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The Mindless Stupidity of Negative Interest Rates
The Mindless Stupidity of Negative Interest Rates
Here we are in the midst of The Great Stagnation Middle Class Elimination and some central bankers and mainstream economists are promoting negative interest rates. One economist was quoted in a Marketwatch piece by Greg Robb as saying,
“…pushing rates into negative territory works in many ways just like a regular decline in interest rates that we’re all used to.”
OK. That’s false. We know exactly what negative interest rates do since Europe has made a fine case study of it. They don’t work just like a “regular decline in interest rates.” I mean not that a “regular decline in interest rates,” does what economists think it does, but that’s another story. The issue here is how negative interest rates work.
Negative interest rate proponents ignore the basic tenets of double entry accounting.
Because there are two sides to a bank balance sheet, negative interest rates are the mirror image of positive rates. The move to negative rates imposes new costs on the banks, unlike low positive rates or ZIRP which reduce bank costs.
The greater the negative interest rate, the higher the cost imposed, which is the same as a central bank raising interest rates when they are positive. When the Fed lowers a positive interest rate, it lowers the bank’s cost. But when there are trillions in excess reserves held by the banks as deposits at the Fed and the Fed lowers the interest rate to below zero, that becomes a cost to the banking system which it cannot avoid, except by using those cash assets to pay down debt.
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Fed Is Not Just Behind The Curve, It’s Driving The Bus Over The Cliff
Fed Is Not Just Behind The Curve, It’s Driving The Bus Over The Cliff
So the Fed didn’t raise rates again. And the timing of the rate increase will be data dependent. Ho hum.
There’s just one little problem. The inflation measures the Fed watches really don’t measure inflation. The Fed won’t see what its cronies in the government and economic establishment refuse to measure, which is that we’ve already long since passed the Fed’s 2% inflation target.
Every 3 months the US Census Bureau releases the results of its quarterly housing survey. We now know that rents rose by 6.2% year over year in the second quarter. But the fictitious number that the BLS uses to account for housing costs in the CPI, called Owner’s Equivalent Rent (OER), is only up by +2.9% year over year. The difference of 3.3% is known by the technical term: fudge factor. In this case, the BLS is undercounting the housing component of CPI by more than half.
Owner’s equivalent rent and actual renter’s rent account for 31% of the total weight of the CPI. Multiplying the weighting of this component by the 3.3% fudge factor cuts a full 1% off the headline CPI and 1.3% off core CPI. If rent were counted accurately, headline CPI would be 2.2%, year over year, not 1.2%. Core CPI (excluding food and energy) would be +3.1%, not 1.8%.
Since Core has lately been stronger than the headline number, the Fed has naturally shifted its focus away from Core. But it doesn’t matter. The Fed is behind the curve. Way behind.
Click to view chart from email
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German Establishment View On Tsipras/Troika Showdown
German Establishment View On Tsipras/Troika Showdown
Der Spiegel has a long analysis today on the fate of Greece and the Tsipras/EU pas de deux. The tone toward Tsipras seemed secretly admiring while outwardly scornful and hostile. He comes off ultimately as the bad guy who is completely and solely to blame for the worsening crisis, with Merkel and EU bureaucrats portrayed as earnest leaders who badly miscalculated the situation and misread Tsipras.
Spigel simplistically summarized the views of the two sides:
From the Greek perspective, the EU, German Chancellor Angela Merkel and the euro zone are all synonymous with poverty and exploitation. From the perspective of most European Union leaders, on the other hand, Greece is little more than a failed state governed by clientelism and nepotism, a country whose economy has little to offer aside from olive oil and beach bars.
Then it blamed the current Greek regime for exacerbating an already bad situation.
But relations between the Greek government and its partners in the 18 euro-zone capitals are deeply impaired. The Greek economy’s slide has dangerously accelerated under the new government and Brussels has lost almost all of its trust in Athens.
The Spiegel team went on to heap a litany of blame on the Tsipras regime.
Tsipras’s leftist-nationalist government has not done much for the economy. In the six months since the election, Greek parliament has done little to simplify the tax code as promised or to streamline the country’s bureaucracy. Furthermore, the man in charge of promoting international business relations in the Foreign Ministry is a cousin of Prime Minister Alexis Tsipras. But instead of boosting exports, he has primarily drawn attention to himself with his rhetoric of class struggle and his chastisements of Europe.
They apparently had little difficulty finding Tsipras critics within Greece.
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ZIRP——The Monetary Trick Which Killed Wages
ZIRP——The Monetary Trick Which Killed Wages
Stupid Fed Trick Number 1
The Fed thinks that keeping interest rates low spurs inflation. It was probably happy to see the purported uptick in wage inflation in the just released May jobs report. It wants to see wages start rising to create a bit of inflationary pressure.
That would be a real trick.
See, it doesn’t work that way. In fact, it’s just the opposite.
For the past 35 years, every time the Fed reversed monetary policy, wage rates immediately followed…in the same direction! When the Fed eased, the wage inflation rate fell. When the Fed tightened, wages rose faster. Not just a couple of times. Every single time!
If you want to know what’s killing workers wages in the US there it is. ZIRP.
If the Fed wants to get a little wage inflation, all it needs to do is start raising interest rates.
The above chart shows the annual rate of change in the average hourly wages of production and nonsupervisory employees, which comes from the BLS.
The same data reveals the second stupid trick. It’s not really a Fed trick, it’s a Wall Street economist, financial media trick. But trust me, the Fed will use it.
By now you’ve heard the G-R-R-REAT news that wage gains are heating up! Here’s how the Wall Street Journal put it a few minutes after the jobs report was released on Friday:
“At $24.96, average hourly earnings for private-sector workers were up 2.3% in May from a year earlier. That’s the biggest increase since the summer of 2013 a modest acceleration over the past four months and a little faster than the 2% average during the latest economic expansion.”
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