The BIS explained Repo difficulties, by saying that the banks just had too many treasuries and had no desire to spend cash to buy more. This caused the repo spike in rates. So, what are the banks afraid of? It is simple. They don't want to be stuck with too many bonds when they all go negative.

It turns out that the BIS has revealed that the four large US banks involved in Repo have 50 percent of the treasuries in the banking system. They apparently did not want more and decided to keep cash instead.

This is what the BIS did not say. Clearly, the banks see that there is a speculative aspect of investing in treasuries when it is clear that those treasuries are headed to negative yields.  As Penserra says:

You fork over $100 to buy a 10-year Treasury bond, an investment instrument backed by the full faith and credit of the United States of America, and a decade later, when the bond matures, you get back $94. 

As long as rates are positive, the banks will get back par. As for a real world example, Penserra goes on to show this negative rate regime is good for governments but horrible for banks:

Moreover, on August 20, Germany sold 834 million euros of 30-year debt that will require the government to pay back 795 million euros when the bonds mature in 2050. 

The same could happen with 10-year bonds, as the government could sell the debt and pay less back in 10 years than they received for the sale. This is nuts of course. But Donald Trump is drooling for negative yields. Trump tweeted in August, 2019 that he admires Germany's negative regime.

So Germany is paying Zero interest and is actually being paid to borrow money, while the U.S., a far stronger and more important credit, is paying interest and just stopped (I hope!) Quantitative Tightening. Strongest Dollar in History, very tough on exports. No Inflation!.....

So, this becomes a stealth tax on the big banks. Maybe they deserve it. But even if they do, the cost will be severe. Are the four big banks powerful enough to strike any time they please, forcing snapbacks in rates as happened in September, 2019? Obviously, Trump woke up a sleeping giant with the banks. He is still calling for lower rates from the Fed, which actually has a responsibility to keep the banks solvent,squeezing the Fed.

Does all this repo turmoil matter to the real economy? The Fed says no. But in reality it could do real damage to the economy. As central banks buy more and more bonds, (think Japan), eventually the market may slow. The Penserra article shows that these negative yielding bonds are being purchased by central banks, pension funds and commercial banks. There is still demand for Euro bonds even if there isn't much for Japanese bonds.

Threats to the financial system of negative bonds will show up as no growth in the real economy, total destruction of savings, and the inability of banks to generate profits. If banks can't profit they can't lend. It could bring down the entire financial system and hurt the economy directly.

Failed Negative Rate Experiment

I remember economists calling for negative rates as a means for growing economies. That little experiment has failed. Turns out people are buying negative bonds to speculate on the price, hoping that will outgrow the failings of yield. But it strikes fear in investors because really, how low can negative rates go? How high can bond prices go under a negative rate regime? When will the speculators leave the market? 

Will a negative rate environment strike fear in China, Japan and other major holders of US treasuries?

And perhaps the most disturbing trend is in the making. In the old days, bank success mirrored success in the economy. As we see from some zombie banks, saving these banks becomes divorced from the saving success of the economy. Could we see a scenario where the Fed pays banks more and more interest on excess reserves to make up for negative yields on all the bonds they hold in the system.

Well, if Japan is an example, no. In Japan, banks are forced to pay interest to the BOJ as the BOJ wants banks to lend and not park money at the central bank. So, banks hold negative rate bonds there, and can't park money at the central bank. While negative rates push the currency down, they also destroy bank earnings. If banks can't make money will they lend?

Turns out the BOJ does not charge too much for Japanese banks to park their money at the central bank. It still erodes profits. In a recession could rates go farther negative? Rates should rise if there is economic growth. But they appear to be headed lower the world over.

Why Don't Negative Rates Work as Stimulus?

So, why don't negative rates work as an economic stimulus? It has been said that upside economic growth is a surprise. It is the result of entrepreneurs running with ideas that bring technological innovations. Turns out no bank would trust those folks with negative rate loans anyway.

Look what happened with the unicorns, companies that have an idea but don't make money. They may make money someday, but for investors it is hard to figure out if they will or won't ever be profitable. Negative rates will make that process worse. Unicorns may never have a chance. Also note that Softbank is an example of a Japanese bank desperate for growth, with none coming from Japan. Softbank has perhaps the softest, pun intended, unicorn, WeWork.

Banks also are not necessarily risk-taking. Low and below interest rates they offer show they are not keen on making money through the next genius invention anyway. While rates were not negative back in the day, what bank would have taken a risk on Las Vegas? It took the mob to build early Las Vegas because no bank would take a chance. Looking back it seems like they were as dumb as bricks. But that is how banks operate. Negative rates will only make this worse.

Politicians have given up on growth and now want negative rates to fund government. That seems like trouble brewing.

US Corporate Bonds Victims of Speculation?

Corporate Bonds are risky these days as well. Speculators are piling in and Investopedia says it like it is:

U.S. corporate bonds represent about 12% of outstanding investment-grade debtworldwide and account for nearly 33% of yield income, according to Bank of America Merrill Lynch, as reported by The Wall Street Journal.

When speculators pile out of corporate bonds, it could hurt investors badly. 

Some may go to China. As Kenneth Rapoza of Forbes says:

...time to diversify out of U.S. bonds and CDs and put that retirement money somewhere far, far away.
It can’t go to Germany. That’s a negative yield debt. It can’t go to Japan. That’s money under the mattress. So it has to go to the emerging markets. Like China. Yes, China.
“We own China dollar bonds,” says James Barrineau, co-head of emerging market debt at Schroders in New York. “You get single-A-rated debt at generous spreads versus the rest of single A debt out there,” he says of the price differentials between China’s investment grade bonds, Treasurys and other emerging market bonds of similar rating.

Bonds have better positive yields where nations are growing. Of course, if Trump decides he ever wants to divorce China, assuming he wins the next election and institutes the Bannon plan, then this investment may be forbidden one day. Here is a list of banks involved in the newest issue. Dollar bonds can default. Tewoo was not bailed out by the Chinese government.  

The Fed Takes Down the Economy

The Fed took down the financial system twice, in the Great Depression and in the Great Recession. In both instances, wages were pruned in a massive way. People making over $20 dollars per hour in the Great Recession were cut to minimum wage. That was in just one company. Speculators were chased away in all markets.

It would be nice if we could have an ordinary recession, where bubbles could be paired back. Yes, wage growth would slow, but it would bounce back in short order.

One wonders if there can even be that sort of recession again.

See also: The Derivatives Monster Creates a Bull from Capital, Not Labor