This trader believes that markets are constantly seeking equilibrium. Negative interest rates seem like some kind of not natural phenomenon, and an obvious sign of desperation. It seems like it will only bring the world to more of a state of Extremistan than it already is. I'm not sure I want to be around when this whole thing gets unwound.View attachment 161307
Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world’s central banks.
Yen Tumbles as Kuroda Surprises With Negative Interest Rates
The Background
Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead ofextending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the euro area. While it’s still too early to tell if they will work, Draghi pledged during the height of Europe’s debt crisis in 2012 to do “whatever it takes” to save the area’s common currency, signaling the ECB’s willingness to be innovative. It chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S. and Japan. Policy makers are trying to prevent a slide into deflation, or a spiral of falling prices that could derail the recovery. The euro zone is grappling with a shortage of credit and unemployment near its highest level since the currency bloc was formed in 1999.
SOURCE: BLOOMBERG
The Argument
In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there’s a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead. Janet Yellen, the U.S. Federal Reserve chair, said at her confirmation hearing in November 2013 that even a deposit rate that’s positive but close to zero could disrupt the money markets that help fund financial institutions. Two years later, she said that a change in economic circumstances could put negative rates “on the table” in the U.S., and Bank of England Governor Mark Carney said he could now cut the benchmark rate below the current 0.5 percent if necessary. Deutsche Bank economists note that negative rates haven’t sparked the bank runs or cash hoarding some had feared, in part because banks haven’t passed them on to their customers. But there’s still a worry that when banks absorb the cost themselves, it squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend. Ever-lower rates also fuel concern that countries are engaged in a currency war of competitive devaluations.
What Can One Expect from Negative Interest Rates?
- Thread starter schizo
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the fed is just another player in the market, and they are a big player. They are to USD what ADM is to beans.
Yes, actually I do.
Ah, please show what it would look like, avoiding hypothesis and guesswork.
No, that's not to be inferred from what I wrote. One of the consequences of monetizing is inflation . The new debt has not been significantly monetized, up to this point anyway, as evidenced by first a weakening dollar with virtually zero inflation, and now a strengthening dollar with little inflation.. In any case monetization is not something determined by central bank policy, it is something forced on the central bank by fiscal policy.
Monetary and bank regulatory policy is supposed to be dictated by economic conditions. The Central Bank has wide latitude in how control of monetary policy is implemented. There are good examples where it is known, after the fact, that the central bank erred in setting policy. One such very prominent example would be the CB's reaction to the Great Depression, and another would be policy leading up to the 2008 Great Recession. It is clear now that the central bank played a major role in making the Great Depression worse, and in causing the Great Recession. In the case of the recent Great Recession, they had the authority and the tools to head off financial system breakdown well before a crisis developed. The Fed Chairman, however, was an adherent to the philosophy of objectivism, i.e. "the proper moral purpose of one's life is the pursuit of one's own happiness (rational self-interest), [and] that the only social system consistent with this morality is one that displays full respect for individual rights embodied in laissez-faire capitalism ". The Chairman did not believe in regulation of the financial markets; he was certain they would self-correct relatively harmlessly. He believed markets far from equilibrium would spontaneously return to equilibrium if left alone. He was the chief regulator, and he intentionally failed to regulate because even though he was well aware of market and banking excesses and abuse of mortgage underwriting standards, he so firmly believed in the hands off approach that he did nothing to correct the situation. He later recanted of course, and admitted he had been wrong not to have acted..
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I am not going to take the time to do that, but there are many studies you can refer to. Just the huge number of GM and its many subsidiaries and suppliers' employees alone resulting from GM going out of business would have been massive; not to mention all of the additional jobs that would have been lost, and consequent follow on calamities that would have been caused, in the financial and insurance sector, had that sector not been largely rescued. It was bad enough as it was. Please refer to the numerous economic studies available to you.
No inflation, except for everything I need to live, like food and health care. People who claim there is no or little inflation have no effing clue what they are talking about.
This is a thoughtful post on your part and I thank you for that. You've mentioned several things that are related to the after effects of the financial crisis, but might have (would have ) been made much worse had the CB not used QE. For example the lower median household income today than before the 2008 crisis. Also very important aspect to QE that's not mentioned in your post, and is often overlooked, is that QE makes it possible for the government to raise massive amount of money quickly without putting upward pressure on interest rates. QE is where the money came from for recovery programs and TARP (largely repaid at this point) . It is by far the least costly way for a government to raise massive amounts of money quickly. [Of course a county must have good credit to be able to take advantage of QE.]
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Yes, I agree, your ballooning, out of control health care costs plus higher food, insurance and property taxes are only partially offset by deflation in energy costs and other areas of the economy. That's why there remains some residual inflation. I am also one of those who believe the way the government measures inflation tends to underestimate the inflation most of us experience.
We must not lose sight of the fact that the government's numbers are composite numbers, so for example when your healthcare costs go up, in another state, with different regulation, numbers of carriers, etc., costs may have moved down. Recently Louisiana elected a Democrat (Edwards) to Replace the Republican Governor (Jindal). Edwards immediately expanded Medicaid bringing access to routine medical care to several hundred thousand residents (maybe more than a million?). If the government used hedonics in computing Louisiana's health care costs the result could be a massive decrease in cost depending on how the change in cost is computed. The devil here is in the details.
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