Get ready for negative interest

[Nemo2]

Quote:

Originally Posted by VFK57 And now, after 7 years of "recovery", we're at what is typically the tail end of a normal economic expansion. What happens if the U.S. does tip into a "normal" recession in light of where we are at the peak of this expansion? Seven years of recovery was was fueledby the Feds "monetary expansion" other words money printing ($3.5 trill). Without those money there would not be any sign of any recovery. Current interest rate is still almost at 0% for almost 8 years. There is no other tool for the Feds left but inflation. Most likely negative rates or/and they may resume money printing.

+1

[Gone4Good]

Quote:

Originally Posted by MichaelB Not really. Negative rates are more about the banking system. As the ECB pushes down it's own rates, the strong currency countries such as Sweden and Switzerland have to follow suit or their currencies appreciate.

Sure, but "following the ECB" doesn't fully explain why Sweden's recently lowered bank rate of (0.5%), or even it's previous rate of (0.35%), is lower than the ECB's (0.3%).

If anything it seems as if Sweden is leading and Frankfurt is following. It could be they're just being more aggressive because they don't have to answer to Germany or it could be that they feel they have more room to maneuver. Probably a bit of both.

[MichaelB]

With regard to monetary policy, no one has any room to maneuver in Europe - or anywhere else for that matter. Global productive capacity has risen faster than global demand, now there is excess capacity, which leads to an excess of capital, which no one wants. There is no easy solution, and the world's central bankers could use a little help from other policy makers.

[Gone4Good]

Quote:

Originally Posted by MichaelB With regard to monetary policy, no one has any room to maneuver in Europe - or anywhere else for that matter. Global productive capacity has risen faster than global demand, now there is excess capacity, which leads to an excess of capital, which no one wants. There is no easy solution, and the world's central bankers could use a little help from other policy makers.

On that we all agree.

[Gone4Good]

Seeing as how we're already geeking out on obscure monetary policy, I'll lead us deeper into the weeds with this article about NGDP targeting. The author positions it as an alternative to negative interest rates. It's not. Negative rates are a tool. NGDP targeting is a strategy. And I suspect negative rates may still be a useful tool in implementing an NGDP, or level targeting, strategy during periods of low-flation.

But here's what it is and why it might be better than what the Fed is doing now.

Quote:

Under a level targeting regime, the Fed would compensate for missing its target in one year by overshooting the following year. For example, in 2015, the Fed's preferred measure of inflation came in at 1.4 percent — 0.6 percent below the Fed's 2 percent target. Under level targeting, the Fed would aim to achieve 2.6 percent inflation in 2016, delivering 2 percent inflation on average in 2015 to 2016. That would not only support faster economic growth in 2016, it would also give the markets more confidence in the Fed's forecasts for 2017, 2018, and beyond. And while inflation-based level targeting would work better than what we're doing now, Sumner argues that the best strategy would be to target the total amount of spending in the economy. This approach, known as nominal GDP targeting, has been endorsed by prominent economists such as Christina Romer.

[cyber888]

Yellen said that the Feds studied negative interest rates a few years back, and the outcome is not beneficial. I don't think we will go into negative rates. We might go back to 0% but not negative.

[Running_Man]

Negative rates have never been successfully utilized in any economy, they have long been advocated by economists even going back to the start of the 20th century where it was thought that currency could become outdated and need to switch it with government at a lower value, in the 90's there was thought of putting digital code in currency that would take a percentage out each year in value when taken to a back to "deposited".

Negative rates are nothing but a tax on currency, the beneficiary is the government, whose debt in creating currency is reduced. You can fund limitless government deficits at zero or below interest rates, so when Central banks around the world push down rates below zero the beneficiary is not the citizens but governments.


Sweden has 3.1 Billion US dollar equivalents in M3 currency, so the cost of negative rates there even at 1 percent is only 3 million dollars per year. They need to keep their currency low in order to not import deflation. Sweden is not leading anyone, they are not big enough to do so.

The United States of course stopped tracking M3 as "too expensive" back in 2006 and instead release "MZM" which is total money with zero maturity and of that the US has 13.7 trillion dollars. If the US goes to negative rates, the costs of getting out of negative rates becomes ever increasing with government deficit spending that is not reflecting in any increased costs. Indeed the US defict increase since 2008 of 8 trillion dollars has actually been reduced interest rate expense in the US. This is why zero interest rates are so hard to escape.

[Senator]

When you have deflation, people and companies have little desire to spend. In order to increase the demand for spending, negative rates make sense.

Decreasing wages and deflation go hand in hand. You cannot cut wages in half, and double the amount of people, and have the same effect on GDP. Forcing banks to lend, with negative rates, only works if people and companies have the money to pay the loans back.

Negative rates are a symptom of the underlying issue, Global Wage Equalization, not the actual issue. Get deflation under control, and you have negative rates under control. It may be a Central Bank initiative, but if you look at the 10 year yields in Japan or Germany, these rates are set by the market, not the banks. It's not pretty.

I am sure the Fed will raise rates again this year, not lower them. Banks still need higher profits.

[Gone4Good]

Quote:

Originally Posted by Running_Man Negative rates are nothing but a tax on currency, the beneficiary is the government, whose debt in creating currency is reduced. You can fund limitless government deficits at zero or below interest rates, so when Central banks around the world push down rates below zero the beneficiary is not the citizens but governments.

Pst, it's not some dark conspiracy. The simpler answer is the better one that . . .

(1%) interest - 0% inflation = 1% interest - 2% inflation


Besides, if the motivation for 0% rates since 2009 was really to "fund unlimited deficits" where's the rampant inflation that's been promised by so many for so long?

Oh, I forgot. Inflation statistics (and I guess gasoline prices now too) are part of the conspiracy.

[MichaelB]

Quote:

Originally Posted by Gone4Good (1%) interest - 0% inflation = 1% interest - 2% inflation

The math may work out the same, but I think the first, negative nominal rates, describes an economic scenario that is pretty close to "worst case" and on the edge of a deflationary spiral that is quite difficult to reverse.

[Gone4Good]

Quote:

Originally Posted by MichaelB The math may work out the same, but I think the first, negative nominal rates, describes an economic scenario that is pretty close to "worst case" and on the edge of a deflationary spiral that is quite difficult to reverse.

My reading comprehension skills are failing me this morning so I'm not sure if you're saying that my hypothetical comparison is an unlikely "worse case" or saying that we're pretty close to that "worst case" now.

I'd argue it's the latter based on where we are now . . .

0.25% to 0.5% Fed Funds Rate - 0.7% LTM CPI = (0.45%) to (0.2%) real

And that's in the U.S. where things are going well by comparison to the rest of the world.

[MichaelB]

Quote:

Originally Posted by Gone4Good My reading comprehension skills are failing me this morning so I'm not sure if you're saying that my hypothetical comparison is an unlikely "worse case" or saying that we're pretty close to that "worst case" now.

My point was, your example equated the same negative real interest rate in two scenarios that are not comparable. In effect, one does not equal the other, as you suggest, because economics is behavioral.

[Running_Man]

Quote:

Originally Posted by Gone4Good Pst, it's not some dark conspiracy. The simpler answer is the better one that . . . (1%) interest - 0% inflation = 1% interest - 2% inflation Besides, if the motivation for 0% rates since 2009 was really to "fund unlimited deficits" where's the rampant inflation that's been promised by so many for so long? Oh, I forgot. Inflation statistics (and I guess gasoline prices now too) are part of the conspiracy.

I did not state the the motivation for 0% rates was to fund unlimited government deficits, I stated the BENEFICIARY of the 0% rates was the government. The natural consequence of that is the 8 trillion dollars added to deficit spending has resulting in a net decline in government interest over from 8 years ago, and those deficits make it difficult to raise rates. Government interest in 2008 was 451 billion on 8 trillion in debt.
https://www.treasurydirect.gov/govt/...ir_expense.htm

On 16 trillion in 2015 there is now 405 billion a benefit of 51 billion per year despite doubling of debt. I find that is a benefit for the government. Not some deep conspiracy, a mathematical fact. I have been stating since 2007 on this website, that deflation is the most probable outcome for the economy. Lower interest rates, as proved in Japan, do not solve this problem they intensify and put the problem into corporate long term business practices.

x-y =1 where x is the interest rate and y is the inflation rate, is not the controlling equation for the economy of the United States where any value for X&Y that solves the equation has the same effect on the US economy.

I get that you feel that all interest rates are the same, only net real margin remains as if there is a inflation level that controls interest rates to that level. And that by controlling that level you control economic activity to be balanced.

Prior debt and decisions made at prior interest levels have real consequences and the changing of rates have impacts on how different entities work. MZM has increased steadily 30 percent over the last 5 years (3 trillion dollars), so there is an increase in money that is ongoing in the United States.

If we get in the United States to 2 percent negative interest rates on long term debt, how the valuation of the stock market could possibly be justified in a long term declining value economy? Or perhaps it is your belief that a "market assessment" that a long term decline of 3 percent per year in the value of goods produced should require an ever higher level of market valuation? The history of stock market valuations in deflationary economies has not been good. The odds that this would encourage large scale investment in anything other than cost cutting measures is low, because the benefit is not in growing but rather hoping to maintain the same with costs dropping faster than government inflation figures and investment will go into those areas, as they have in the commodity arena.

[explanade]

Mohammed El Arian is pushing a new book, going around doing some interviews.

Says we have reached the limits of what central banks can do. He's talking globally.

He talks about investment to spur growth but won't say for instance the congress needs to fund this or that program. Studiously avoids saying anything specific about the election or candidates.

Is his book just saying the legislators need to do more fiscally, because the central banks are out of bullets or does he have specific policy prescriptions?

Hmm, even politicians will publicly tie themselves to certain policy proposals.

[Gone4Good]

Quote:

Originally Posted by Running_Man I have been stating since 2007 on this website, that deflation is the most probable outcome for the economy. Lower interest rates, as proved in Japan, do not solve this problem they intensify and put the problem into corporate long term business practices.

By what mechanism does lower interest rates intensify deflation?

[Running_Man]

Japan's Economy Contracted Again in Final Quarter of 2015 - Bloomberg Business

Lower interest rates lower expectations of business and consumers while at the same time lowering costs for business, resulting in lower prices and lower production see this report out just now about economic activity contracting much further than expected in Japan despite 3 years of all out lowering of rates and QE in Japan, otherwise known as Abenomics, this failure is being met for calls of increased Abenomics.

Japan's Economy Contracted Again in Final Quarter of 2015 - Bloomberg Business

[jim584672]

The worst thing about NIRP is that the central banks will have no more ammunition left beyond ZIRP+QE+NIRP. It is an admission of failure of the policies of the central banks. Once the confidence in the central banks evaporates kiss the markets good bye.

[papadad111]

Forgive my ignorance but how is QE - quantitative easing not the same as negative interest rates?

The result is the same. The mechanism may be ever so slightly different.

[Senator]

Quote:

Originally Posted by jim584672 The worst thing about NIRP is that the central banks will have no more ammunition left beyond ZIRP+QE+NIRP. It is an admission of failure of the policies of the central banks. Once the confidence in the central banks evaporates kiss the markets good bye.

There is always a larger negative amount to go to. Or quantitative easing. Or selling our own currency. Or even talking down the currency.

[Running_Man]

Quote:

Originally Posted by papadad111 Forgive my ignorance but how is QE - quantitative easing not the same as negative interest rates? The result is the same. The mechanism may be ever so slightly different.

QE throughout the world by Central Banks is how they keep long rates from jumping, Central Banks have purchased a total of 12 trillion dollars of debt worldwide, as a result there is 8.3 trillion presently of newly issued debt yielding zero or less worldwide(this means for book purposes central bank "assets" have gained in value). By purchasing debt the bank maintains low rates through two mechanisms 1. the lower amount of bonds available 2. The greed nature of bond traders is to trade "with" the FEDS of the world and Central Banks always announce long before a QE program is to begin in order to allow this demand to take hold. This is more on the longer end

On the shorter end Central banks can command what the interest rate will be by forcing banks to accept their targeted rates