Commercial Loans and Fun Blog

Falling Interest Rates Are Deflationary - This Affects Commercial Loans

Posted by George Blackburne on Tue, Oct 15, 2019

Gas maskIf the world's money supply starts to contract again, like it did in 2008, commercial real estate investors and those of us in the commercial loan business are going to be painfully affected

First of all, please grasp the concept that the biggest risk facing mankind is not global warming, a nuclear war, a conventional world war (World War III with no nukes), or some new viral pandemic.

No, the biggest risk facing mankind - because it is far, far more likely - is another global deflationary depression.


Earn Up to 12% Interest


Toilet Hole


New call-to-action


Please Click After Viewing   Earn Up to 12% Interest Video


Imagine a world where huge corporations go bankrupt by the thousands, where the unemployment rate soars to 40%, and where one-hundred-million Americans wander listlessly like Zombies, trying to survive on the tiny Welfare payments provided by the government.  This is what a deflationary depression looks like.

Could it happen?  Easily.  All it would take would be for the banks to stop lending.  Remember, cash only constitutes 8% of the world's money supply.  The rest of the world's money supply is digital money, and almost all of that digital money was created by fractional banking.  More on fractional banking in a moment.

Here's how it works.  The Fed, for example (it works the same way in the EU), buys $1 billion worth of Treasury bonds from Bank A.  Suddenly Bank A is flush with cash, and it needs to put that cash to work.  It is required to keep $50 million (5%) in reserves, and then it loans out the remaining $950 million to Advanced Missile Devices, Inc.


Submit Your Loan to 750 Commercial   Lenders Using  It's Free!


Pumkin Pie


Apply For a Commercial Loan to Blackburne & Sons


By the way, I am so convinced that a missile war with China will happen in the next 3.5 years that I just moved 20% of my retirement account into the stock of six U.S. missile manufacturers - Lockheed Martin, Raytheon, Northrup Grumman, Boeing, General Dynamics, and United Technology.  As I see it, we don't actually have to go to war for these investments to pan out.  America's is now embarking on a crash missile development program.

Did you know that China now has new air-to-air missiles with almost twice the range of our our best air-to-air missiles.  They will be able to shoot down our jets long before we even get into range.  It's kind of like the English long bow versus the French crossbow.  Heavens, I pray that a shooting war doesn't develop with China.  They would probably win, even without Russian, North Korean, or Iranian help.  We are very, very far behind in missile technology.  

Okay, so Advanced Missile Devices spends the $950 million of the $1 billion loan from Bank A, and the proceeds of that loan end up in Bank B.  Bank B then makes makes a $902.5 million (95% of $950,000) loan to Blue Cloud Computing Corp.  Blue Cloud spends the proceeds, and those proceeds end up in Bank C.  Bank C then loans out 95%, and the proceeds up in Bank D; and so on.


Free Commercial Loan Placement Kit


First Helmut


Free Commercial   Loan Software


By the time it's all done, the money supply of the United States has just increased by a total of $20 billion.  That's a 20-fold increase (20:1) of the Fed's injection into the money supply of just $1 billion.

The authority of a bank to loan out money entrusted to its care is known as fractional banking.  Banks don't have to keep their deposits just sitting in their vaults, like an old-time goldsmith.  They are allowed to lend it out, as long as they keep a fraction (about 5%) in reserve.

This money-creating phenomenon is known as the Multiplier Effect, and it has been going on for hundreds of years.  The Multiplier Effect is not some capitalistic evil.  By creating new money that needs to be invested somewhere, newly created bank money has helped to finance huge technological advances, like canals, railroads, billion dollar computer chip manufacturing plants, and Elon Musk's new giga-factory for car batteries.


Free List of 3,159 Commercial Lenders  Sort By Your Own Criteria


Screen Shot 2019-08-16 at 11.15.59 AM


Nine-Hour Video Training Course  How to Broker Commercial Loans


But here's the thing.  The multiplier effect works in reverse - and this is where things get really, really scary.  If a U.S. bank takes in a loan payment of $1,000 - and it is too nervous to lend it back out - $20,000 gets sucked out of the country's money supply.  It's a factor of 20:1.  The multiplier effect works in reverse.  Grasp this important concept:  The multiplier effect works in reverse.

Not scared yet?  Banks have outstanding about $6 trillion in loans.  If we assume an average annual interest rate of 6%, this means that every year $360 billion flows back to the banks in interest payments.  

Now let's suppose the banks get scared, and they only lend back out $160 billion.  Wearing helmets and World War I gas masks (see picture above), they hunker down in their financial bunkers, hoarding the remaining $200 billion in loan payments.


How To Market For Commercial Loans  Video Course - Freshly Updated


Porch Pirates


Commercial Mortgage Brokers You're Doing It All Wrong


Get ready for it... twenty times $200 billion is $4 trillion dollars!  This is what happened in 2008.  About $4 trillion disappeared from the U.S. money supply in abut one year.  Ouch.  Not coincidentally, this is about the size of the increase in the Fed's balance sheet during the Great Recession.  By buying up trillions of dollars worth of outstanding Treasuries, the Fed was able to re-inflate the supply. 

Okay, so you now see the danger of a bank slowdown in lending - horrible deflation.


Earn HUGE Loan Servicing Fees  Become a Hard Money Lender




Get Both Video Training   Programs For Just $849.


Need a NMLS License  Or Your Renewal Hours?


Finally the Point of Today's Article:

An important research paper was just released that showed that negative interest rates reduce bank lending.  

Why?  Lower interest rates squeeze bank margins, meaning they have less money to build their capital reserves.  Capital reserves are the funds the owners of the bank chipped in to create the bank originally and the profits from prior years that the owners left in the bank in order to grow the bank.  They are the reserves of the bank to cover future losses.

Banking regulators don't allow banks to grow if their reserves don't grow proportionately.  Sometimes banks are legally required to shrink if their reserves fall too low.  

How do banks shrink?  They stop making new loans and hoard their incoming loan payments.  What happens to the money supply when banks stop making new loans?  Twenty-to-one, remember?  Company failures, mass layoffs, and a deflationary depression..  

Negative interest rates reduce bank lending?  It's as if gravity just got stronger.


Fee Agreement and Fee Collection Course. Just $199.




Banks and Credit Unions:  Get 200 Free SBA Loan Leads


Subscribe to the Commercial   Loans and Fun Blog


Topics: Negative interest rates, Deflation, commercial loans

Commercial Loans and Negative Interest Rates

Posted by George Blackburne on Thu, Jan 29, 2015

Negative_Interest_RatesSomething extraordinary happened this month.  Interest rates turned negative in Germany, Switzerland, and Japan. In fact, the headline of a recent article in The Telegraph, a British newspaper, read, “Europe's Bond Yields Fall to Their Lowest Level Since the Black Death.”

Suppose you’re the trustee of the endowment fund for a large German university or the trustee of the pension plan for a large German corporation.  Your trust documents require you to keep 15% of your corpus invested in German federal treasury bonds – known as bunds. Since the German national government is almost running a budget surplus, there are a limited number of these bunds.  Other trustees want them for their own funds and plans, so you are forced into a bidding war for them. When the bidding settles, you realize that you have actually paid a huge premium for these bunds. Your yield over the next five years is a negative 0.007% annually. Basically you’re paying the German government to store your money for 5 years.

Italian, Spanish and Portuguese yields have also seen spectacular drops over the past several weeks.  The French state can borrow for five years at an annual rate of 0.13% (much less than 1%), and Ireland can do so at 0.32%.

Free List of 3,159 Commercial Lenders  Sort By Your Own Criteria

One reason for these spectacularly low rates is that the European Central Bank (ECB) has just embarked upon its own quantitative easing campaign, in order the head off deflation and to jumpstart the slowing European economy. The ECB will soon be buying massive amounts of European government bonds.




The issue is caused by far more than just a shortage of European government bonds. There is a currency exchange rate issue as well.  The Swiss Central Bank recently removed its peg to the Euro, resulting in a stunning, one-day, 25%+ leap in value for the Swiss franc.  As a result, large Swiss banks, like UBS and Credit Suisse, can now pay a negative 0.75% on deposits, loan it out to hedge funds at 0.50% annually, and still earn a handsome 1.25% spread on their money.

Why would any investor pay a private bank 0.75% annually to store his money? It’s the exchange rate! Sure, you might lose almost 1% on the interest rate, but if the Euro falls another 3% versus the Swiss franc, you are still miles ahead when you convert your Swiss franc deposits back into Euros.


A banker buddy of mine recently shared this true story on Facebook:  My wife needs a little cheering up, so I would like to share one of our first and funniest memories. After a few months of dating, Amy was kind enough to accompany me to one of my annual poison ivy ER visits. Yep, I needed a shot. Without hesitation, I dropped my pants AND underwear. With my naked butt in the air, I heard the nurse surprisingly say, "Sir, the needle actually goes in your arm."


Is the ECB making the right decision at this point to embark on another round of quantitative easing?  While I absolutely saluted Ben Benanke’s Quantitative Easing to save the U.S. economy, I wonder if the ECB is not now confusing bad deflation and good deflation.

There are actually two kinds of deflation – bad deflation and good deflation. Bad deflation is typically accompanied by fear and panic.  It is time of money destruction, as debtors go bankrupt and banks stop lending. Often the underlying basis of that fear and panic is the excessive debt accumulation and the poor investments made with the proceeds of that debt in prior years.  Economists from the Austrian School of Economics call investments that fail to pay off malinvestments. A good example of excessive debt and malinvestments were the home purchases made by unqualified subprime borrowers in the decade leading up to 2008.

But deflation is not always bad.  Did you know that during the period between the end of the Civil War and the start of World War I the U.S. economy enjoyed slow deflation and steadily falling prices? This and other periods of slow deflation were the result of scientific discoveries, improvements in production methods, and increased competition.  For example, oil prices today are declining because of advances in oil extraction technology, such as horizontal drilling and fracking.  U.S. producers are now competing with Russia and Saudi Arabia, resulting in falling prices.

One could therefore argue that the ECB may be overreacting to a modest amount of good deflation; but there is no question but that the ECB is indeed acting.  With European investors now desperate for yield, our mortgage bonds and commercial real estate look very, very attractive.  You can therefore expect mortgage rates to stay low for a number of years, and you can expect cap rates on commercial properties to continue to fall.


“Keynes did not teach us how to perform the ‘miracle of turning a stone into bread’ but the not-at-all miraculous procedure of eating the seed corn.” – Ludwig von Mises, Austrian economist


I had a very interesting conversation with a CMBS lender this morning.  He said the conduit loan business was fabulous.

Conduits are now regularly making 75% loan-to-value loans on multifamily, office, and retail centers.  This translates to debt yield ratios of 8.0% to 8.5%.  Conduits are also making 70% loans on hospitality properties, which translates to debt yields of 10%.

These leverage levels are much higher than I had expected to hear.  No wonder he is just killing it in conduit loan originations.

If you enjoyed today's article, I sure would appreciate a few Twitter re-Tweets, Facebook Shares, Google+ atta-boys, and Linked-In Shares.  Thanks, guys.  :-)

Please be on the look-out for any bankers making commercial loans.  I'll trade you 2,000 of mine for one of yours.


Free Directory of 750+  Commercial Real Estate Lenders


The commercial mortgage business is about to get hotter than a pistol.  There is over seven years worth of pent up demand.  It would help if you were an expert in the subject.


Nine-Hour Video Training Course  How to Broker Commercial Loans


Need a commercial loan?  Tired of stingy bankers kicking sand in your face?


Apply For a Commercial Loan to Blackburne & Sons


Got a sweet-sweet commercial loan that is far too good for Blackburne & Sons?


Submit Your Loan to 750 Commercial   Lenders Using  It's Free!


I have gotten a lot of compliments on my new marketing course for commercial mortgage brokers.


Click me


Don't forget that you can now place business loans, not secured by real estate, with C-Loans.  The reason why you might want to dabble in business financing is because the deals close in just 10 days.


Business Loans Not Secured By   Real Estate - Unsecured or Secured 


I have told you for years that the real money in commercial real estate finance is in loan servicing.  Heck, my wife and I serviced our first 50 hard money loans by hand using payment books.  It wasn't that hard.  We now earn a 2% loan servicing fee on about $40 million in hard money loans, so that's a cool $66,000 per month that comes in the door, whether I close a new hard money loan or not.  You can get my course on finding private investors for just $549 or get both my nine-hour course on commercial mortgage brokerage, plus my investor course, for just $849.


Become a Hard Money Lender.  Approve Your Own Deals!


Topics: Negative interest rates