The world turned upside down

Denmark has negative interest rates of -0.20%.  The Swiss 2 year bonds are now at -0.454%.  France is selling 3-month treasury notes at a rate of -0.005%.  Germany just sold 2 year bonds at -0.06%.  Belgium sold some 3-month notes at -0.016%.  The Netherlands and Finland have also issued bonds at negative rates.

Spain, Italy and Greece for some reason don't have this problem.

How is this possible?  Wouldn't it be smarter to just bury the cash in your backyard?  No.  Maybe if you were just talking about a few thousand dollars, but you can't do that with hundred of millions, which exist only in electronic form.  And banks have to invest the money.  The only alternative is to leave it on deposit with the Fed, which pays 0.25% interest, although that number will probably drop to zero soon.

What about buying gold?  Well, gold can go down as well as up.  Gold was almost $1900 about 6 months ago and now it is about $1600.  Although it seems hard to believe that gold will drop substantially, it is possible for gold to drop some more.  And banks are required to invest at a "risk-free" rate.

So what is the effect?  Deflation, obviously.  Downward pressure on all prices, including wages and real estate.  Moore's law contributes to this effect as computers keep getting cheaper and more powerful.  Since wages are "sticky" (most people won't agree to a cut in salary), it becomes necessary to lay more people off.  With deflation, your dollar is worth more tomorrow, so there is an incentive to save even if you don't get interest.  This savings also decreases the velocity of money.

What is the solution?  Hello, deflation is the solution, you should be asking what is the problem.  Deflation won't last forever, but it took Japan 16 years to get out of its deflationary trap.  Don't fight it.  The more the deflation ("ying"), the quicker we will get to the bottom and then the real recovery ("yang") can start.

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Update:  A corollary to this is that in the upside-down world, banks are unnecessary, and actually become a drag on society.   "in a negative carry universe — one in which goods, collateral and assets are expected to permanently outnumber money in the future — bank profits can only be achieved through pariah practices rather than lending. Banks are ironically encouraged to destroy capacity, disincentivse investment, borrow money from the economy rather than lend it, and hoard wealth. All phenomenons we are currently seeing. All phenomenons which are economically destructive. One of the best illustrations of this topsy turvy world, meanwhile, is that corporate cash piles are rising,  with corporates not just weaning themselves off banks, but lending directly to the banking industry itself."
--http://ftalphaville.ft.com/blog/2012/07/05/1071671/pariah-profits-in-an-age-of-negative-carry/

Please allow them to fail if they can't generate enough profits to survive.  We would all be better off.  But ... Central Bankers will do whatever it takes to support the banking lobby.  They are not looking out for the best interests of the country as a whole.