Federal Reserve Vice-Chairman Stanley Fischer made a couple of controversial statements this week regarding negative interest rates.
Fisher stated negative rates “seem to work” while admitting they are bad for savers but they “typically they go along with quite decent equity prices.”
There are two problems in play. The first is an explicit admission that the Fed sponsors wealth inequality. The second problem is Fisher does not understand how markets even work.
Failed Transmission
John Hussman takes Fisher to task on how markets work Failed Transmission – Evidence on the Futility of Activist Fed Policy.
Any economist with even a vague understanding of how securities are priced should understand that elevating the price that investors pay for financial securities doesn’t increase aggregate wealth. A financial security is nothing but a claim to some future set of cash flows. The actual “wealth” is embodied in those future cash flows and the value-added production that generates them. Every security that is issued has to be held by someone until that security is retired. So elevating the current price that investors pay for a given set of future cash flows simply brings forward investment returns that would have otherwise been earned later, leaving little but poorly-compensated risk on the table for the future (see QE and the Iron Laws for an illustration of this process).
In this context, the following statement last week by Federal Reserve Vice-Chairman Stanley Fischer last week (Bloomberg) displayed a strikingly narrow understanding of the investment process:
“Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that and we have to make trade-offs in economics all the time, and the idea is the lower the interest rate, the better it is for investors.”
To be fair, there’s a kernel of truth in Fischer’s view that lower interest rates are “better” for investors. In recent years, low interest rates have certainly encouraged speculation, stretching reliable measures of equity market valuation to the third most offensive level in U.S. history next to 1929 and 2000. But Fischer’s statement is also incomplete. A clear understanding of how financial securities are priced suddenly turns Fed policy from something that seems quite generous to investors into something that’s actually terrifically hostile. See, the lower the interest rate, the better it is for investors, but only provided that investors wholly ignore the future.
In reality, depressed interest rates ultimately benefit only those investors actually cash out at the speculative pre-crash extremes that the Fed seems so fond of producing. From here, for example, we estimate that the prospective 12-year nominal total return on a conventional portfolio mix (60% stocks, 30% bonds, 10% cash equivalents) is likely to average just 1.5% annually. As for the S&P 500 Index itself, we presently estimate annual total returns of just 1.4% annually over that horizon, with a strong likelihood of cyclical losses on the order of 40-55% in the interim (which would be a rather run-of-the-mill outcome from present extremes). Real prospective long-term returns are already likely to be negative on both fronts after inflation. The blue line on the following chart brings the future of conventional investing up-to-date.
The foregoing chart estimates 12-year prospective S&P 500 total returns using the log ratio of nonfinancial market capitalization to corporate gross value-added. The two have a -93% correlation on that horizon in post-war data (negative, because higher valuations imply lower subsequent returns).
Reflections on Wealth Inequality
The US does not have negative rates, but it certainly has had amazingly low rates. What Fisher said about negative rates applies equally well to low rates.
By holding rates too low too long the Greenspan Fed created a huge property bubble.
Who benefited?
It certainly was not the saver. The beneficiary of the bubble was the equity holders and bank CEOs. Not only did financial insiders make a fortune in stock options in the runup, the Fed bailed out the banks after the crash as well.
Negative Rates “Seem” to Work
In his speech Fisher said Negative Rates Seem to Work in Today’s World.
Negative rates “seem to work” for whom?
Mike “Mish” Shedlock
Private debt to GDP is over 200%. Federal debt is around 100%. Without negative rates we are looking at a fiscal crisis, a depression or both.
I think those of us who want reform need to give up on trying to fix the system and instead start thinking about how to break it faster. Once we have hyperinflation we can wipe out all debt and have a meaningful reset, like the debt jubilees in antiquity.
“I think those of us who want reform need to give up on trying to fix the system and instead start thinking about how to break it faster.”
It would break NEARLY OVERNIGHT if more people did THIS. This is something that everyone can legally and ethically do INDIVIDUALLY and, as a matter of fact, within this culture it used to be accepted as the ADMIRABLE thing to do:
The Undebtors: Sworn Enemies of the Vampires of Debt – Those who refuse debt, regardless of the sacrifice, are starving the parasitic, exploitive machine; those with debt are feeding it.
“People talk about starving the machine. You want to truly starve the machine? Get out of debt and stay out of debt, regardless of the sacrifices needed to do so.”
http://charleshughsmith.blogspot.com/2015/03/the-undebtors-sworn-enemies-of-vampires.html
So, everyone stop bellyaching and actually do this!
I AM and have been for a decade now!
Winston,
I am debt free and have savings on top of that. My savings is just sitting in a bank and, thus, available for lending somewhere. My savings is supporting whatever banks still lend for.
Being debt free is great. My house is paid for and my credit cards are paid off monthly.
I’m old and will avoid the stock market until I can get my savings squirreled away into interest bearing accounts that provide a realistic income. Then I will spend this income at the rate of 100% per year. If I die with some on the table, my heirs will likely flush it down the drain on all sorts of wasteful things that kids like to spend inherited money on. This will aid the economy. That being said, I used to be a really good range trader and want to put a Roth to work in that way as a hobby for pin money, but not until I get decent interest income to fall back on again.
The Fed is stupid. They seem to forget that your interest expense is my interest income.Paying interest that becomes income to someone else adds to the ‘velocity of money’. The higher it goes, the more inflation you get. The Fed is causing the problem they are trying to fix with low rates. Increasing rates will increase incomes that will be spent and increase the velocity of money. To that extent low and negative rates do not work unless your goal is to slow the economy. They apparently flunk econ 101.
However, the Fed is a victim of regulatory capture. The upper 1% like low rates out of pure greed. Low rates allow them to amass great wealth with no effort except for the work needed to persuade the Fed and politicians to support them in their efforts to amass great wealth.
Low rates also subsidize government spending by keeping interest expense low. They are also a form of indirect taxation that offers 100% compliance in tax collections, and over 100% when you take printed money being used to monetize government debt into consideration.
Low rates aren’t going anywhere. Think Charlie Brown and the football kick.
Inflation erodes savings.
Hyperinflation wipes out savings.
Deflation wipes out debt.
As people borrow and spend more, store owners react by increasing prices. Old debt is paid off with cheaper dollars; however, the amount of system debt increases faster by consumers than debt being retired by retailers. When people borrow less money because they want to buy fewer things, prices fall. Stores generate too little revenue to repay debt, and defaults happen. Once a default happens, debt has been eliminated.
Default, however, wipes out and erodes savings. Every dollar of debt is someone’s dollar of savings. When a debt is wiped out in bankruptcy or otherwise becomes uncollectable, then savings is wiped out and savers pay for that one way or the other.
How negative rates work:
Low and negative rates allow debt, including government debt, to be sold at rates far below those in recorded history. This permits governments to deficit finance more cheaply. Printing money to monetize the debt, such as the ECB and BOJ routinely do, helps more.
Other means to perform government financing are
1. inflation combined with long term debt, debasing currency values over time so the real value of the debt decreases over time – a form of taxation and alternative to point 2 below – what the central banks tried and failed to accomplish
2. actual tax increases so the government can pay as it goes using normal interest on debt, alternatively, the government can provide lower service levels so it can lower expenditures and liabilities and live within its means (not politically realistic)
3. outright debt monetization via central banks without regard for interest rates (uncommon)
Negative rates ‘work’ because they allow the government to borrow money cheaply and finance the deficit more easily and for a longer time than if normal rates were paid in a non-inflationary period.
Think of negative rates and abnormally low rates as a tax. Instead of remitting a percentage of earnings to the government, you don’t get earnings on your savings with the savings on debt service being a proxy for tax revenue. Taxes stay lowish and service levels remain high. The public is paying taxes indirectly.
This is the real reason why the Fed is reluctant to raise rates.
They also ‘work’ because they permit the wealthiest to game the system and profit from low rates for the purpose of amassing personal wealth. These people provide positive reinforcement to people such as the FOMC, who confuse it with doing good works for ‘the people’.
“These people provide positive reinforcement to people such as the FOMC, who confuse it with doing good works for ‘the people’.”
Precisely. Bernanke took things so far as to acclaim his actions to be “courageous” and afterall, nobody wants a cowardly banker.
These financial shylocks are going to eventually force millions of senior citizens to eat Purina Dog Chow for supper.
They act stupid but are fully aware of the outcomes of their intended desires. Evil is as evil does.
The last 8 years have been all about keeping the club members happy. The very ones who destroyed the global economy at the expense of the bystander peasants.
If hell actually exists I’m sure the divine powers have big plans for these folks.
Personally I am fed up with being the one who has to pay the price so that someone eventually gets punished .
I would actually feel sorry for these people as they seem so misguided as to actually believe that they are performing some great service … but then I always spot traits of jealousy, greed , vindictiveness even , along the way … well they say no one is perfect … so maybe they will forgive me my being witness eventually … though more often they seem to like erasing any testimony so as to keep the sheet clean .
Dictatorship is ruthless , socialism is careless , are we living in the hybrid , a kind of sociatorship ?
I like the word “kleptocracy”
I think that describes it perfectly.
Agree, at least just until the word gets confiscated…
If low/neg rates plus QE have a direct impact on real estate and equity pricing,
Then with all due respect Mish, why didnt you and other analyst promote equities
With repeated vigor as far back as 2011? It seems one can look back and see what
Has occurred and comment on it but I can’t recall anybody around 2010-12 saying
How it directly would impact stock pricing? I certainly do not agree with fed policy
But had I been at the summer parties in the hamptons I may have had a greater
Equity position exposure.
I think it is more complex than that . The SP 500 has doubled since 2010 roughly , but if QE and low/negative rates were responsible , well EU should be doing well too ? CAC 40 is up roughly 10% over that time , Eurostoxx 50 about the same . Gold is up 20% . I haven’t the calculations for the profit in changing yield of government debt during that period .
I think the point is that we do not know what the prices will be tomorrow for anything , and each person has to follow their best judgement – it is not a competition , it is placing wealth where you are content to store it with relation to earnings or conservation . Hindsight is not the same as estimating into the future , confidence does not always wear the same colour.
Very difficult (impossible may be) to identify the pin that pricks the bubble. Even now you can only say that risks have increased, for all one knows it can end in 2016, 2017 or may be 2024. Who could have imagined that the central bankers would do this. May be few years hence we might be saying the same thing. Who knows, they may be able to ban cash, stop production of all but $1 note, make law holding gold is criminal, make accounting rules which can be marked to fantasy for ever, stop sales using cash, do helicopter money, do QE for ever, take interest rates to -5% (if you ban cash even this or lower may be possible and you will not be able to do much about it) and confiscate money in your bank account. This is what you get when you have central bankers running amok and are not held accountable for their actions. Why this policy, what are the benefits, what are the risks, by when will it deliver, what is the guarantee it will deliver, where is the proof it will deliver, have you tested it, who will be held responsible if it does not deliver, have you studied the unintended consequences etc. (now the Fed just says it will work, it is for your god and we have to take their word for it and if it does not work we did not do enough and you have a Congress which conveniently does not ask this question). And after sometime of god’s work like this Goldman Sachs is waiting for them with open arms.
It is always the guy holding the bag who gets smoked, when he finds that the marginal buyer does not turn up (Marginal buyer… http://www.peakprosperity.com/blog/100798/marginal-buyer-holds-pin-pops-every-asset-bubble). How will you know when the marginal buyer will not turn up – is it when S&P is at 2120 or 2250 or 3000? If you can, ride it till you can.
re: the end
2016 or 2017, yup.
2024? Not a chance that the balls will remain in the air for anywhere near that period of time.
From Stephanie Kelton on Twitter:
Keynes: interest is a reward in exchange for giving up liquidity.
The Fed: negative interest is a punishment for not giving up liquidity.
When I think of it that way it makes perfect sense.
LIKE
Lower rates can increase future cash flows by lowering the expense of debt, thus increasing the value of not just the price of equities.
I can likewise increase cash flows by expanding credit to subprime borrowers by pretending they are prime borrowers. Treating the 600 FICO as though he were an 800. Ask the automotive sector about this.
These are all variants of the “extend and pretend” meme. Not sure how value of equities gets improved by it. (Price/earnings gets better?)
Looking at it from the perspective of the borrower. If corporation X has $1/share in interest expense on debt and they refinance to lower rate and the interest expense drops to .25c/share then that increases their current and future profits, all else being equal.
(((Fischer))) and the rest of them should be dragged into the street and dealt with by the Great Unwashed.
Now that’s something to HOPE for.
Cannot agree more!!!
I look at artificially low interest rates as aiding and abetting the creation of a bubble in equity values. (Just where are those future “earnings” supposed to be coming from?) Since I am retired, I cannot take the risk of playing financial musical chairs if I cannot analyze and trade fast enough to avoid being the one without a chair when the Fed music stops, especially if I have to work through a fund.
Fed press releases with constructive disclaimers are not guidance. (Insert story of boy digging through the manure looking for a pony). So with debt not giving a good return, and no trust in current equity markets, I bought a house and paid it off. At least the rent avoided can be considered a dividend of sorts and just maybe I will get some growth in asset value too if the stars are in alignment when I sell. In the short run I have lost opportunities, but I have to manage risk at my age and the way markets are behaving make no sense to me except to the degree the Fed is still playing the rate music.
The seniors who did the right thing and saved all their lives have been hobbled by the establishment…until there is real pain…the pain that people feel when they have no access to money…will there be people who will resort to the “last resort”. There is no integrity in this country at the highest level…when others see people who are achieving great levels of wealth at others expense and there is no ramification then they want to try it too….and these same criminals look down on those who have maintained their sense of integrity…but we maintain our hope…
the federal reserve ended QE and increased the federal funds rate. The stock market has gone up and market rates have gone down. That is reality. The Fed is just acting like it is in control.
“A financial security is nothing but a claim to some future set of cash flows. The actual “wealth” is embodied in those future cash flows…Every security that is issued has to be held by someone until that security is retired…” Hussman.
When it comes to predicting future cash flows as a measure of wealth or value for financial securities, I would defer to Danish physicist Niels Bohr: “Prediction is very difficult, especially if it’s about the future.”
Bonds with a maturity date, if all goes well you may have a claim to actual wealth. But sometimes debt is reneged on (e.g. bankruptcy, “haircuts”), or the so-called wealth is nominal in devalued or hyperinflated currencies. Stocks do not fit Hussman’s paradigm well, as they are not typically retired (albeit sometimes bought out or going to zero in bankruptcy). Then there is the conundrum of picking start and end dates for the predictions, which leaves you as knowledgeable about what to do as Yellen and the FED Politburo. In short, we are all equally clueless, whether we know it or not.
True stocks are only rarely ‘retired’ (which I think means a company buys up all of its shares and ‘goes private’ or is purchased entirely by another company).
However, over time I think you can model the price of a stock on corporate cash flow.
First, many companies do have an explicit policy of turning a portion of cash flow over to shareholders directly either by stock buybacks or dividends. Soover time this return will track the company’s underlying cash flow.
Second, over time stock prices do indeed track to a company’s cash flow. Long run growth means long run price increases and vice versa.
Third, consider an model where this wasn’t the case. Suppose you had a company whose cash flow kept growing but whose stock price refused to increase. Another company could buy up those shares on the cheap, take command of the cash flow and direct it towards buying back its own shares. It is hard to see how that wouldn’t cause the price to increase in anticipation of such a thing happening.
Good points, Brian. But the stock market often does not do as it “should.” You can go broke waiting for the stock market to price the cash flow as it “should” or make a ton of money exploiting it. Plus “cash flow” can be fungible and even fraudulent or otherwise not reliable nor the dominant metric for valuing some companies. Free markets like the stock market are thus inherently more unpredictable than “rigged” markets governed by Central Planning Politburos, such as FED interest rates for member bank reserves. You can get all the numbers right with a stock/company, and still lose a ton of money, which can be maddeningly confounding; but as likely as not is the norm. Sometimes it seems like the better the numbers look, the worse the stock/company turns out to be; and, vice-versa, meaning the stock with the worst numbers gets “retired” at the best price. I’m sure you’ve seen it plenty of times.
True any particular stock can behave erratically and the company may be distorting its financial reporting. That risk, though, gets much easier to manage if you are buying many different companies rather than trying to bet on just one and if you are buying with a long term time horizon rather than a short term one.
Same issue can happen with bonds, the company or locality may go broke, for example. Or even your broker, he might steal the funds from your account and skip town. Risks abound in life.
Joe, your Niels Bohr quote is probably misattributed:
http://quoteinvestigator.com/2013/10/20/no-predict/
Not really, CJ. The article just says that the original quote may have been made in an obscure 1937/1938 volume of Danish Parliamentary proceedings cited by the author of a later book written in Danish. Which is “he said that he said that he said,” and in Danish, which the article says has not been verified. Bohr, being Danish, might even be the original source referred to in the Danish parliamentary proceedings quote of 1937/8, if indeed the quote exists there at all (unknown). Thus, the article does not make the case that Bohr did not say it, much less that someone else said it. Rather at the end it is making a plea for someone who knows the Danish language to check out this possibility.
The quote does sound like something Yogi Berra would say, only Yogi came later and was Italian. From Berra, it would indeed be a “comedy” quote, which is how the article treats it. But from Bohr, it would more likely be the philosophical musing of a guy at home with the “spooky behavior” that made Einstein shy away from quantum mechanics. Scientific experiments making predictions about outcomes, are likely in physics to be more about the universal applicability, not about predicting the future per se. For instance, the law of gravity would predict the future, but it would be just as much about predicting the past and present if it were a universally applicable law. Thus, if the quote is Danish, I would stick with Bohr as the source until conclusively proven otherwise.
The cash that is created by qe is transferred to a seller and will eventually be spent on something else. All things being equal, sellers will consume more driving profits in the same companies they sold, substantiating the value they received. You never know whether the price is too high or profits are waiting to go up. As long as profits are denominated in the same store of value being created, via qe, the above is hogwash.
What’s after negative interest rates when savers run out of money? They will soon tell us dropping bags of money from helicopters is the only solution, consequences be damned.
Printing is the bank’s war on the majority, especially the poor and elderly.
The majority is poor and elderly?
Pray tell me what great options citizens have if they ban cash as they seem to be trying to do now (by floating theories through academic stooges like Rogoff as cover) and take the interest rate negative. By eliminating 500Euro notes the EU has effectively raised the storage cost of cash 2.5X.Unless people wake up to this and revolt BEFORE it happens this is what you are going to end up with. What we need is American Revolution 2.0 with the intention of saving capitalism from the deranged central bankers and ensuring that the central bankers are strung from the nearest lamp post as an example to ensure no central banker will ever dare to do what these guys are doing. IMO, no punishment is ever severe enough for the damage they have brought on the world. On top of this my blood boils at the way they say it is for public good, as if they are doing us a service. Do they think we are imbeciles to believe that negative rates are good for us?
Saving capitalism
https://www.washingtonpost.com/news/rampage/wp/2016/02/05/millennials-have-a-higher-opinion-of-socialism-than-of-capitalism/?utm_term=.e483c2c84864
http://fortune.com/2015/11/03/majority-of-americans-dont-like-capitalism-yougov-poll/
Comment withheld due to links… should appear at some point, may work with one link
https://www.washingtonpost.com/news/rampage/wp/2016/02/05/millennials-have-a-higher-opinion-of-socialism-than-of-capitalism/?utm_term=.16ab3f110297
All American Millennials should be sent on a field trip to Venezuela, so that they can partake in the benefits of socialism. Millennials should note that Bernie Sanders would change the subject when asked about Venezuela.
So I guess you’re saying socialism only works for the 1%?
More on what the fed has wrought and why they should be lynched here…
http://www.peakprosperity.com/blog/101139/sorry-losers
1. First ‘holding rates low’ does not happen. The Fed can only hold rates low of the securities it is buying. Unless the Fed is directly going to start making mortgage loans, it cannot increase house prices. This is obvious if you consider any episode of hyperinflation. In those cases the central bank was buying up bonds left and right. Yet interest rates don’t go low when the market thinks the central bank is sparking off inflation, they shoot up. I’m not going to take 3.5% from you for 30 years if I suspect the central bank has gone mad and prices 30 years from now will be 100 times higher than they are today.
Mish unwittingly stumbled upon this a few posts ago when he had a graph that showed the rates of securities eligible and not eligible for QE. They moved together until QE was announced, then those that were eligible dropped faster and have remained lower ever since. Mish thought this showed ‘distortion’ but it actually shows confusion on his part. If the central bank creates low rates by lowering one rate, then evidence that rates diverge undercuts that story.
2. Savers…..
First take a peek at https://twitter.com/stlouisfed/status/772138445200392192. Since the crises the savings rate as a % of disposable income has nearly doubled from 3% to 6%. So if you are considering ‘rewarding savers’ as some type of noble thing….like saving kittens trapped in trees…even though interest rates are lower there’s nearly twice as much saving to reward today as there was in the past. It also kind of undercuts the ‘low interest rates are bad’ argument if low interest rates are coming from the market rather than as a policy. More savings means more supply of savings which all things being equal tends to lower costs. If tomorrow farmers decided to grow twice as much corn it wouldn’t be a ‘crises’ to hear the price of corn has gone down.
Second, rewarding savers has little impact on inequality except to make it worse. Most people cannot derive a lot of income from interest on savings even if rates are more like 3% than 0.5% unless they already enjoyed a huge amount of income in the past. The primary economic benefit of saving for individuals is to smooth out consumption over a lifetime and provide a cushion against risk.
Third, an environment of low interest rates will naturally cause securities prices to be higher. As you quoted, a security is just a claim on future cash flow. If low interest rates means I have to put $1M in my bank savings account to get $10,000 per year where before I could get that for $0.75M, then it would also mean a set of stocks that has $10K per year in dividend payments should increase in price until they are at a par. That isn’t ‘speculation’ but reality. If it didn’t happen then why wouldn’t people pull money out of their savings accounts and buy cheap stocks to get high dividend income?
This makes the spooky ‘until the crash’ talk incoherent. If there’s a stock crash, then money would leave the stock market and go, where? Savings accounts? Wouldn’t that make interest rates even lower? But if stocks are now cheaper I can buy ‘future cash flow’ cheaper in that market (adjusted for risk) than I could in the bank…so why am I adding to my savings accounts with negative rates?
A ‘crash’ would have to come with increased interest rates. That would make sense if the economy was overheating and inflation was starting to build up.
Alternatively QE lowers rates on one set of investment and pushes existing investment into riskier investment for yield, hence the creation of graphed disparity – it takes time and is partial . Point of the matter is that monetary expansion, which is necessary to provide paper returns instead of experiencing a hard restructuring ( bankruptcies) , is all that is keeping assets and investment afloat. As the non (lesser) interventionist credit process had reached a peak unorthodox measures are being used. It is either an escape ( for those responsible and those who followed them) from previous errors, an opportunity to make further gains, or a power grab designed to lead to a new normal that even yourself would feel ill at ease with. If you didn’t, you soon would as its imposition would lead to conflicts that no idealism would shade your conscience from, if you have one, of course ;-).
Also bear in mind that QE is international. Monetary stimulus in other countries may and does make its way into the markets of yet others. Hence the great relevance of ECB, Japanese, Chinese policy in the whole. So it is not just the US policy that counts, the ‘meaning’ of its decisions may mislead if you study from an isolated viewpoint.
“Alternatively QE lowers rates on one set of investment and pushes existing investment into riskier investment for yield, hence the creation of graphed disparity – it takes time and is partial .”
Except previously the investments had returns that mirrored each other. QE applying to one of the two lowered the rate of the QE eligible investment but not the non-QE one. If your theory was true we’d actually expect to see the two investments still joined after QE since the money from the purchase of QE investments would have flowed into the non-QE investments forcing their rates to stay joined. Instead they diverge. Why?
Because the market recognized that before QE both investments had the same types of risks but after QE the investment subject to it had lower risk hence a different rate. Since the other investment didn’t directly lose any risk the market priced it differently whereas before it was priced as the same.
This belies the model you’re presenting where some ‘search for yield’ generates bigger and bigger risks being taken. Fact is there is no law that requires ‘yield’. Investors seeking yield could just as easily opt to pull out of saving all together and consume more. If I could get a 10% return, I might opt to put my $5000 into that vehicle….but if not spending that $5000 on a great European vacation might be just as good. AS unhappy as it may make the brokerage firm, a travel agent (or website) could just as easily get that money.
Let’s try this from a simpler perspective. If you increase the money supply, the rate for borrowing will reduce. The only limit to the side of the lender is that his total return must outpace inflation, or he will make a loss, where there is a shortage of borrowers he may lend below inflation to make less of a loss than simply holding cash.
Savings is not necessarily investing earnings, it is often paying down debt. No holidays there for many.
I think we actually agree. Increasing the money supply will decrease rates only to the degree that the market believes the money supply increase will not increase inflation. That is the critical check on just printing money until the cows come home, not ‘distortions’ or ‘malinvestment’.
Yes paying down debt doesn’t feel as fun as building a nest egg up. But in effect both are the same thing. If I pay off a $500 debt today then that means tomorrow I have $500 less to pay, that’s effectively the same as putting $500 in a savings account today and tomorrow having an extra $500 to play with. In both cases the act of saving increases my net wealth since that is defined as my assets minus my debts.
Hi Brian,
Central banks don’t hold rates low? What about BOJ and the ECB? Odd coincidence or spooky motion at a distance? I vote conspiracy. You’re right … screw the savers. They deserve squat. Let the central banks provide the spending money for government expenditures, not savers making loans. Print the money. ignore the savers. Teach them a lesson about who is boss. Put low interest money into the stock market. Flipping paper assets is good work.
No they don’t. What does the BOJ and ECB do? Every so often they print money and buy certain types of securities. The best that could happen is that the rates on those types of securities could be lowered. But not with QE.
Why not? Well traditional monetary policy operates by picking one rate and targeting that. In the old days, and today, that would be the 3 month T-bill rate. If the Fed wanted that rate to fall from 4% to 3.5%, it would start buying 3 month bills and use ‘printed money’ to pay for them. Other than the ‘printed money’ this would operate no different than any other Wall Street firm. Their traders would look at the bid and ask prices and purchase as many bills as they can at the best price. The Fed would print as much as it needed to force the price to 3.5%. If the price started falling below 3.5%, it would start selling from the bills it accumulated so the price becomes ‘set’. But nothing else was set. If the market thought the Fed was sparking high inflation it would demand higher rates from everything else, esp. long term rates.
QE though doesn’t set a rate. It makes a fixed amount of purchases each month (say $50B per month of 30 yr bonds). Unlike the above case, if the 30 yr rates still go up the traders cannot increase their purchase to force the rate down. Even if the Fed did start setting both 3 month and 30 year rates, it can only do so on the securities it buys. There’s all types of 30 year rates from corporate bonds of different ratings to mortgages. If the market thought the Fed was going to create inflation it would demand higher rates and the Fed would find even if they set the rate of many different types of securities different rates would keep popping up all over the place.
You say I’m ‘screwing the savers’ but savers are getting about as much as they did before. The savings rate doubled but interest rates fell in half. So those paying interest are roughly paying savers what they paid before, it is just that savers doubled their savings. So whose getting screwed here for real?
If the price of corn goes down, those growing corn ‘get screwed’. The price of providing savings has gone down so yea that is rough for those providing savings. But in the first case that’s taken as a market signal, we don’t need as much corn so please try growing something else if you can. Why cannot you not accept the fact that maybe this economy simply doesn’t need as much saving at the moment?
They openly state inflation is a target. Investment cannot demand higher returns, the more there is the lower returns will be – the only way to invest in demand and spark inflation is to credit it, which the governments are happy to do at the expense of those creating wealth. Corrupt system.
Brian
Take a couple of minutes and learn bond math. Higher prices for bonds cause lower rates paid on the bonds. It’s a mathematical certainty. Bond pricing is learned in accounting 101 and basic business math.
When central banks pay too much for bonds and buy a lot of them and all central banks coordinate and do the same thing endlessly, the price for all bonds lowers. Search for yield takes care of the rest via supply and demand.
Economics is easy. The fact people with an uninformed and uneducated opinion can blather it out does not make said people informed. It makes them annoying when they refuse to learn anything new. Anyone can be ignorant. No shame in that. It takes effort to grow out of it. Blathering uninformed opinions relentlessly just gets you trolled like this.
Whoop, I said “When central banks pay too much for bonds and buy a lot of them and all central banks coordinate and do the same thing endlessly, the price for all bonds lowers. Search for yield takes care of the rest via supply and demand.”
I did it again. Upon proofreading … endless bond buying with endless printed money basically forever in massive amounts causes rates to decrease and prices to rise.
Damn, at least I got the post intro paragraph right.
Crys,
An openly stated inflation target may or may not be meet. Investment return is not just about inflation but also the ‘reward for savings’ or the ‘price of borrowing’. so even in a world where inflation was always 0% year in year out forever you’d still have a rate of interest that would move around.
cdr,
Bond price is driven by supply and demand. If the Fed happens to buy some bonds that mature in 30 years the price will rise and rate fall. But what if people start thinking the Fed has gone crazy and inflation will soon be sparked because of that. Well the Fed may buy $50B this month but people holding bonds might say “I can’t trust getting $1000 30 years from now if these loonies are going to make inflation run at 20%!” and sell off $100B worth, then the price won’t rise but will instead fall and rates will go up.
What if the Fed doubled down and started buying $100B a month? Well if the market then sellers will sell $150B since that would make the inflation fear that much worse. What if the Fed tried to buy every 30 year Treasury bond? Well they might be able to force set the 30 year T-rate but what would happen to 30 year mortgage rates? Corporate bonds? Or 15 year rates? Every other bond is going to go up in rate and down in price.
You can keep crying ‘market distortion’ but you haven’t shown any evidence that the low rates we are seeing are anything other than the market itself!
Brian
You win. Gravity is an unproven theory. Prove otherwise. Maybe Glen Beck knows an expert you can rely on? Just wondering. That’s the Rush Limbaugh method of providing evidence.
His ‘expert’s’ opinion is proof but I would need an unending lineage of references, ending well past God, to prove any other point? Common sense applied with reading books is not enough.
Look, you obviously like to think. Why not read some books and start learning actual cause and effect, not gobbledygook logic. I have yet to finish one of your long posts because they actually generate pain in my head.
Fisher stated negative rates “seem to work”
Seem. Twice a day, a stopped clock seems to be correct.
Market manipulation does not work. It just seems to work, just as a stopped clock seems to work.
“There are two problems in play. The first is an explicit admission that the Fed sponsors wealth inequality.”
The FED is sponsoring global social unrest.
Exactly how does low or negative interest rates increase inequality when the fact is those with the largest amount of savings are those who by definition already have an unequal share of wealth?
Extreme wealth inequality teaches corporate CEOs and their boards that they can do anything they want.in the name pursuing profit.
Here’s a great example of how inhumane corporations operate today.
An oil pipeline protest in North Dakota turned violent on Saturday, as private contractors from Energy Transfer Partners reportedly used dogs and pepper spray against demonstrators who say the construction project will desecrate sacred lands and damage the environment.
A Tribe Spokesman told the Chicago Tribune at least 30 people were pepper-sprayed and at least six people were bitten by dogs, including one child.
On social media, those expressing sympathy for the pipeline protesters compared yesterday’s clash to the violent crackdowns faced by Civil Rights protesters in the 1960s.
Extreme wealth inequality teaches corporate CEOs and their BODs to believe they can take any irresponsible action they want.
Here’s a great example of how inhumane corporations operated just this last weekend, but no major news outlet is willing to report the atrocities.
An oil pipeline protest in North Dakota turned violent on Saturday, as private contractors from Energy Transfer Partners reportedly used dogs and pepper spray against demonstrators who say the construction project will desecrate sacred lands and damage the environment.
A Tribe Spokesman told the Chicago Tribune at least 30 people were pepper-sprayed and at least six people were bitten by dogs, including one child.
On social media, those expressing sympathy for the pipeline protesters compared yesterday’s clash to the violent crackdowns faced by Civil Rights protesters in the 1960s.
posted
http://www.attn.com/stories/11172/memes-contextualize-standing-rock-protests