Home » Posts tagged 'negative interest rates' (Page 5)

Tag Archives: negative interest rates

Negative interest rates, helicopter money trigger Clash of Titans.

Relations between the government of Europe’s biggest economy, Germany, and Europe’s most powerful financial institution, the European Central Bank, have soured to the point of curdling.

The latest volley of barbed remarks came from Germany’s dour Finance Minister Wolfgang Schäuble, who has never been one to mince his words. Speaking at an awards ceremony outside Frankfurt on April 8, he told the audience that the stellar rise of right-wing populist Alternative für Deutschland party was due in large part to the ECB’s loose monetary policy.

“I told Mario Draghi … you can be very proud,” according to a report by a Dow Jones journalist who was present.

Schäuble’s off-the-cuff remarks set in motion a flurry of caustic statements from other conservative German politicians, with the lion’s share of the ire reserved for the ECB’s negative interest rate policy.

“Mario Draghi’s policies have led to a massive loss of credibility of the ECB,” said the deputy head of the CDU parliamentary group, Hans-Peter Friedrich, who also called for Draghi to be replaced by a German when the Italian completes his term, in 2019. “The next ECB Chief must be a German, who feels bound to the German Bundesbank’s tradition of monetary stability.”

Friedrich’s sentiments were echoed by the CSU foreign policy expert and member of the Bundestag Hans-Peter Uhl. “We cannot afford another Draghi,” he said. “We need to place a key German financial specialist at the head of the ECB.”

As the German daily Handelsblatt notes, the latest exchange marks a new low for Germany’s policymakers in their relations with the Frankfurt-based ECB. The main trigger for the latest storm of protest was Draghi’s praise last month for the idea of “helicopter money” – showering citizens with newly created money.

…click on the above link to read the rest of the article…

Negative Interest Rates Destroying the World Economy

April 18, 2016

Negative Interest Rates Destroying the World Economy

QUESTION: Mr. Armstrong, I think I am starting to see the light you have been shining. Negative interest rates really are “completely insane”. I also now see that months after you wrote about central banks were trapped, others are now just starting to entertain the idea. Is this distinct difference in your views that eventually become adopted with time because you were a hedge fund manager?

Just curious;

Bob

Summers-Larry-Career ANSWER: I believe the answer is rather simple. How can anyone pretend to be analysts if they have never traded? It would be like a man writing a book explaining how it feels to give birth. You cannot analyze what you have never done. It is just impossible. Those who cannot teach and those who can just do. Negative interest rates are fueling deflation. People have less income to spend so how is this beneficial? The Fed always needed 2% inflation. The father of negative interest rates is Larry Summers. He teaches or has been in government. He is not a trader and is clueless about how markets function. I warned that this idea of negative interest rates was very dangerous.

Yes, I have warned that the central banks are trapped. Their QE policies have totally failed. There were numerous “analysts” without experience calling for hyperinflation, collapse of the dollar, yelling the Fed is increasing the money supply so buy gold. The inflation never appeared and gold declined. Their reasoning was so far off the mark exactly as people like Larry Summers. These people become trapped in their own logic it becomes irrational gibberish. They only see one side of the coin and ignore the rest.

…click on the above link to read the rest of the article…

The Strange Idea of Negative Interest

April 14, 2016

The Strange Idea of Negative Interest

This article addresses the role of demurrage (negative interest) in the design of new currencies. But it takes a roundabout route with diversions around the zero and negative interest rates being currently applied to fiat money; and a detour via positive interest which is itself a stranger idea than we have been led to believe. It suggests that demurrage is worth a place in the designer’s kitbag, but not for the reason normally postulated.

The basic idea of interest is simple. It’s a special type of rent. If we loan out something we have no immediate need for ourselves, it seems reasonable that the borrower should pay us rent for its use. So interest is a rent on money.

A fundamental problem with the rent rationale in general occurs when the ‘property’ concerned is a public good – a commons which has been enclosed – or where it has been secured by violence or some other unfair means. In that case we might feel a little aggrieved at having property we feel we should have a degree of proprietorship over sold or rented back to us. This is the way many people feel about water for example.

Another issue arises when the property owner has (and will have) no need for the property themselves and have acquired it only for its rental value. Seeking a store of value via investment is understandable but when the asset class created is a ‘stuff of life’ good, tensions are sure to arise because investors are affecting the price of essentials. The more they can corner the market the more they can increase the cost of basic living. This seems to be increasingly the case with housing.

…click on the above link to read the rest of the article…

What’s Wrong With Negative Rates?

April 13, 2016

What’s Wrong With Negative Rates?

NEW YORK – I wrote at the beginning of January that economic conditions this year were set to be as weak as in 2015, which was the worst year since the global financial crisis erupted in 2008. And, as has happened repeatedly over the last decade, a few months into the year, others’ more optimistic forecasts are being revised downward.

The underlying problem – which has plagued the global economy since the crisis, but has worsened slightly – is lack of global aggregate demand. Now, in response, the European Central Bank (ECB) has stepped up its stimulus, joining the Bank of Japan and a couple of other central banks in showing that the “zero lower bound” – the inability of interest rates to become negative – is a boundary only in the imagination of conventional economists.

And yet, in none of the economies attempting the unorthodox experiment of negative interest rates has there been a return to growth and full employment. In some cases, the outcome has been unexpected: Some lending rates have actually increased.

It should have been apparent that most central banks’ pre-crisis models – both the formal models and the mental models that guide policymakers’ thinking – were badly wrong. None predicted the crisis; and in very few of these economies has a semblance of full employment been restored. The ECB famously raised interest rates twice in 2011, just as the euro crisis was worsening and unemployment was increasing to double-digit levels, bringing deflation ever closer.

They continued to use the old discredited models, perhaps slightly modified. In these models, the interest rate is the key policy tool, to be dialed up and down to ensure good economic performance. If a positive interest rate doesn’t suffice, then a negative interest rate should do the trick.

…click on the above link to read the rest of the article…

Peak Negative-Interest-Rate Absurdity? Hilarity Ensues

April 13, 2016

Peak Negative-Interest-Rate Absurdity? Hilarity Ensues

Among the goodies: “reverse Yankee” landmines.

When a central bank like the ECB imposes negative interest rates along with QE on its bailiwick, funny things start to happen.

Investors become so eager to get any kind of visible yield that they will do the craziest things. They’re now chasing €3 billion of 50-year bonds that the French government placed today. The yield? 1.916%.

These 50-year bonds are bought by institutional investors who, in normal times, would have been institutionalized.

The impact of negative interest rates isn’t limited to the bailiwick where they’re imposed. These yield-desperate investors will go anywhere to get some yield. They’re now scrambling to get their hands on Argentina’s new dollar-denominated bonds: $15 billion spread over maturities of five, 10, and 30 years, expected to come to market next week.

This is a country that has spent 75 of the last 190 years in default, including 2013-15, 2000-04, and 1980-92. The next default might be ten years down the road. Since Argentina cannot default on those bonds via devaluation of the peso, it will have to default on them in the classic Argentine way.

But investors need the yield now, and to heck with the risk of default. They’re hoping they can dump these things – or at least move on to the next job – before the government pulls the plug.

Yet there are a few things that the noble combination of negative interest rates and QE has not been able to accomplish.

Consumers, whether in the Eurozone, Japan, or other NIRP countries, are inexplicably leery of becoming even bigger debt slaves by borrowing to consume. And those who try it by running up their credit cards find that negative interest rates, or even low rates, haven’t made it that far.

…click on the above link to read the rest of the article…

SocGen: “Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets”

April 12, 2016

SocGen: “Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets”

With the ECB now unabashedly unleashing a bond bubble in Europe of which it has promised to be a buyer of last resort with the stronly implied hint that European IG companies should issue bonds and buy back shares, and promptly leading to the biggest junk bond issue in history courtesy of Numericable, it will come as no surprise that the world once again has a debt problem.

For the best description of just how bad said problem is we go to SocGen’s Andrew Lapthorne, one of last few sane analyzers of actual data, a person who first reveaked the stunning fact that every dollar in incremental debt in the 21st century has gone to fund stock buybacks, and who in a note today asks whether “central bank policies going to bankrupt corporate America?”

His answer is, unless something changes, a resounding yes.

Here are the key excerpts:

Sensationalist headlines such as the one above are there to grab the reader’s attention, but the question is nonetheless a serious one. Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today. These central bank policies are having some serious unintended consequences, particular on mid cap and smaller cap stocks.

Aggressive central bank monetary policies have created artificial demand for corporate debt which we think companies are exploiting by issuing debt they do not actually need. The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand.

…click on the above link to read the rest of the article…

The Catastrophic Mismanagement of the Economy & The Coming Meltdown

April 12, 2016

The Catastrophic Mismanagement of the Economy & The Coming Meltdown

Cover-Pension Crisis We are finishing up the “Pension Crisis – The Next Nightmare,” which is a special report outlining the next global meltdown. Germany’s Federal Finance Minister Schaeuble is now openly blaming Mario Draghi for the electoral success of the AFD in Germany, which is the Alternative for Germany (In German: Alternative für Deutschland, AfD). The AFD is a right-wing populist party that is also the Eurosceptic political party in Germany. The AFD has risen from 0% to nearly 40% in about 2 years.

Additionally, Schaeuble seems to be rumbling that the ECB is creating a huge problem with negative interest rates. If the ECB does not change its monetary policy radically and soon, Germany will be engulfed in its own major pension crisis. Central banks may be forced to raise rates to try to bail out pension funds. This has nothing to do with the economic trends.

The pension crisis is becoming a real nightmare for federal and state budgets and now depend on exceptionally low interest rates while pension funds are going bankrupt. Raising rates to help the pension funds will wipe out government budgets. This entire idea of Keynesian economics, which says that government is capable of managing the economy by raising and lowering interest rates, is a complete disaster. These people are incapable of forecasting the economy, as former Secretary of the Treasury Larry Summers openly admitted to Bloomberg TV. Those who think they are endowed with magical powers to manipulate society have created a complete mess and they are too brain-dead to realize the consequences. Our computer is extremely bearish on government. The turning point (2015.75) was the PEAK IN GOVERNMENT. Ever since that turning point, we have begun the downhill move that is destined to collapse into January 2020 (2020.05).

…click on the above link to read the rest of the article…

The Precious Metals Conspiracy

April 11, 2016

The Precious Metals Conspiracy

Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

Goild conspiracy A metallic conspirator and his flying factotum… Image via sceptic.com

Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc. Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong).

However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Something tells us that this effort to draw in buyers is concerted. Certainly there has been an 8.4% increase in silver held in trust for SLV. This is the result of relentless buying of SLV shares. When buyers push up the price of SLV relative to the price of silver, that creates an arbitrage opportunity for Authorized Participants.

They buy silver metal, create SLV shares, and sell the newly issued shares. They can do that as much as they want while there’s a profit to do so. But of course this pushes down the price of SLV until it is very close to the price of silver. SLV is somewhere between metal and futures. It can be a speculative play on price, but it’s bought with less leverage and it can also be a long-term holding for many people.

…click on the above link to read the rest of the article…

CEO Keith Neumeyer Warns: “There’s Going To Be a Major Revolt… We’re Going To See Riots”

April 10, 2016

CEO Keith Neumeyer Warns: “There’s Going To Be a Major Revolt… We’re Going To See Riots”

With negative interest rates now the order of the day in much of the Western world, it’s only a matter of time before financial institutions start charging American depositors for the privilege of keeping their money safe in the U.S. banking system.

And according to Keith Neumeyer in his latest interview with SGT Report, that could spell disaster for socio-economic stability. Neumeyer, who is the CEO of one of the world’s top primary silver producers First Majestic Silver and the Chairman of mineral bank firm First Mining Finance, says that should The Fed and government policy makers implement negative interest rates and continue on their current course of bailing out big business while impoverishing average Americans, we could well see riots in the streets.

Negative interest rates are a way that governments are trying to tax the people… it’s going to start with big corporations that have a lot of cash sitting around in the banks and then it’s going to trickle down to the average person on the street… the people that get hurt are the small investor… the people that could least afford it… the retired people that rely on their interest on their savings that they expected to have… this is all changing… the world is changing…

I think there’s going to be a major revolt… If we actually do see negative interest rates in North America… we’re going to see riots.

(Watch At Youtube)

The Fed has lost credibility. And that has left the average person on the street with an air of uncertainty and concern over the stability of the system.

…click on the above link to read the rest of the article…

Cash Banned, Freedom Gone

April 7, 2016

Cash Banned, Freedom Gone

Some politicians want to ban cash, arguing that cash is helping criminals. The first steps in that direction are the withdrawal of big denomination notes and the limits imposed on cash payments.

Proponents of a ban on cash claim that this will help fight criminal transactions — involved in money laundering, terrorism, and tax evasion. These promises of salvation are used to get the general public to agree to a society without cash. But there is no convincing proof for the claim that the world without cash will be a better one. Even if undesirable behavior is indeed financed by cash, you still need to answer the question: will the undesirable behavior disappear without cash? Or will those who commit the undesirable acts take to new ways and means to reach their goal?

Take the example of the 500 euro note. If we do away with it, won’t those who wish to use cash pay with five 100 euro notes instead? Or ten 50 euro notes? And what about the costs imposed on the large majority of respectable people, if you put a ban on their cash? Using the same logic, should we ban alcohol, because some can’t handle it properly?

It’s Really about Central Banks

The plan to restrict the use of cash, or to abolish it step by step, has nothing to do with the fight against crime. The real reason is that states (and their central banks) want to introduce negative interest rates.

Although central banks have long pursued inflationary policies that devalue the debt owed by governments, negative interest rates offer a new and powerful tool to do this. But, to make negative interest rates work well, you have to get rid of physical cash.

…click on the above link to read the rest of the article…

Japan Prints Additional ¥10,000 Bills As People Scramble To Stash Away Cash

April 7, 2016

Japan Prints Additional ¥10,000 Bills As People Scramble To Stash Away Cash

Long before negative interest rates shifted from the monetary twilight zone into the mainstream (with some 30% of global government bonds now trading with a subzero yield), one organization wrote a report warning about the dangers of NIRP. The NY Fed. Back in 2012, NY Fed staffers wrote “If Interest Rates Go Negative . . . Or, Be Careful What You Wish For” it warned “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.”

Then, last October, Bank of America looked at the savings rates across European nations which had implemented NIRP and found something disturbing: instead of achieving what what central banks had expected, it was leading to precisely the opposite outcome: “household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”

The evidence:

Which was to be expected by most people exhibiting common sense: NIRP by definition is deflationary, and as such as prompts consumers to delay consumption, and as a result to save as much as possible, if not in the banks where their savings may soon be taxed under NIRP regimes, then in cash.

And nowhere if the failure of NIRP – and unconventional monetary policy in general – more evident than what just happened in Japan, where according to Japan Times, the Finance Ministry plans to increase the number of ¥10,000 bills in circulation, amid signs that more people are hoarding cash.

…click on the above link to read the rest of the article…

Mises.org: And So It Begins…Negative Interest Rates Trickle Down in Japan

April 5, 2016

MISES.ORG: AND SO IT BEGINS… NEGATIVE INTEREST RATES TRICKLE DOWN IN JAPAN

The negative interest rates imposed by the Bank of Japan have begun to make their way into the Japanese banking system. Japanese trust banks have begun to impose negative interest rateson accounts held by institutional investors. It shouldn’t be surprising that Japanese banks are trying to pass on the costs imposed by the central bank’s policy of negative interest rates. It happened in Switzerland, it is happening in Japan, and it will happen in Europe. And as it becomes more widespread, investors will begun to withdraw their funds from the banking system.

Some people, such as Ben Bernanke, don’t think that will have much of an effect on the banking system.

It seems implausible, though, that modestly negative short-term rates would have large incremental effects on bank profitability or lending. Contrary to the simple story, most U.S. bank funding does not come from small depositors, but from wholesale funding markets, large institutional depositors, and foreign depositors, all of whom would presumably accept a marginally negative rate if the alternative were holding currency.

It’s actually the depositors at either end of the Bell curve who would be most likely to withdraw their funds. The depositor with $500 in the bank who is facing guaranteed losses might just pull out five $100 bills and stuff them under his mattress. Similarly, a large institutional depositor with $500 million or more in funds facing a negative interest rate of -0.10% (a cost of $500,000+ per year) might find it more worthwhile to build a safe room and hire armed guards, particularly if he thinks negative interest rates will be around for a long time. It is the depositors with in-between sums, too much to stuff under the mattress but too little to assume full responsibility for guarding their money, who will be affected the most.

…click on the above link to read the rest of the article…

The Path to the Final Crisis

April 1, 2016

The Path to the Final Crisis

Reader Questions on Negative Interest Rates

Our reader L from Mumbai has mailed us a number of questions about the negative interest rate regime and its possible consequences. Since these questions are probably of general interest, we have decided to reply to them in this post.

The NIRP club – negative central bank deposit rates – click to enlarge.

Before we get to the questions, a few general remarks: negative interest rates could not exist in an unhampered free market. They are an entirely artificial result of central bank intervention. The so-called natural interest rate is actually a non-monetary phenomenon – it simply reflects time preferences. Time preferences are an inviolable category of human action and are always positive.

Market interest rates consist of the natural interest rate plus two additional components: a price (or inflation) premium that reflects the expected decline in money’s purchasing power, and a risk premium or entrepreneurial profit premium that reflects the perceptions of lenders of a borrower’s creditworthiness and generates an entrepreneurial profit for those engaged in lending.

One often reads that interest is the “price” of money, but that is actually not quite correct. It is really a price ratio, the difference between the valuation of present against that of future goods. An apple one can obtain today will always be worth more than a similar apple one can obtain at some point in the future. If time preferences were to decline to zero, people would stop consuming altogether. All efforts would be directed toward providing for the future, but they would never see that future, because they would starve to death before it arrives.

…click on the above link to read the rest of the article…

Helicopter Money: Global Central Banks Consider Distributing Money Directly To The People

March 23, 2016

Helicopter Money: Global Central Banks Consider Distributing Money Directly To The People

Should central banks create money out of thin air and give it directly to governments and average citizens? If you can believe it, this is now under serious consideration. Since 2008, global central banks have cut interest rates 637 times, they have injected 12.3 trillion dollars into the global financial system through various quantitative easing programs, and we have seen an explosion of government debt unlike anything we have ever witnessed before. But despite these unprecedented measures, the global economy is still deeply struggling. This is particularly true in Japan, in South America, and in Europe. In fact, there are 16 countries in Europe that are experiencing deflation right now. In a desperate attempt to spur economic activity, central banks in Europe and in Japan are playing around with negative interest rates, and so far they seem to only have had a limited effect.

So as they rapidly run out of ammunition, global central bankers are now openly discussing something that might sound kind of crazy. According to the Telegraph, central banks are becoming increasingly open to employing a tactic known as “helicopter money”…

Faced with political intransigence, central bankers are openly talking about the previously unthinkable: “helicopter money”.

A catch-all term, helicopter drops describe the process by which central banks can create money to transfer to the public or private sector to stimulate economic activity and spending.

Long considered one of the last policymaking taboos, debate around the merits of helicopter money has gained traction in recent weeks.

Do you understand what is being said there?

The idea is basically this – central banks would create money out of thin air and would just give it to national governments or ordinary citizens.

So who would decide who gets the money?

Well, they would.

…click on the above link to read the rest of the article…

The ECB and John Law

March 21, 2016

The ECB and John Law

Last week, the ECB extended its monetary madness, pushing deposit rates further into negative figures.

It is extending quantitative easing from sovereign debt into non-financial investment grade bonds, while increasing the pace of acquisition to €80bn per month. The ECB also promised to pay the banks to take credit from it in “targeted longer-term refinancing operations”.

Any Frenchman with a knowledge of his country’s history should hear alarm bells ringing. The ECB is running the Eurozone’s money and assets in a similar fashion to that of John Law’s Banque Generale Privée (renamed Banque Royale in 1719), which ran those of France in 1716-20. The scheme at its heart was simple: use the money-issuing monopoly granted to the bank by the state to drive up the value of the Mississippi Company’s shares using paper money created for the purpose. The Duc d’Orleans, regent of France for the young Louis XV, agreed to the scheme because it would provide the Bourbons with much-needed funds.

This is pretty much what the ECB is doing today, except on a far larger Eurozone-wide basis. The need for government funds is of primary importance today, as it was then.

In Law’s day, France did not have a central bank, such as the Bank of England, managing the issue of government debt, let alone a functioning government bond market. The profligate spending of Louis XIV had left the state three billion livres in debt, which was the equivalent of 1,840 tonnes of gold. This was about 85% of the world’s estimated gold stock at that time, at the livre’s conversion rate into Louis d’Or. John Law would almost double that by June 1720, with unbacked livre notes issued by his bank.

…click on the above link to read the rest of the article…

Tag Archives: negative interest rates

Content

Post categories

Economic Links

Energy/Resource Links

Environmental Links

Geopolitical Links

Liberty Links

News Links

Other Links

Survival Skills

Post Archives by Category

Post navigation

Latest Posts