A question on negative interest rates has arisen in response to Negative Interest Rates: Have They Backfired Already?
Reader Tim stated “I really don’t see why negative rates could not occur naturally especially in a deflationary environment“.
In my article I stated upfront “Anyone with an ounce of common sense knows that negative interest rates cannot occur naturally, can only occur with government or central bank intervention, have nothing to do with free markets, and must fail eventually.”
In light of Tim’s question, let’s explore that idea.
On June 12, 2016 the Wall Street Journal reported Fed Decision Makers Wrestle With So-Called Natural Rate.
According to the textbooks, this so-called natural rate is the inflation-adjusted rate that’s consistent with the economy operating at its full potential, expanding without overheating. Also known as the equilibrium or neutral rate, it balances savings and investment.
The natural rate can’t be observed directly; the Fed knows it has been reached only by how the economy responds. “It’s like discovering Pluto: you can only see the effect of the gravitational pull,” said Eddy Elfenbein, an investor and blogger at the site Crossing Wall Street, comparing it to the dwarf planet whose existence was inferred from the orbits of Uranus and Neptune.
“We’re seeing no pickup, none whatsoever, in the natural rate even as the economy has gotten back to full strength,” John Williams, the San Francisco Fed president who has spent years studying it, said in a recent interview with The Wall Street Journal.
“I think the current level of neutral or normal rates is pretty low,” Fed Chairwoman Janet Yellen said in Philadelphia last week. She expects it will rise over time, but said “that is something we’re uncertain about and have to find out over time.”
Fed Vice Chairman Stanley Fischer this year predicted the natural rate will remain low for the next few years, and warned that factors governing the rate are “extremely difficult” to forecast.
“The answer to the question, ‘Will [the natural rate] remain at today’s low levels permanently?’ is that we do not know,” he said in a January speech. “Eventually, history will give the answer.”
Fed Nods to Negative Rates, Hurdles and All
On February 10, the Wall Street Journal reported Fed Nods to Negative Rates, Hurdles and All.
Federal Reserve Chairwoman Janet Yellen waded into fraught territory before Congress, suggesting the central bank could turn to negative interest rates in an economic downturn despite legal and other uncertainties.
When questioned about the possibility, however, she said it could be done if necessary.
“I’m not aware of anything that would prevent us from doing it,” Ms. Yellen said.
No Laws Prevent Stupidity
While nothing legally might prevent negative rates, please note that there are no laws that prevent stupidity.
With that thought, let’s return to Tim’s question.
Negative Rates Logically Impossible
Negative rates are logically impossible because they imply a negative time preference. That statement may be over the heads of most, so let me phrase it a different way.
“Negative interest rates imply that one would rather have 90 cents tomorrow than a dollar today!”
Phrased that way, negative interest rates are logical idiocy. I am not trying to be harsh on readers like Tim. Indeed, I am thankful he brought the question up.
It’s easy for many readers to fall into the trap of listening to mainstream media.
However, Janet Yellen (or any economist) is either a clueless idiot or a big liar or both, to ever state or imply that time preferences can ever be negative or even zero.
Yet, this is what we are dealing with.
Natural Rate
In regards to the “natural rate“, economists note that it can only be observed, not set. I agree. Yet central planner fools at the Fed (central banks in general), all think they can set the natural rate.
The Bank of Japan and the ECB illogically set the rate negative, with detrimental consequences.
The Fed sponsored asset bubbles in 2000, 2007, and again now in search of the “natural rate”.
Frustration
This is all so obvious, it’s beyond belief. And it has been going on for years. Yet, every Humphrey Hawkins meeting (when the Fed Chair addresses Congress and Congress gets to ask the Chair questions), the Congressional questions and comments have been beyond lame.
I would have crucified Bernanke and would do the same with Yellen. It’s a trivial matter to do so actually.
Time and time again, Congressman Ron Paul launched into worthless tirades instead of asking a series of pointed questions that would have trapped Bernanke no matter how Bernanke responded.
Paul fans cheered. But with every one of his wasted tirades, I nearly thew up at the lost opportunities.
Here’s the bottom line on Paul: He preferred hearing himself talk than asking a series of questions sure to make Bernanke look like an idiot.
In the doubtful chance that any Congressman or Senator is interested in hitting Janet Yellen hard with a series of no-win questions for her as opposed to wasting time in meaningless rants, please get in touch.
Mike “Mish” Shedlock
I think your best bet would be Sen. Bernie Sanders. He sure took it to Alan Greenspan a few years ago. And it was Bernie Sanders & Ron Paul who made the Fed audit happen.
There has not been a fed audit. If congress ever passed one, Obama or Hillary would veto it. As for The Donald, who knows?
“And it was Bernie Sanders & Ron Paul who made the Fed audit happen.”
Forget about Bernie.
I had already lost what little respect I had for The Bern when he switched to support for the Clinton Crime Syndicate.
The negative interest rates work well:
https://mises.org/library/free-money-miracle
http://www.lietaer.com/2010/03/the-worgl-experiment/
http://www.arbitragemagazine.com/features/miracle-town-worgl/
http://www.george-reiff.eu/miscellaneous/sub-section-about-germany/free-economy-and-the-miracle-of-worgl/
Just the money lose its function as a store of the value.
Asking what the natural interest rate should be, is the same as asking what the natural price of potatoes should be. The price of potatoes is determined by lots of suppliers that have to deal with lots of different aspects, like the quality of their land, weather, plant diseases and of course demand. But different suppliers will have different prices.
The price of money, interest rates, should work the same. Different banks, with different assets and different customers, will have different interest rates. And banks should have different rate curves, based on their own balance sheet.
You can agree to some spot price and call that the natural interest rate or price.
The sentiment is right, but I have trouble with the term “natural” applied to interest rates. Probably just poetic license, and certainly just an explanatory metaphor. I would not infer that the FED even thinks in those terms. The FED may be guilty of idiocy and totalitarian or authoritarian monetary activities, but I am sure when they sit around in their conference room discussing economic interventions like interest rates they would laugh at anybody calling it “natural,” particularly in a election year when USA.gov is boosting 2016 spending above 2015 levels for the same months in order to goose the economy for Hillary and the Dems.
I remember reading that Nestle and some other corporations issued negative interest rate corporate bonds. That needs to be explained, even if it seems like logical idiocy. I certainly would not buy negative interest rate corporate bonds, and it sure seems like idiocy to me, but some institutions are buying these negative interest rate bonds for some reason. Perhaps less default risk with negative interest rate bonds from Nestle and other corporations, versus the sovereigns; but nonetheless a money losing proposition for pension funds and others needing to show positive returns. Maybe the bet is that currencies will be worth more in the future and that rates will go more negative? Perhaps, therefore, a logical bet on continuing idiocy and illogical central banks? Maybe the negative interest rate bond buyers know the central banks well (e.g. insiders), and have confidence that rates will go more negative, making the bond values go up enough (e.g. thanks to helicopter money) to produce the desired gains? Whatever the reason, negative interest corporate bonds have found buyers. Natural or unnatural, free market or not, I have no idea.
The only reason people buy bonds with negative interest rates, is to sell them for a higher price. They are looking for the greater fool. Well, the ECB is a great fool and buys corporate debt, causing supply to of bonds to drop. Nobody wants to hold these bond until they mature.
“it sure seems like idiocy to me, but some institutions are buying these negative interest rate bonds for some reason”
There you have the root of the problem that all analysts, be it in economics, industry or politics have and which frankly makes their punditry less than useful. These people, especially politicians and government, do things for their own reasons and rarely admit what those reasons are, usually because they would be unpalatable to others or counter to their claimed position or intentions. Instead they spin whatever sounds plausible, is totally meaningless in reality or panders to the prejudices of their audience.
What appears utter stupidity to those with common sense (a rare, rare commodity in today’s world) would be eminently sensible if we knew what they really intended. Of course, not knowing those intentions also means that no one is in a position to analyse, critique or argue the merits of their actions.
I have long applied the “don’t listen to what they say, watch what they do” method. Unfortunately it only confirms that they rarely speak truth, only occasionally exposes what they really intended and often takes years if not decades before becoming apparent.
People are not buying corporate bonds because there is less risk than the sovereign — there is Tr$13 of negative yielding sovereign debt already. Rates on corporate bonds are going negative because there’s nothing else to bid on, and because the ECB is also bidding up corporate bonds, either directly or by accepting it as collateral at face value (or more).
People buy negative yield bonds for a variety of reasons, none of which correspond to the simple case of an investor trying to buy a stream of future (income) payments.
1. Speculation — they extrapolate total returns from the past and expect that they will keep increasing, essentially banking on the capital gain to be realized.
2. Banks need sovereign bonds to round out their assets, which requires (legally) certain amounts of zero-risk capital.
3. Pension funds, insurance companies, and other institutions are required (by law) to keep a certain proportion of their assets in the form of bonds. They are also required to match their liabilities with assets of the same duration.
4. Financial institutions (including central banks) need to possess bonds as the underlying for all kinds of hedging, collateral, and derivative deals: think of foreign currency reserves, interest rate and forex swaps, ETF’s, portfolio’s … myriads of financial instruments.
Excellent explanation and analysis, webej. Thank you.
I think your argumentation is too simplistic. With true money deposits negative interest is not only naturally possible, but in fact the normal state of affairs. In the distant past, people deposited silver and gold with goldsmiths who happened to have the most secure places for storing valuables. For this service they paid the goldsmith a fee or an interest. Hence, if you deposited 100 gold pieces for a year, the goldsmith may have given back only 99, keeping 1 piece to reward his service of keeping your gold save.
The time preference theory of interest applies not to true money deposits, but to real investable goods, such as bricks, steel, timber, and labor. For these real goods you would expect a reward that exeeds whatever you could do with these goods yourself. If nobody has any use for it anymore the natural rate is zero and if you had to pay somebody to take these goods off your hands, the rate would be negative.
This is, practically not possible. If capital goods yield negatively they must be abundant, i.e. we would have reached a state of no-scarcity of capital. Since the value of capital goods is derived from consumer goods at a negative natural rate also consumer goods would be abundant, i.e. no scarcity of consumer goods.
In this situation human action stops, economics stops – we would be living in paradise.
This Situation has clearly not arrived and this situation will in all likelihood never arrive. Hence, the natural rate cannot be negative.
There is a difference between negative interest rates set by central banks and fees one might have to pay for safekeeping. It is precisely those fees – coupled with large denomination bills removed from circulation (allegedly to prevent fraud – yeah right), that lets central banks get away with this.
But there is no real safekeeping involved here. Money is swept from checking accounts into savings accounts nightly, and banks collect interest on excess reserves.
Mish
I rarely disagree, but here I am. Safekeeping is an important function. Storage costs (for silver, not so much gold or fiat) can also be important. Bitcoin would be more expensive if bitcoin safekeeping and storage weren’t problematic. If bitgold proves itself over time, it may put a floor on interest rates. GLD would, if not for rehypothecation, various frauds on commodity accounts, etc. Of course if interest rates go negative enough, people will find cheaper ways to secure their wealth.
Real rates quite frequently been negative yet you seem to have no problem with this, just negative nominals. As for negative time preferences these occur regularly in commodity markets, why should the market for cash be any different.
The natural interest rate is from the days of classical economics where they thought markets normally tended towards a balance. Pretty math, but just not true. Read Minsky.
QE is over in the U.S. So interest rates are set by the free market.
Negative rates are possible in a mad max scenario, where theft is ubiquitous. Paying someone to hold your money is feasible given an unsafe environment.
Y, I can imagine hypothetical scenarios where negative interest rates make “sense” but these are all hypothetical and unlikely to occur in the real world which economists and other self-styled smart people seem increasingly divorced from. In plain English if have $100 and lend it to someone, I expect “rent” on that money (i.e. interest) in addition to the full principal back. Giving me $90 back is what we would normally consider a breach of contract, a default in financial terms. If I thought there were a good possibility I would not get the $100 back PLUS rent, I might just as well not lend the money to that person and wait for a more credit-worthy borrower to come along. Simply SPENDING it instead of lending it is NOT an alternative option. If I needed to buy something, I would spend it but it’s nonsensical for me to go and spend my $100 on something I don’t necessarily want or need just because I can’t find a borrower willing to give me a decent return. Food spoils, money does not, so the most rational choice for most people is to hold onto the $100 until a worthy investment or an actual need comes along. I don’t know if this kind of thinking fits into the theoretical models nose-in-book economists have constructed, but I gotta say I sincerely doubt it. Their “maps” simply do not match the actual territory anymore.
I understand your frustration.
Please be advised the crooks are running the show and their supporters are, well, being supportive.
Negative and/or abnormally low interest rates exist because those in the background who control things wanted them to make some money. Flunkies such as Ben Bernanke, Janet Yellen, the FOMC in general, and those in Congress all prefer to support those in the shadows rather than the people and provide the cover of legitimacy.
Or, in the case of the Eurozone, negative rates exist as a kick the can measure for the EU. Otherwise, the ‘project’ would collapse under it’s own weight. Now, the collapse won’t happen until the world wakes up and tires of the ECB financing the Eurozone with printed money and artificially low interest rates that allow easier deficit financing. Give it a couple or five more years, long after Draghi is gone and someone else is left holding the bag.
Re your question about stupidity: There isn’t enough stupidity in the world to explain the concept of negative interest rates as a good idea for the world in general. They are ludicrous and this fact is obvious. Yet, people who should know better circle the wagons in support.
Corruption provides a better explanation than stupidity. They’re just doing what they’re told.
The monied class at the top of the 1% decide what they want to see. They whisper to politicians, telling them what they need to do. Flunkies such as the FOMC do the actual work. This is why we have negative and/or abnormally low interest rates, perpetual war, QE in general, and unrepresentative government.
Negative and/or abnormally low interest rates will end when the top of the 1% tells the central banks to end them. Not before. Even if the FOMC knows better, they’re too cowardly to do anything about it.
Your simple example of why negative interest rates cannot occur naturally is refuted by the behavior of the fruit seller mentioned in your previous post.
If I have a dollar today that I want to have tomorrow I’ll put it where my analysis says that I’ll get the best return. It doesn’t matter if you are offering me a positive return if I doubt your ability to meet that obligation; I may prefer to pay for a more likely return. As Will Rogers is reputed to have said “It’s not the return on my money that I worry about, it’s the return of my money”.
That kind of thinking may be behind the increased savings in countries with negative rates.
Keith Thomas
Your simple example of why negative interest rates cannot occur naturally is refuted by the behavior of the fruit seller mentioned in your previous post.
Ridiculous – It’s not refuted by anything
I have a book published in the early 20th century titled “Natural Money” that is basically a propaganda piece advocating for formation of a federal reserve system. As far as I can tell there has never actually been a natural money nor a natural interest rate. Both are abstractions that substitute for something other than that which they are, the values of which are determined both by real things and circumstances as well as human wants, desires, and fears.
Hey teapartydoc, love to know the author of that book…
john
Here is another question: If you could borrow money at negative interest, guaranteeing a positive real return, why would you not borrow an infinite amount?
This sort of happens.
A sees an opportunity and controls B.
A has B borrow money at low or negative rates.
Since A controls B, A uses the borrowed funds for profit leaving B to pay it back someday.
A profits, B is left with the liability.
In order to maintain a net interest margin and have low rates for borrowers, rates must go negative. Some would call this fraud, but since it’s done by government, it’s legal. Hacks with doctorates openly support it and claim its no problem.
This is the schematic of a stock buyback, with A being executives in search of bonus and B being the company with the new liability. This is also the description of the Eurozone, with A being the citizens who use the borrowed money for day to day living expenses and not investment or something special. It also explains malinvestment, or investment that would never occur if the cost of money reflected its value to savers.
In Europe, the ECB is simply buying various government bonds from banks at higher prices than the banks are paying for them, causing the interest rate to be negative. It incentivizes the banks to fund government bonds because they get a guaranteed profit and it keeps government financing costs low.
The governments in question are not going to use the opportunity to sell an infinite amount of bonds because they are simply not allowed to.
You and I aren’t ever going to get negative interest rates on anything.
The root of the problem is that governments, via cbs, attempt to set rates. This can happen via repos or by penalties/rewards on reserve and other balances. Perhaps if the cbs instead focused instead on audits (ie, operational integerity in all its forms) the economy would be in a better place.
““Negative interest rates imply that one would rather have 90 cents tomorrow than a dollar today!””
In the summer the squirrel can find more than enough nuts to eat. So he hides away 100 nuts. During the winter, though, he can only eat 90 of them because some nuts get lost, some get stolen, some go bad and some he just forgets where he put them. Why doesn’t the squirrel just eat an extra 100 nuts in the summer and nothing in the winter?
Well you say because his body doesn’t work like that. Not quite true, many animals do indeed eat extra food during the summer and burn off the fat in winter. But adding fat has costs. It takes extra energy to move around when you weigh an extra 100 lbs heavier, for example. Being fat for a bear may not be so bad but for a squirrel it makes it harder to escape predators. So even eating 100 extra nuts today has it’s own negative interest rate for the squirrel.
So given the choice between two negative rates, the squirrel chooses the one that is least negative. This is no different than choosing a higher rate of return if you were looking at two equal bank CD’s but one pays 0.03% and the other 0.01%.
Negative interest rates imply deflation just as positive interest rates imply inflation.
The rate of interest must be priced to reflect inflation, risk, scarcity, and value to the owner of the capital.
Negative inflation implies low interest rates, possibly negative.
Risk does not exist if the money exists from the press of a button or a printing press
Scarcity does not exist if money is printed freely upon demand.
Value to the owner of the capital contains two components. To the money printer it’s just so much flotsam and possibly an inside joke. To the people with actual earned savings and no yield, it’s a monstrosity they have no control over.
If investment is simply flipping paper assets, no jobs are created except if some trickle down is performed.
Thus, no inflation outside of asset inflation. High rates spoil the party.
You also have to consider interest as a price on storing value. I have $100. I could go out today and enjoy it or I can set it aside and go out a year from now and enjoy it. In order to set it aside and store it, I have to pay a price just like anything else in life. If I keep it in a safe, I have to buy a safe, remember the combination, run the risk that someone might break into the safe and steal it. If I put it in a safe deposit box, I have to pay the bank to run the safe deposit box service.
The US dollar is the World’s global Reserve…now more than ever…so the theory that rates could ever be negative let alone “go negative” is an impossibility since the demand…let alone consumption…of dollars is so high. Cash being the antithesis of debt guarantees carry in the dollar denominated World. “Real rates” in the form of Rubles, Reales, even Chinese Yuan are in fact quite high. So are the actual prices of gold, silver, platinum, palladium, oil, natural gas, etc….all of which the USA has in abundance. Even food prices are very high in the USA who is by far the largest producer of foodstuffs.
“Negative rates” sounds like a problem for someone else and their so called “Banking System” would appear.
The USA does have truly massive trade and budget deficits…both of which have massively expanded under the Obamas and their “Jewish Kings.”
Such behavior does not come as a surprise to Americans however who are familiar with this style of (corrupt) finance quite well.
All of the previous practitioners are dead actually.
Budget deficits are a problem only to the extent the central bank monetizes the debt and then, after amassing a ginormous amount, tells the Treasury to forget about it (as Japan will do eventually.) If the CB does not monetize a large amount, then the rate on the debt must rise over time as a reflection of risk, unless, of course, the CB manages rates to be artificially low. Then the day of reckoning is put off awhile.
International trade is self balancing and not a concern. If a country has a large trade deficit it has an equal and offsetting capital surplus. That money MUST be reinvested in the country with the trade deficit, otherwise it’s just useless paper to the holder. For example, many of the Chinese dollars are being reinvested in the US in the form of bloated real estate prices. Jobs producing investment would have been better, but it’s still being repatriated.
That simple equation is called The Balance of Trade. Deficits in trade are always equally offset by surpluses in capital. If we had a surplus of Chinese currency, we would HAVE to reinvest it back in China somehow. Chinese currency is not legal tender in the US, or anywhere except China.
It’s a convention of the hand wringers to forget the other side of the equation. Politicians make careers out of it.
The US dollar is legal tender in many countries and can be used as tender, legally or not, in most of the world.
Leaving aside nuts and squirrels, one other mental image to think about here. There is an episode in Breaking Bad where Walter’s wife gets fed up, she brings him to a storage unit. Inside there is a huge pallet topped with cash. She tells him she used to count the cash coming in, but gave up. Now she has tried to weigh it and maybe there’s ten, twenty million. She’s used the car wash to try to launder as much as she can but there’s so much it would take hundreds of years at the pace she’s been going.
With this in mind think about the statement:
““Negative interest rates imply that one would rather have 90 cents tomorrow than a dollar today!””
She very well might be willing to pay to be able to transfer those dollars into the future. In fact that’s what they were doing (storage unit costs money after all).
Wealthy Chinese are accepting negative interest rates in order have capital outside of the Chinese financial system.
The bigger question is when has deflation (which is what is pushing central bankers to push for negative interest rates) ever caused consumers to put off purchases? Sure, we’re all waiting to buy a new iPhone because Apple has telegraphed a new model will be introduced later this year, but how many people saw the Model T and decided to keep their horse because “it will be cheaper next year?”
Central bankers are desperate for consumers to get busy buying stuff again, but the problem is that people who have all money aren’t in a position to consume anything. They (sort of) own houses, have a bunch of stuff, and (most importantly) are looking at retiring in the next few years and wondering how they’re going to survive when they aren’t going to get any reasonable interest on their savings. Until someone in DC figures out that fact, millennials aren’t going to get beyond entry level jobs, Gen X’ers aren’t going to move into upper management and we’ll continue to hear boomer journalists talk about how they plan on working forever because “they love their jobs.”
In step with the idea that most people hold some (usually benign) delusions, I imagine readers have surmised that it is not unusual to find delusional people in politics (or the Fed, which is political, despite what they claim.) The primary difference is, in politics, one’s delusions can more easily cause pain for the many.
_aleph_
Politely disagree.
Never use stupidity as the excuse to explain corruption. Stupidity exists but corruption is more common. Stupidity is the excuse they use to avoid being caught.
Why are people corrupt? They are wired that way.
Hillary is a good example – she has the morals of an animal.
fingerhole, why are you insulting animals?
In my article I stated upfront “Anyone with an ounce of common sense knows that negative interest rates cannot occur naturally, can only occur with government or central bank intervention, have nothing to do with free markets, and must fail eventually.” Mish
That depends. Accounts (a deposit is legally a loan) at the central bank are inherently risk-free* and thus should return no more than 0% anyway. (Otherwise one is receiving welfare proportional to account balance.) Subtract central bank overhead and one ends up losing money which is only justice** if one does nothing with it.
Otoh, loans to the private sector are risky and so one might expect and receive:
a) a positive interest rate
and/or
b) collateral in excess of the loan amount so the lender profits in case of loan default.
*Inflation risk does not apply to demand deposits.
** See Mathew 25:14-30 (“The Parable of the Talents”).
I agree that the Fed can’t set the ‘natural rate’ and will almost always get it wrong but I still wonder if negative rates can’t naturally occur.
Let’s say we’re in a deflationary environment where real prices are declining 5% a year and the negative rate of interest is 1% for a one year bond.
Someone buying those bonds may receive $99 one year from now for each $100 invested but if prices are falling by 5% per year, would they not be ahead by 4%?
The investor who has decided that no other investment offers the assurance of government bonds has protected his capital and can now go out and buy assets that are 5% cheaper than the year before.
If the investor waited 3 years and assuming 5% real deflation each year, the investor would theoretically be ahead by about 10%. I don’t know how to run the math but I know it’s not a clean 4% gain each year since the discount is based on a shrinking amount.
Someone buying those bonds may receive $99 one year from now for each $100 invested but if prices are falling by 5% per year, would they not be ahead by 4%?
No they would be behind where they should be by 1%
“However, Janet Yellen (or any economist) is either a clueless idiot or a big liar or both, to ever state or imply that time preferences can ever be negative or even zero.”
To ever actually admit their economic theory and the models based upon it are seriously wrong would mean the end of the confidence in central banks which is the only thing holding up equity markets worldwide. The CONfidence game must continue. That can’t happen if the empress ever admits she’s naked (oh, the mental image; glad I’ve already eaten breakfast…)
Plus, there’s this (the fully justified quotes around “Sciences” are mine):
“The mystery is how a conception that is vulnerable to such obvious counterexamples survived for so long. I can explain it only by a weakness of the scholarly mind that I have often observed in myself. I call it theory-induced blindness: Once you have accepted a theory, it is extraordinarily difficult to notice its flaws. As the psychologist Daniel Gilbert has observed, disbelieving is hard work.” — Daniel Kahneman who shared the 2002 Nobel Memorial Prize in Economic “Sciences” with Vernon L. Smith.
Again, I guess I need to keep drilling this in … Never assume stupidity as an excuse for corruption. Nobody is that stupid for such a long period of time.
As the old saying goes, if you don’t know who the sucker at the table is, that means it’s you.
Your job is to keep lamenting about “Why can’t they just see something so obvious?” and their job is to keep blathering nonsense and ignoring you while supporting the top of the 1%.
Speaking of corruption.
Years ago the GAO (on the Pentagon) famously said something along the lines of “they haven’t failed an audit … their books are so screwed up they can’t be audited”.
Year after year the Defense Department is a black hole for $hundreds of billions of taxpayers money. I have no doubt TPTB like it that way so they can have untraceable slush funds, black ops, contracts with friends/family, etc.
cdr’s razor seems to be the opposite of Hanlon’s Razor:
https://en.wikipedia.org/wiki/Hanlon%27s_razor
CJ,
Not at all. Everyone says stupid stuff now and then. They often repeat it. Most are educable if approached and the problem is explained. Even me.
Persistent, unflappable, wrongness that is used to benefit a few at the expanse of many, for a long time without even a little bit of introspection, is plain simply lying. Anyone who consistently accepts the excuses without challenge, even when their beliefs and action defy all common sense, reality, and observation, is a useful idiot. There are armies of useful idiots around for this problem. The polite introspection from the WSJ excerpted above is an example. They should be more dogged and blunt.
CJ,
If someone tells you 10 lies that you reject, but you eventually fall for their persistence and start to kind of believe 2 of them a little, then you’ve been sold and the liar is now a part of your life. They probably think it’s cute that you defend their fictions or even debate them as possibly factual.
It’s called the foot in the door. This is how wacky economic theories are sold. You’ve been had.
And now you’re angry because I had the audacity to question your judgement.
This is called hook, line, and sinker.
Settle down cdr, I am not angry at all, I made an objective observation. There certainly are exceptions to Hanlon’s Razor, for example, Hillary is not stupid, she is just plain evil. She can keep on lying forever but I will not believe any of it, regardless of what Goebbels said.
CJ,
I’m not angry. I just write that way. Actually, I’m more despondent since I believe little of anything anyone writes in objection will make the slightest difference. The simple fact ‘we know’ matters insignificantly, if that much. Nothing will change.
I’m just a fanboy of fraud and all the ways it goes about getting done. There are actually a limited number of ‘ways’. The implementations are infinite. They all boil down to the same basic elements if you look at it objectively. It all amounts to figuring out the ‘con’. After that, it’s simplistic to understand. Doing anything about it is another story. In this case, a likely impossibility. Even the FBI is supporting the Establishment, just as J Edgar ignored the Mafia when they knew he wore dresses and threatened to tell the world.
“Negative rates are logically impossible because they imply a negative time preference.”
So? … if in deflationary environment.
US in a fractional reserve banking system. Only about $1.5 trillion in currency (M1 about double that). Not everyone can be holding “cash”. For the average individual this might be possible. But for a very wealthy person? Fortune 500 firm? They have to use the banking system. Certainly a lot cheaper to pay a few basis points on a very large sum than paying for vault, security, etc.
Certainly a lot cheaper to pay a few basis points on a very large sum than paying for vault, security, etc. Tony Bennett
Yes. Moreover, all citizens (and not just depository institutions, aka “banks”) should be allowed inherently safe, convenient accounts at the central bank itself and not be limited to unsafe, inconvenient physical fiat, aka “cash.”
Otoh, individual citizen accounts at the central bank should be free from negative interest up to, say, $250,000 US, in line with current deposit insurance, which should be abolished as an unnecessary subsidy of the banks.
Negative rates are ridiculous. I’m supposed to pay for the privilege of banks holding my money (or me holding their debt)? This is ass-backwards and shows just how screwed-up the current financial system is. Keynesian economists are merely doubling-down on a failed policy based on a failed thesis. Sovereign defaults along with social unrest are the next step in a logical progression from here. I also think there will be a move towards crypto-currencies and the PMs (i.e. Ag, Au) as people move their money out of the failed financial system.
“Gold is money, all the rest is credit” – JP Morgan testifying in Congress in 1912
“Fiat money eventually always goes back to its intrinsic value – zero” – Voltaire
http://www.peakprosperity.com/podcast/86788/lacy-hunt-world-economys-terminal-case-debt-sclerosis
Lacy Hunt: The World Economy’s Terminal Case of Debt Sclerosis
In danger of dying from too much debt
by Adam Taggart
Sunday, August 24, 2014, 11:54 AM
Dr. Lacy Hunt: The relationship between bond yields and nominal GDP is what economists call the Wicksell effect. Wicksell was a Swedish economist; he was born in 1851, died in 1926, contemporary of _____[Inaudible 00:24:05] also born in 1851. What Wicksell said, and there’s a lot of validity in it and it’s been confirmed by more contemporary studies, is that the key to monetary policy is to look at the relationship between the market rate of interest and the natural rate of interest. If the market rate of interest is above the natural rate of interest, that will depress economic activity; because you’ll have to take resources from the income stream and put it into the financial stream. Otherwise, if you get the market rate of interest below the natural rate of interest, then you can take resources from the financial stream and divert it to the income stream. Now probably the best measure of that for the market rate of interest would be something like the Baa rate. The Baa is the lowest investment grade rate. So you’ve got all types of credit out there and the natural rate of interest would be nominal GDP growth rate. Well we have this relationship, you can look at the date since 1930, and what you see is when the market rate goes above the natural rate, you get recessions; when it goes below, you get expansions.
The market rate went above the natural rate during the 2007-2008 period and in spite of the Fed’s efforts, the market rate—the Baa—rate has stayed above the nominal GDP growth rate. The only way that you can possibly deleverage this system is to create the other situation. My way of thinking is that our central bank policy’s inability to activate the Wicksell effect is a symptom of the extreme over-indebtedness in the same way that the low inflation rate subdued economic growth, the growing deterioration in demographic fundamentals in the U.S., Europe and Japan are all occurring. These are symptoms of the over-indebtedness. The root cause of the problem is too much debt, too much of the wrong kind of debt and trying to solve an indebtedness problem by taking on more debt.
What should the natural rate of interest be on gold?
And might there be a difference between the interest rate on depreciating fiat currency, which is nothing more than debt, and that on value retaining real money?
Time premium + Risk premium. Both apply to fiat, but only one to gold.
Really, when the very value of Federal Reserve Note promises to pay is manipulated by their issuer, so must the rate of interest be tweaked to reflect such tinkering.
The dollar is the property of the Central Bank that issues it, so said issuer can set it’s time value to whatever it perceives to be advantageous to it’s agenda. At this point, that agenda would be to zero in on generating maximum “Wealth Effect” by blowing bubbles,,,,,,because, TINA,,,,,you know?
As with any Carnival Operator, admission fees can be waved, but he’ll get you on the concessions.
One can play the game,,,or not. Just don’t take any wooden nickels.
,,,,,but I digress,,,,,the natural rate of interest can only be set by each individual actor at the grass roots level. Only that market player can determine the Time/Risk premium on the stored fruits of his labor.
,,,,provided we are talking real money, that is. Who in his right mind would store his wealth in someone else’s debt instruments,,,,at zirp?
Negative rates. No wonder Americans don’t save enough for their retirement. No wonder corporate and muni pensions are toast.
Calpers retirement fund is broke but not toast, the taxpayers are legally required to make up any shortfall:
http://reason.com/blog/2016/08/09/californias-six-figure-pension-club
Fortunately for pensioners taxpayers are trapped, unable to leave the state. Oh wait…
In the United States, the Federal Reserve has almost no control over the interest rates in the private sector. Interest rates are at historic lows because the demand for money is at historic lows because businesses can not find good investments and Americans are buying houses at an historic low rate.
All of this conspiracy theory about the federal reserve and “central planners” is hokum.
The Federal Reserve sets the overnight rate between banks (adding, draining liquidity to achieve target) … the market decides the rest of the yield curve.
But central banks certainly have their thumbs on the scale via their balances sheets. Cumulatively they have $trillions of assets (mostly debt instruments) on them. IF they decided to sell, they could drive yields higher (the more they sold the higher the yield).
Which would be the right thing to do in a high inflation environment.
This is what happens when you are in a Minsky Moment. That’s the moment (decade) when your Ponzi based banking system plus your Ponzi based financial system starts to shrink instead of expand. All kinds of Through The Looking Glass stuff starts happening because the payment system operated by those same Ponzi banks is threatened. We will starve if the payment system fails (see Venezuela) so the government starts making it up as they go. Anything is allowed so long as the Payment system survives and functions. The threat (or channel in CB speak) is interbank counterparty risk. It was Lehman that showed exactly what can go wrong when a big bank turns into a bad and bankrupt bank. Around four $Trillion of Fed money printing, asset buying, loan guaranteeing, and bankruptcy bailing later we are barely on an even keel. Janet Yellen would slap Mish up side the head and say: You have no idea how screwed this system is. Negative rates are the least of my problems. If I thought I could fix this piece of shit financial system with negative rates I’d do it.
The real problem is it won’t work not that it’s stupid. What would work is a debt jubilee but almost everyone is too smart to see that.
Politely disagree. Yes, the good times will end. The weight of debt and low rates will eventually snap back and bite the rear ends of everyone.
Afterward, a new scam is waiting in the wings. The details have yet to be worked out because they will need to be fine tuned to the facts of the moment. The response is already a work in progress. No traditional bust following the boom will happen. If anything resembling a bust happens, it will be fodder for the planned reply. The upper 1% has a plan in mind already. After the dip … life will go one and most people will be relieved and forgetful.
The fix will involve central bank provided liquidity, interest rate management (low rates), and deficit financing monetized by the central banks. The same as now, just bigger with a new sales pitch behind it. Plus the scapegoats and a new economic theory or two.
Hint: it involves more of the same with a scapegoat or two for the masses to prosecute. Then, old wine in new bottles, with a TARP-like reply as a bonus. Anything less would force a debt panic on the world that would wipe out some aspects of civilization.
you read it here first.
Of course, it doesn’t NEED to end like this … a perpetual central bank oriented monetized debt based economy with low rates and financial market inflation only. Here’s the alternative:
All debts on the books be paid for by those who benefited from the money. For example the people of the Eurozone pay down the debts being incurred for their day to day living expenses: Or China’s empty cities be populated or paid for. Starting today and in earnest.
From now on, governments live within their means. Taxes support expenses. Investment is based on planned growth. Central banks keep alert for liquidity crunches, otherwise they just sit there like potted plants. Financial market regulators protect investors of all kinds. HFT excesses end.
Or, to quote Hillary when asked about her speeches to Goldman Sachs … “HA HA HA HA HA”
Or, to say it differently, we are on the cusp of doing it right or doing it wrong. I expect the worst.
The Interest Rate Trap: According to this article, lower rates or higher rates – both have bad results:
http://www.zerohedge.com/news/2016-08-04/metlife-misses-big-feds-low-interest-rates-driving-massive-job-cuts-insurer
Maybe the best thing would be to just get rid of the fed and artificially set interest rates?
The squirrel analogy quoted above by Brian Considine is a good one to think about, but I think people can be lead astray if they don’t think about it carefully.
The squirrel knows, all else being equal, he needs to have the calories of 100 nuts to just survive from September to March- that is the return he needs on the time and labor he invests in the Summer. .In other words, those 100 nuts he consumes during the non-Summer season are value of the invested time and labor that Summer. Now, for the purposes of argument, let’s suppose that the squirrel knows that to consume 100 nuts during the Fall-Spring, he needs to actually accumulate 150 nuts in the Summer because there are losses due to theft and spoilage as a matter of course. This does not mean that the real return is minus 33% (the loss of 50 from 150). If the squirrel eats 100 nuts from Fall to Spring, then his real return is 0%- remember, he invested time and labor, not 150 nuts, to make sure he had 100 nuts to eat in the off seasons. That is the important distinction that one must make here. The nuts are like money in this example, and the time and labor are like capital. The time and labor had the value of 100 future nuts at the point they were invested, and that is what they produced in future consumption- 100 nuts, which is the minimum required for the squirrel to repeat the process the following Summer-sort of capital maintenance- hence the zero return.
Of course, this example is like a subsistence farmer saving food from the Summer harvest, and the principle is the same. However, the farmer can also invest time and labor and other resources to improve his losses from spoilage and theft-capital improvements of a kind- or he can make labor saving implements, or he can find a way to trap the rats eating his grain etc.- thus he can raise his return into positive territory thereby saving more food than he can consume during the Winter, thus freeing some of his time and labor in the next Summer, and so forth. One can extend this into trade of the surplus Winter food etc. In other words, his capital not only replicated it’s value for the following Summer, it deepened itself so that less labor can be expended on just survival- hence the positive return.
Now back to the squirrel, let’s suppose that circumstances during the next Summer change- the squirrel notices that the other fauna have quadrupled in population, and the calculation for the effort needed in the Summer to ensure 100 nuts has changed, too- the new number of nuts that must be accumulated isn’t 150 any longer, it is 300. The time and effort he must expend has doubled, so his real return isn’t minus 66% (loss of 200 from 300), it is minus 50% because his invested capital is worth half as much as it was the previous Summer- it produces half as much in future consumption as it did. It would be like the farmer finding that half his cattle were stolen, or sick- both have suffered a capital loss.
For the modern world, we save/invest money as the proxy for a defined future of consumption goods. We, of course, evaluate that future value on a continuous basis. For example, I might start to put away $1,000 a month for 20 years with the expectation that I will have $240,000 in nominal money (of course, this means I put it in a bank account or mattress with a 0% nominal return) in 20 years time. When I started, let’s say my expectation was that the inflation rate of my future consumption basket was 0% itself, so that is how I match my desires for 20 years time with what I was doing in the present day. What happens if the bank suddenly says it will charge me 10% each at the end of the twenty year period? My nominal expected return has dropped by 10% to minus 10% from 0%. With the personal CPI still at 0%, my real return has also fallen by 10%. I could just deposit $1111.11 every month instead to make sure I have the $240,000 at the end after the nominal and real loss, and this sort of what some of the people saving for tomorrow are doing today in the low and negative nominal rate environment- it is just that funding tomorrow has gotten more expensive in the present. Let’s also suppose that the bank can make the deposit haircut steeper at some point- I then face the choice of finding another way to save my money- taking the original 10% cut immediately and transferring- or accepting the higher haircut later, and saving even more money in the present to make the $240,000 nominal target. However, this raises my uncertainty level- I now don’t even have a firm expectation what the future value of my present day investments might be- I might well reach the point where I decide the future value is going to be zero, at which point I might not invest in anything other than a bunker and guns.
My fear is that the present day western world might well be tipping over into capital consumption. Capital consumption can take a lot of different forms, and in a lot of heavy government controlled regions, it comes in the form of premature infrastructure replacement, worthless infrastructure like pyramids or bridges to places no one will ever want to live, or high-speed rail that no one will pay enough to even maintain, or into the building of production facilities of which can’t be operated on a profitable basis.
Speaking of high speed rail, if I were king I would make the casinos in Vegas pay for the high speed rail from LA to Vegas, which everyone knows can never get enough revenue by itself to pay for it., even though the I-15 from LA to Vegas is horrible on Fridays and Sunday afternoons.
“According to the textbooks, this so-called natural rate is the inflation-adjusted rate that’s consistent with the economy operating at its full potential, expanding without overheating. Also known as the equilibrium or neutral rate, it balances savings and investment.”
Of course one cannot observe “the natural rate.” Because either 1) one does not exist anywhere, ever; or 2) exist all the time, everywhere. More fundamentally, there is no such thing as “an economy operating at it’s full potential.” Again, it either never does, or always does. dependent on random definition. And finally, savings always balances investment.
The only “benefit” of clinging to the silly pseudoscience that has been passed off as “economics” for the past 70-odd years, is maintaining the illusion that “the economy” is yet another “thing” that can, hence should, be “managed” by members of the privileged classes.
Which they, as with everything else; conveniently, predictably and consistently can be counted on to ‘manage” in a way that somehow mysteriously end up benefiting themselves to the detriment of the rest.
I have no doubt having to work for a living sucks, compared to basking in self aggrandizement while “managing” figments of ones imagination. But other people are stuck suffering on account of this idiocy. And while the latter may still remain mostly indoctrinated enough to believe is pseudo babble, sooner or later they, like the Somalis two decades ago, will realize there really is nothing whatsoever worth preserving in any of it. And that simply blowing it all up and replacing it with nothing but a steaming crater, is pretty much the gold standard for reasonable behavior. And that the world and society that results from doing so, is a vast improvement over what came before.
No free man ever benefit from being “managed” by a bunch of self appointed, at best half literate, hacks. And hence, no “economy”, which is simply a bunch of rules of thumb for better understanding relations between free men, does either. And no amount of progressive indoctrination will even change that universal fact.
thoughts on “Negative Interest Rates: Can They Ever Occur Naturally? Mish
Yes they can occur naturally since who says that a monetarily sovereign government MUST provide physical fiat, a.k.a. “cash”?
Thus all fiat could reside in accounts at the central bank where negative interest might be applied*. Otoh, since the accounts are inherently risk-free, no positive interest should be provided since that would constitute welfare proportional to account balance.
So yes, negative interest can occur naturally.
* e.g. to discourage money hoarding beyond, say, an individual adult citizen limit of $250,000 US.
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