Negative Interest Rates Implications - deflationary and inflationary

T

TraderD

Most commonly cited immediate implication is even greater increase in current inflation - negative rates cause people to withdraw deposits and buy other assets. And sure this action will increase demand for stocks/gold etc.

But I wonder if there is a case for deflationary impact given fractional reserve banking. If deposits go down, so will reserves and so will lending. So the whole banking system will begin to deflate, thus there will be less $$$ to go around and prices will experience deflationary pressure.

Which of above forces is greater? To me it seems like deflationary: while 1$ withdrawn from bank and used to buy non cash assets will increase number of bids, same dollar, eventually may pull up to 10$ from the system (in extreme hypothetical case where all loans are called off)

Side notes:
* interesting case would be negative interest with GOV printing more money. My head can't get around this.
* i also wonder how temporary deflation (regardless of negative interest rates) can be used as cover for more money printing, and if it can - then it sure would make sense for it to materialize

What is your take on the implications??? Please share.
 
Bump.

Also, i wonder if there are tools which can track how total amount of deposits in US banks relate to their reserves. Should not this info be public, since all big banks are public? Given that and knowing 10% reserve requirements, one could glean some useful info from banks books.

BTW, was not it sweet move to change reserve requirement from 30% to 10% about 100 years back? Just 20%, no big deal, huh?
 
If there is less incentive to lend then could it cause a bank run?
 
I haven't looked in a while, so I don't have a link handy - but I believe it's available both from FDIC and the Fed's websites; I recall there's even a series that tells you how much treasuries vs others held by banks broken down by size.

Quote from TraderD:

Bump.

Also, i wonder if there are tools which can track how total amount of deposits in US banks relate to their reserves. Should not this info be public, since all big banks are public? Given that and knowing 10% reserve requirements, one could glean some useful info from banks books.

BTW, was not it sweet move to change reserve requirement from 30% to 10% about 100 years back? Just 20%, no big deal, huh?
More...
 
I'll go with no - because financial transactions are book entry changes: when you withdraw $1k to buy stocks, you are transferring that deposit from your savings bank to your brokerage account, who then deposits it in the custody account. When your buy trade settles, that $1k is then transferred to the custody account of the seller and sits as a deposit there; So net net, there's no change in the net money supply.

Buying foreign stocks is different of course, but that's the same as any other net foreign transaction flow.

Quote from TraderD:


But I wonder if there is a case for deflationary impact given fractional reserve banking. If deposits go down, so will reserves and so will lending. So the whole banking system will begin to deflate, thus there will be less $$$ to go around and prices will experience deflationary pressure.
More...
 
Quote from Martinghoul:

There are no direct implications, other than what it means for central bank capabilities.
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So people won't look for other investments and withdraw from banks?

I would and have done so. I only operate current accounts now.
 
Quote from DontMissTheBus:

I'll go with no - because financial transactions are book entry changes: when you withdraw $1k to buy stocks, you are transferring that deposit from your savings bank to your brokerage account, who then deposits it in the custody account. When your buy trade settles, that $1k is then transferred to the custody account of the seller and sits as a deposit there; So net net, there's no change in the net money supply.

Buying foreign stocks is different of course, but that's the same as any other net foreign transaction flow.
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Thanks, good points. But then if this does not change money supply net net in one country, what an ingenious way to charge interest for NOT giving you money.

DontMissTheBus, what is your macro view for the next couple years?
 
Quote from Martinghoul:

There are no direct implications, other than what it means for central bank capabilities.
More...

Which are? What are exact benefits which central bank owners extract from this policy?
 
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