Monday, February 15, 2016

Negative Interest Rates

From the Telegraph:
One of the unintended consequences of global central banks' race to the bottom (which seemingly has no bottom) is that negative interest rates act as a tax on the banking system. By penalizing commercial lenders for parking their reserves at the central bank, it erodes the profit margin they make on charging already low interest rates while raising the cost of capital.
So far, "banks seem unable or unwilling to pass negative deposit rates to their retail customers, leaving them with few options to offset costs", note analysts at JP Morgan.
They also highlight that, should banks start imposing higher lending costs on their customers, this would have the reverse effect of easy monetary policy, crimping credit creation and tightening financial conditions.
All of this begs the question of whether the world has hit the limits of what monetary policy can achieve, as the distortions produced by sub-zero rates overwhelm its stimulatory benefits.
The current global recovery has been one of the most deflationary in modern times. Over the last six-and-a-half years, the nominal GDP of the advanced world - or the total cash value of their economies - has grown by just 11pc, according to Bank of America Merrill Lynch.
Meanwhile, more than $8 trillon of high grade sovereign debt is trading at a negative yield.
Distortions such as this have led prominent monetary policymakers to dub the move into negative interest rates a "gigantic fiscal policy failure".
Eight years on the from the financial crisis, central banks have done all the heavy lifting to get the world out of its low growth morass. Monetary policymakers have cut interest rates 637 times and purchased $12.3 trillion (£8.5  trillion) of assets since March 2008.
Mario Draghi, president of the European Central Bank, bemoans that his institution has provided the sole source of stimulus to the eurozone over the last six years. He renewed his calls for governments to finance mass public investment schemes and cut tax burdens to reflate their economies this week.
So although negative interest rates may herald new danger for financial markets, they could well be the catalyst jolting politicians and governments into finally making use of powerful fiscal policy tools to rescue the world from the grips of another slump.

As much as the stock market is a rigged game we're rapidly coming to the point that it will be important to have most of your savings in real & productive assets. If you need capital equipment and can pay cash for it now might be the time.


  1. What do I know, I'm just an average Joe with no special training in economics. However I did manage to bootstrap 3 companies, the 1st a failure, the other two a good success which yielded a return when I sold them as going concerns with much good will.

    So, while I can agree their is a problem I cannot say what is the answer. (you know business owners are always concerned with solving problems) Instead, allow me to ask some questions.

    Does credit create wealth?
    What is an allowable amount of debt?
    By what means is this established?
    Is it sustainable?
    Across all markets?

    My answer has always been that credit does NOT create wealth. To say that debt can be leveraged is a foolish endeavor. that debt should be allowed only to short term (seasonal) funding then to be extinguished in term. Debt is NEVER carried across the sheet.

    So maybe I don't know jack. But it looks that, in spite of all the experts, the world is now faced with a serious due date which cannot be met. Everything forward of this date (actually, go back to the 1980s) is only a shell game designed to pass the buck. And I, as an individual, have increasingly developed a profound hatred of those folks who dare to elevate themselves to 'expert' status. Fortunately for me I have been paying strictly cash for goods and services beginning 20 years ago. Unfortunately, cash does not accrue wealth in this market. However, my definition of wealth has changed to become a bartering interest. Hence, I suppose the rise of Bitcoin and the like. Can I say Effing banksters?

    1. Can't disagree with anything there. Debt is the Sword of Damocles, even when it isn't a current financial strain it's always a mental one if you have the imagination God gave a turnip.

  2. Correction: RE: 2nd to last sentence.

    add a comma after, 'I suppose...'. It does change the inference therefore is necessary. Thank you.