Get ready for negative interest

[Gone4Good]

From a Bloomberg News article:

JPMorgan estimates that if the ECB just focused on reserves equivalent to 2 percent of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5 percent. . . .

The Bank of Japan’s lower bound on a similar basis may be minus 3.45 percent, while Sweden’s is likely minus 3.27 percent, the economists said. Should they also go negative, the Fed could cut to minus 1.3 percent and the Bank of England to minus 2.69 percent

I'm a fan of the idea as it seems obvious that a 0% interest rate floor functions no differently than any other arbitrary price support. We all know that bad things happen when you mandate a minimum price in other commodity markets (resulting in excess supply of the affected commodity, insufficient demand, and a poorly functioning market).

This seems like only a partial fix. But it's a step in the right direction.

 

[Refresher]

If so a good buy would be EE bonds. Will double in 20 years.

 

[VFK57]

Watch the Gold (rather physical Gold) price. If negative rates or another QE is implemented, Gold would shoot much higher. The sad thing is that we are slowly but surely slide into recession and stock market reflects it.

 

[GrayHare]

It is difficult to build a stable long-term plan around negative interest rates since they are fragile. In the past similar economic conditions have quickly been modified by large-scale wars.

 

[Mulligan]

I am not am expert on this but wonder how negative interest rates provide meaningful growth. Official rates are already low but interest rates for lower tier companies is already high and wont change. Solid credit companies not seeing economic benefit to expand capacity will just borrow at rates cheaper than dividend payout and do share buy backs. At best it kills conservative investors and savers, at worst it inflates a bubble that will burst? Are my thoughts way off base?


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[Gone4Good]

It is difficult to build a stable long-term plan around negative interest rates since they are fragile.

I'm not so sure about that, it just takes a different mindset. Instead of putting your money in financial products and expecting a return, you'd have to put your money into building real things that were useful enough to at least maintain their value.

And isn't that what we want out of our economy? People to invest in real things that create real value?

 

[mrfeh]

I don't see how it could happen in the US. They just got off 0 a couple months ago - they're not gonna suddenly reverse direction.

The US economy is in pretty good shape. People need to remember that equity markets != economy.

 

[Senator]

The US economy is in pretty good shape. People need to remember that equity markets != economy.

It really depends on who you ask. Companies top line revenue growth is stagnant. Wages are stagnant. Deflation is here, even SS has not increased recently.

The economy is moving along, and the Fed needs to prepare for continued lowering of prices. Higher interest rates make for less spending and even lower prices. Banks, who are their members, make more money.

Once people start to hunker down and not spend, it will get worse.

 

[Gone4Good]

I don't see how it could happen in the US. They just got off 0 a couple months ago - they're not gonna suddenly reverse direction.

The US economy is in pretty good shape. People need to remember that equity markets != economy.

I agree. The Fed is on hold, but not likely going in reverse.

But with a Fed Funds rate of just 0.25%-0.50% there's legitimate concern about how much ammo the Fed has to respond to the next recession. Having the ability to go negative helps alleviate some of that concern.

 

[Mulligan]

I agree. The Fed is on hold, but not likely going in reverse.



But with a Fed Funds rate of just 0.25%-0.50% there's legitimate concern about how much ammo the Fed has to respond to the next recession. Having the ability to go negative helps alleviate some of that concern.

Speaking of the Fed.....If anyone here has a sleeping problem, go to CNBC now and record Janet Yellen's comments...She has the most boring monotone voice I have ever heard...Just drank 2 cups of coffee and a goods nights sleep and she has me ready to call it a night already.


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[MichaelB]

Speaking of the Fed.....If anyone here has a sleeping problem, go to CNBC now and record Janet Yellen's comments...She has the most boring monotone voice I have ever heard...Just drank 2 cups of coffee and a goods nights sleep and she has me ready to call it a night already.

It has to be part of the job description. I also read somewhere that advanced monotone is part of the PhD program for economists.

 

[Mulligan]

It has to be part of the job description. I also read somewhere that advanced monotone is part of the PhD program for economists.

Well if that is the case, she certainly was a top notch student in her day!


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[Running_Man]

I'm not so sure about that, it just takes a different mindset. Instead of putting your money in financial products and expecting a return, you'd have to put your money into building real things that were useful enough to at least maintain their value.

And isn't that what we want out of our economy? People to invest in real things that create real value?

This is the road to chaos. For one to expect people that do not immediately spend all their money are to pay for having money destroys the very notion of money and what it's purpose is, a store of value. You wind up slowing the economy to a crawl as everyone switches instead to a barter economy, which is what existed before the notion of money and interest paid on money became something to be dependable. The fact that loans have been unable to lead the economies of the world into sustainable economic glory is precisely because borrowing has lead to poor economic outcomes.

Do we really want to live in a world of musical chairs where money is to be used to purchase something, anything of value that does not depreciate as fast as the negative interest rates?

Despite decades of proof in Japan that sustained low or zero interest rates do nothing for an economy it is now being used as a panacea for stock markets around the world which have become in a strange way the gauge of success of central banks.

Negative interest rates indicate an upcoming implosion of economies and nothing more, if unveiled on a world wide basis there will be a world wide collapse in economic activity.

 

[Gone4Good]

This is the road to chaos. For one to expect people that do not immediately spend all their money are to pay for having money destroys the very notion of money and what it's purpose is, a store of value.

Perhaps I'll introduce you to a little thing called inflation.

1% bank interest - 2% inflation = (1%) real rates
(1%) bank interest - 0% inflation = (1%) real rates

See the difference? Nope, neither do I.

 

[Running_Man]

You do not realize how people work you realize how spreadsheets work

 

[Running_Man]

Deflation causes people to defer purchases and slow economic activity which in the new world would mean even lower interest rates and lower economic activity which leads to lower rates and lower economic activity. This is why bankers in Europe are warning of a death spiral

 

[Gone4Good]

You do not realize how people work you realize how spreadsheets work

Oh, that must be it.

 

[samclem]

I hope we don't go there.

From a piece by the former head of the St Louis Fed.

Negative central-bank interest rates will not create growth any more than the Federal Reserve’s near-zero interest rates did in the U.S. And it will divert attention from the structural problems that have plagued growth here, as well as in Europe and Japan, and how these problems can be solved. Part of the impetus behind a central bank’s negative interest-rate policy is a desire to devalue the currency. With lower market interest rates, holders of euros, for example, may sell them to flee to countries with higher interest rates—driving down the euro’s exchange rate, boosting European exports and growth. But it is impossible for every country in the world to depreciate its currency relative to others.
. . . .
The interest rate on a 10-year T-bond is a bit below 2%. Can any informed person believe that the cost of borrowing is holding back capital formation in the United States?
. . . .
Honest central bankers know that policy gimmicks will not deliver growth, but admitting as much is politically verboten. Where central banks can help is by identifying the structural impediments to growth and recommending a way forward. In the U.S., Congress should force the Federal Reserve to come clean about why growth has been so slow.

I'm not interested in propping up stock prices with negative interest rates (as we've been doing with the artificially low rates we've had to this point). Obviously, when CDs and bonds yield only a tiny amount, people are induced to buy stocks, propping up the price. For awhile, until the bubble bursts. I'm interested in true sustainable industrial/economic growth. That happens when industry uses captial in an efficient way, and it won't happen if funny money is pumped in (just to avoid having it sit in a bank and be charged for that privilege) to schemes with faint merit/ROI.

 

[Gone4Good]

Deflation causes people to defer purchases and slow economic activity which in the new world would mean even lower interest rates and lower economic activity which leads to lower rates and lower economic activity.

I'm with you on all this.

I'm not sure why you think the "lower rates" the market clearly wants are the problem rather than the solution, though.

 

[Amethyst]

Yet the cost of services (paying anybody to do anything) continues to rise. What gives?

 

[audreyh1]

It has to be part of the job description. I also read somewhere that advanced monotone is part of the PhD program for economists.

Yeah - they all put me to sleep.

 

[Gone4Good]

I hope we don't go there.

From a piece by the former head of the St Louis Fed.

It's a gated article so I can't respond to it in it's entirety but I can respond to the three parts you posted:

. . . .But it is impossible for every country in the world to depreciate its currency relative to others.

This is always true. It's more of an argument against monetary policy in general than an argument against policy at a specific point in time. I'm not sure why this argument has any more relevance now than it would if the Fed Funds rate were 4%.

The interest rate on a 10-year T-bond is a bit below 2%. Can any informed person believe that the cost of borrowing is holding back capital formation in the United States?

It's a little awkward to respond to this because the Fed's last action was to raise rates, not cut them. So to make an argument for easing with 2% 10-year treasury rates we'd have to imagine different economic conditions than the ones we currently have.

But is it impossible to imagine a U.S. economy where rates even lower than 2% were needed to restore economic growth? Absolutely not.

What if 10-year inflation expectations were negative 2% rather than positive 1%? With 2% annual expected deflation a 2% nominal treasury bond yields a real 4%.

So I'll turn the question back to Mr. Poole: "Can any informed person believe" that risk-free real rates of 4% wouldn't hold back capital formation in the U.S.?

That's obviously not the condition we have, but it shows the flaw in arguing that some level of nominal interest rate is obviously too low, or even low enough.

Honest central bankers know that policy gimmicks will not deliver growth, but admitting as much is politically verboten.

What's gimicky about the Central Bank cutting rates? And why are interest rate reductions seen as gimicky when used at one interest rate level but not another?

 

[Running_Man]

I'm with you on all this.

I'm not sure why you think the "lower rates" the market clearly wants are the problem rather than the solution, though.

The market does not clearly want it, governments clearly want it as huge budget shortfalls are easily financed and it defers the bad economic outcomes of prior bad decisions. The path for this was set when Central Banks were not willing to let bad assets fail in the financial crisis and embarked on QE sending rates too low and pulling forward economic activity that has led to overproduction of commodities, too much investment in China and the use of borrowing to buy shares of stocks back with cheap debt greatly increasing corporate indebtedness.

When the Central banks of Switzerland went negative to stop their currency from rising because they were financially strong and Europe then ignored laws to allow QE in Europe. interest rates have plunged and central banks continue to play this game. There are no free "markets" in interest rates when Central Banks around the world are buying trillions upon trillions in debt everywhere. But we are at the end game here, we shall see but this is looking very ugly.

How is a bank to utilize a negative interest rate on a house? Buy a house for 100K interest rate is negative 3 percent pay $181.67 per month or $65,400 over the term of the loan and the bank will make this up by charging depositers an ever higher negative rate on money in the bank? Economic activity will come to a crawl........

 

[Mulligan]

Deflation causes people to defer purchases and slow economic activity which in the new world would mean even lower interest rates and lower economic activity which leads to lower rates and lower economic activity. This is why bankers in Europe are warning of a death spiral

Im with you Runningman, but I am a bit self serving. If GoneforGood can get me a negative rate mortgage, I am switching sides!


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[Gone4Good]

Yet the cost of services (paying anybody to do anything) continues to rise. What gives?

In any average of changing levels some items rise while others fall or rise more slowly.

When it comes to CPI there's a natural tendency for people to disregard the average by pointing out only the items that are rising fastest. The argument used to be "but hey, have you seen the price of gasoline recently?" Now no one cares about gasoline inflation anymore. What gives?