There is nothing unnatural about negative real returns on stores of value (even though negative nominal rates can create issues). Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.

Government bonds are seen as ultra-safe, comparable to cash, and while 2.2% is not great it's better than 0%.

Maybe they think inflation will stay low. My sense is that at the moment there's a lot of money sloshing around chasing not-so-great returns, so returns on everything are low - capital is subject to supply and demand like anything else.

In essence, if you're got a pessimistic outlook, would you rather loose $10, or $100?

> Government bonds are seen as ultra-safe, comparable to cash, and while 2.2% is not great it's better than 0%.

And much better than anything < 0%.

swiss and some german bonds have been known to sell for negative yield because losing a small gauranteed amount is better than losing a lot

How would you lose value in cash in a way that you wouldn't with a bond?

When you're talking about billions:

If you hold it physically, you have to store it and secure it, which costs money.

If you deposit it in a commercial bank, it'll be less safe than German bonds.

Wait, what? Isn't most money electronic anyway? How does it cost (O(n)) money to keep an entry in a digital record?

> keep an entry in a digital record

A record where, though?

Bank "clearing" means that ultimately a bank is keeping its money either with other banks or with the central bank. They're records, but not necessarily interest-bearing, and keeping it with other banks is not risk-free.

How about keeping it with the central bank?

ECB deposit rates are also negative.

https://www.ecb.europa.eu/explainers/tell-me/html/what-is-th...

I'm not an economist or finance expert so take the following with a grain of salt, but this is how I understand it...

When you talk about "money being electronic" you're basically talking about bonds. When people (or companies, foreign governments, etc.) want to hold large quantities of USD they don't really hold USD, they hold short-term US government bonds.

The only truly "real USD" is physical cash, or an account balance at the Federal Reserve (which is available only to banks).

So people don't own bonds just because of the coupon, it's also really the only convenient way to own (something mostly equivalent to) currency -- other than keeping it in a private bank, which is much more likely to fail than the government.

The odds of a commercial bank going bust is higher then Germany going bust. Commercial banks only need to keep a few % of the money deposited at them on their books (its called fractional reserve banking), the other 95% or so can be invested or lent out elsewhere. There are regulations that restrict the risk, require hedging, insurance, etc but those don't help much if the insurer or a significant amount of the borrowers go bust as well due to systemic problems.

Banks are allowed to loan out the money, but they don't have to, and could take business from the negative-yielding government bonds by just leaving the money alone, in their electronic reserve account.

Then where is the bank supposed to keep their money? In another commercial bank? In cash? This creates an infinite regression problem...

They could keep it in the Fed, but the Fed charges money for the privilege (and I assume so does the ECB and other equivalents)

Banks hold unloaned reserves already.

Hold them where? In cash?

I imagine I could hold cash safely for a fee less than 0.75%

FWIW we're used to thinking of bank deposits as risk free- but realize, FDIC insurance is capped at $250k! Bank deposits of large sums, then, carries some risk, which can be translated to cost/depreciation.

(I realize we're talking about German banks, and FDIC is a US institution)

Because it may make more sense to free up the capital to put it in a better performing allocation. You'd sell the bond for a loss in order to get the cash to invest in something else.

Banks (and other financial institutions). They more or less have to in order to make the books add up; or, in the clearing process, leave their money with another bank, most likely the central bank, which will pay little or no interest.

If you try to leave your money with the Swiss Central Bank they will charge you 0.75%. Buying bonds is definitely preferable to that. https://www.snb.ch/en/ifor/finmkt/operat/id/finmkt_nz

Canada's consumer price index hasn't exceeded 4% since 1990 and has averaged 1.74% since then. So investors who are buying those bonds could reasonably see things differently than you do.

I don't get how that could possibly be true, given that the CAD has depreciated something like 30% in the past few years vs USD?

The USD isn't some gold standard of truth. Like any currency it also appreciates and depreciates over time. You can't just look at the exchange rate between two currencies and make any meaningfully claims. Definitely, you can't make any claims about Canadian inflation by just looking at the exchange rate. When we went up to 1.10 it didn't cause deflation and when we went down to the low .70s we didn't see inflation.

I don't mean it as some expression of hegemony or to demean Canada, it's just that USD is one of the major global reserve currencies, and a large percentage of international trade is conducted in USD. If it's your opinion that it has depreciated less against the other currencies that are commonly used in trade, I'm happy to hear about that. Given a depreciation against the trade currencies, I'd expect a large number of imports to get more expensive nominally, including many necessities like clothing. Maybe this isn't the case, and if it's not, I'd be very interested to hear why.

Not everything bought in Canada is traded internationally and denominated in USD.

Sure, but some significant set of goods must come from abroad. The vast majority of clothing and electronics, for example.

Also there are regulations that say that banks have to hold x% of there reserves in govt. issued bonds for those reserves to count as Tier 1 capital.

If you assume markets price the bonds efficiently, then the price of the bond should contain what the market expects inflation will be over the duration of the bond at the time of the sale.

Interest paying bond is very attractive in the face of deflation.

As a hedge against a market collapse?

Like gold and silver?

Those aren't as valuable in a crisis as you might think. Pure gold and junk gold are largely interchangeable. If you want to be ready for some societal meltdown, load up on junk gold. A small gold ring is easier to barter with than a gold brick.

You can buy much smaller denominations too. There's something called the combibar which is a bar with a bunch of scored 1 gram pieces that you can snap off, like a chocolate bar.

That said, I agree that gold is probably not that useful in a collapse.

I bet drugs, canned food, and weapons/ammo are an even better thing to stock up on if you want to be ready for a TRUE meltdown, where civilization descends into total anarchy/lawlessness.

But there is a pretty wide spectrum between that and what we have now. Gold is a hedge against something like what happened to Yugoslavia, even if it's not a good hedge against the apocalypse.

The closest thing to the "apocalypse" you're likely to see is what happened in Argentina and what's happening in Venezuela.

Having a "prepper bunker" full of expensive supplies is not an asset, it just makes you a target. Having a small cache of things you can easily hide, secure, and trade is significantly better. If you have to bail in your city because things get too ugly you don't need a trailer truck to move.

Any normal person who needs more than a bug-out bag and a passport to survive is doing it wrong.

More like TP, antiobiotics, guns and ammunition.

If TP made it to the top of your list of useful things in a societal meltdown, you need to spend a bit more time roughing it.

You joke, but I'd be willing to bet that TP Would retain value in much the way it can in some prisons.,. Ditto with soap. If you don't believe me, see how desperate people get for it when they don't have it.

I assumed at first that he meant target practice...

Looking at RBS spreads here: http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-...

…looks like the market expects 1.57% inflation over the next 10 years, so these bonds are expected to beat inflation handily.

Because you need somewhere to park $xxB. What are your other options?

Build nation-scale infrastructure? Surely a major bank would benefit greatly, if indirectly, from any improvements in the national economy.

Right, George Parker.

Who is George Parker?

This is easy to answer. Because bonds(while "stable" over the long term), are volatile in the short-term(intraday).

The answer to your question "why would any entity buy bonds..." is: to sell them moments later at a profit.