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Old 02-14-2016, 08:27 PM   #101
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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.

It's not so much a failure as a simple demonstration that monetary policy is limited in capability compared to fiscal policy, and when fiscal policy happens to be inducing an economic contraction as a side effect (see 'austerity'), an expansionary monetary policy won't have a significant effect.


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Old 02-14-2016, 09:18 PM   #102
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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.
Wow, talk about confusing correlation with causation.

It's fairly common knowledge that reduced economic activity results in lower interest rates. That Japan hasn't been able to get traction with it's monetary policy doesn't prove otherwise.

I'd also note that many of the world's central banks have tried raising interest rates (the ECB in 2011, Sweden in 2011, the Fed in 2016) only to have had to reverse course as their economies soured.

But I wanted to test your theory that lower rates cause deflation because the costs are passed through to customers in lower prices. So to see how big an impact lower interest rates have on business costs and prices I went back to 2007 to look at the income statement of a large BBB rated utility - a big, capital intensive, company that uses more debt financing than is typical. In other words, I choose a company about as sympathetic to your argument as I possibly could.

In 2007 Duke Energy Holdings' interest expense represented just 5% of revenue. Even if Duke were able to cut it's interest costs in half (unlikely) and pass 100% of those savings on to customers ( ), you're talking about price cuts on the order of 10s of basis points per year. For companies that use less debt, which is most of them, the impact would be even smaller.

Sorry, that's just not what's causing low inflation around the globe.
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Old 02-15-2016, 07:34 AM   #103
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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.
Sure, but the point of the comparison isn't to equate two different economic environments. It's to counter the widespread notion that rates at or below zero are somehow artificial.
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Old 02-15-2016, 08:17 AM   #104
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Mapped: Why negative interest rates herald new danger for the world - Telegraph

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Why negative interest rates herald new danger for the world
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Old 02-15-2016, 08:36 AM   #105
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Wow, talk about confusing correlation with causation.

It's fairly common knowledge that reduced economic activity results in lower interest rates. That Japan hasn't been able to get traction with it's monetary policy doesn't prove otherwise.

I'd also note that many of the world's central banks have tried raising interest rates (the ECB in 2011, Sweden in 2011, the Fed in 2016) only to have had to reverse course as their economies soured.

But I wanted to test your theory that lower rates cause deflation because the costs are passed through to customers in lower prices. So to see how big an impact lower interest rates have on business costs and prices I went back to 2007 to look at the income statement of a large BBB rated utility - a big, capital intensive, company that uses more debt financing than is typical. In other words, I choose a company about as sympathetic to your argument as I possibly could.

In 2007 Duke Energy Holdings' interest expense represented just 5% of revenue. Even if Duke were able to cut it's interest costs in half (unlikely) and pass 100% of those savings on to customers ( ), you're talking about price cuts on the order of 10s of basis points per year. For companies that use less debt, which is most of them, the impact would be even smaller.

Sorry, that's just not what's causing low inflation around the globe.
Interesting that you chose a company in it's first year of existence that just recently announced it is purchasing Piedmont Natural Gas by borrowing 4 Billion dollars.

Presently Duke has 42.6 billion of debt, going up soon to 46 billion or 2X annual revenues, each percent addition/decrease of interest rate expense (460 million dollars) is equal to 2 percent of revenues and 15 percent of net profit. It earns it's long term interest by 3.6 times, or in other words 27 percent of profits are used to pay interest. How do you think business works by having interest costs at 20-30 percent of sales? If you believe that eliminating interest rate debt for Duke Energy has no real impact on the return on net assets or even that interest rates can fall in 1/2 allowing a doubling of purchasing of capital also has no cost reduction aspects to it and instead allow Duke to merely grow and raise prices faster than inflation or that none of this matters, what will happen to Duke if interest rates were to double on them? (a 4 % increase)

When looking at the amount of capital projects to utilize whether for growth or cost reduction, the first hurdle is cost of capital. Projects that are thrown out at high interest rates become very feasible at lower interest rates if they increase profits or cut costs. Cost cutting projects, which have lower rates of return become much more feasible as interest rates decline and the substitution of capital for more efficient processes becomes affordable. Meanwhile as interest rates fall consumers actually save more and await falling prices deferring purchases.

I do not subscribe that the world works in x+y =z mode, there are many moves that avail themselves and as interest rates fall, cost control becomes paramount, individuals actually spend less and save more. We shall see, if we are lucky negative interest rates will never become a reality in the United States.
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Old 02-15-2016, 12:23 PM   #106
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For your info on pages 61,63, 69 of the 2014 10K financial statement (over a year old),

Long Term Debt 36.6 Billion

Credit Facility Debt utilized 2.1 Billion
Anticipated Borrowing 2015 3.1 Billion
-----------
Total Debt 41.8 Billion

Personally, I think I have enough of a background to understand financial statements. I invest in companies individually and have done well. I managed somehow to avoid the bank debacle as well as getting out of oil companies in 2014, in which I stated the oil industry was the first casualty of too low interest rates by Central Banks and lead to overproduction and low costs of production for new wells. I warned on the debt of Kinder Morgan and how they were likely to cut dividend when told it was impossible, I advised strongly that BHP and COP were going to be a big casualty of upcoming oil issues once their hedges expired, they have both fallen over 50% since. I warned that MLP's were going to get smashed at the end of the oil even though most felt they were only toll collecters,

You can look up and see what I have advised to buy and what I have cautioned against. I think my record shows I am very conservative in my investing nature yet still quite successful and that I do understand financial statements quite well with over 20 years working for S&P500 accounting and preparing of 10K's and 8K's. I post what I think I know in an attempt to increase knowledge available here, however this thread is very disheartening in the twisting of what I present. The Early Retirement Forum has been fun but I think the value of what I add to this forum has come to an end. Time will tell on the negative rates.
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Old 02-24-2016, 07:02 PM   #107
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Just to revive this thread. There are proposals that are more than just negative interest rates. Pretty much "free money" proposals. This is from the UK but it has been discussed in the US as well. I wonder if this idea gets merged with the new trendy idea of per diems for poverty. Basically, give people a small stipend for basic living expenses. I think things are going wacky...

Get ready to be showered by helicopter money
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Old 02-24-2016, 08:46 PM   #108
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Just to revive this thread. There are proposals that are more than just negative interest rates. Pretty much "free money" proposals. This is from the UK but it has been discussed in the US as well. I wonder if this idea gets merged with the new trendy idea of per diems for poverty. Basically, give people a small stipend for basic living expenses. I think things are going wacky...

Get ready to be showered by helicopter money
Yeah, I don't think actual central bankers are planning on doing any of the things listed in this article any time soon . . . or maybe even ever. It's not surprising that the author doesn't like to any comments by central bankers actually supporting any of these ideas. The only link goes to another Op Ed piece about comments made by Jeremy Corbyn, the Labor Leader in the UK Parliament who is, not incidentally, out of power and not in charge of monetary policy in any case.

And the "basic income" movement isn't about "helicopter money." It's about replacing the myriad of overlapping and complicated welfare programs with a simple, single, cash payment. It has absolutely nothing to do with monetary policy.
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Old 02-24-2016, 10:18 PM   #109
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And the "basic income" movement isn't about "helicopter money." It's about replacing the myriad of overlapping and complicated welfare programs with a simple, single, cash payment. It has absolutely nothing to do with monetary policy.
I understand they aren't linked YET. But if you wanted a mechanism to pump cash into an economy I think you would have to try mighty hard to beat this one.
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Old 02-25-2016, 07:16 AM   #110
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I understand they aren't linked YET. But if you wanted a mechanism to pump cash into an economy I think you would have to try mighty hard to beat this one.
I understand what you're saying. I'm just having a hard to seeing the economic difference between the Fed financing a welfare program and financing any other government program. Yes, a basic income scheme transfers money directly to individuals, but it does that regardless of whether the Fed funds it or not.
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