that in Europe you now have to pay your bank to accept your deposits?!


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Investors in Europe and Japan are so desperate for yield that they are snapping up U.S. Treasury securities.  Did you know that the yield on the U.S. ten-year bond dropped from 2.03% yesterday to just 1.88% yesterday?!!!  The ten-year U.S. bond yield may drop below 1% within the next 18 months - maybe even within one year.

I don't want the world.  I just want to refinance every commercial building in America with a lower interest rate.  Is that too much to ask?  :-)

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Topics: falling interest rates