NEGATIVE INTEREST RATES: WHAT IF ?Recently there has appeared economic policy discussions about NEGATIVE INTEREST RATES.
This is the first time in my life that I have ever heard of this concept, and I know of no historical precedent for it.
It seems to be a theoretical construct of policymakers who are desperate to ”stimulate the economy” and are following their belief that lower interest rates will benefit ”the economy”.
This idea of negative interest rates seems to gaining acceptance by Big Government on a world-wide basis. Since it has never been implemented, but may soon be, I open this thread as a forum to discuss the possible implications to ordinary people and investors such as ourselves.
No one knows what will happen. Our opinions and thoughts are as good as anyone else’s; and a government policy of negative interest rates is likely to have a broad impact, so we need to get our bearings on what might occur.
Without claiming expertise I offer the following thoughts to stimulate conversation on the subject:
1. NEGATIVE INTEREST RATES are an an artificial construct of the fiscal authorities, an artificial mathematical projection based on the theoretical assumption that ”low interest rates are good for the economy”.
2. NEGATIVE INTEREST RATES will discourage capital formation; increase debt at all levels; increase consumption; increase speculation; and cause huge distortions in capital allocation.
3. NEGATIVE INTEREST RATES defy logic in that they proclaim that money is worthless, insofar as one does not need to pay for the use
of it. But reality is the contrary, money is valuable and the owner should be paid for the use of it. So the authorities that are promoting negative rates are really saying, ”Our CURRENCY is worthless”, as opposed to ”Money is worthless”.
If someone is willing to lend you $ 100 and you only have to pay back $99, why wouldn’t you borrow tons of money ?
If someone is willing to lend you 100 gold coins and you only have to pay back 99, you do it, right ? So tell me, who is willing to lend me gold coins on this basis ?!
4. The maneuver is also aimed to subsidize and liquify the central banking organizations. They can borrow unlimited amounts and pay it back the next day with less than they borrowed. Pretty good deal for them. The maneuver also removes the fig leaf from the fiction that the governments and banks are really different entities. The banks are instruments of big government and hence will always be bailed out at the expense of people who hold wealth in the form of
currency.
5. Sooner or later there will be tremendous inflation and currency debasement on account of these policies. This is government taxation and confiscation, just as surely as are our our income taxes, sales taxes, excise taxes, property taxes, and all the rest.
What we have left will be inflated into oblivion, possibly in a manner that is outside the control of government.
Remember, inflation is a stated goal of these governments, and it is the only way they can ever fulfill their existing debt obligations.
Open to your comments !
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
Hi HendrixNuzzles. There have been may articles lately on twitter about Negative Interest Rates. Here are two as that is the limit of a post without moderation.
Negative interest rates in 5 minutes? The Bank of Japan’s latest effort to to win over spooked members of the public on.wsj.com/1PDZgGT
WSJ Central Banks (@WSJCentralBanks)
QE1…QEX, Negative Interest rates, Helicopter Money; Fed has tools, IMHO they all smack of desperation #economy http://blogs.wsj.com/economics/2016/03/21/the-time-and-place-for-helicopter-money/ via Ross Morley (@RossMorley)
Suggest search NIRP here: http://www.zerohedge.com/ and ZIRP or NIRP here: https://www.armstrongeconomics.com/
HN: Well done!!….good to have another intelligent author willing to nail their colours to the mast rather than sitting back soaking up others intel efforts.
That said, I think youve got it all wrong….at least, your coming at this from the wrong direction. Youre thinking ‘self’ (as in the individual millions of citizens)….They are thinking ‘the economy’ that serves the millions (and pays the poilticians wages).
The economy is essentially a money go round. If the money dont go round, the economy stalls and the masses suffer.
I earn a buck and pay, say, 20% tax. I spend my 80% and the next guy pays 20% tax on his profit….and on and on and on. Eventually (apart from a vanishingly small amount) the taxman gets it all, but meanwhile, you got a new TV. The problem comes when you dont spend your money, but save it….it stalls the taxman!
So the taxman has a prob….how do I get these guys to spend money so I can tax it? Hmm? Perhaps they havent got enough money to spend. Ok, I know, Ill make it cheap to borrow money! NIR….But how many TV’s do you want even if they are 10cents a dozen? So you still dont spend, so that still stalls the taxman.
Solution….. charge them to save their money via NIR ! Because the interest charged is taxable, (and because you dont like being charged), you dont save….ergo, theres more (taxable) money circulating again on the the merry go round.
But this of course means that you have less savings, so will have no retirement provision.
HA! Thats a problem for the next Administration to sort out.
Hi Alan,
“They” can think of generalities and “the economy”. WE have to think of ourselves and how to protect ourselves from the consequences of the policymakers. So I don’t see where I am wrong about any of this, just yet anyway. As you confirmed, the NIRP should
encourage consumption and discourage savings and capital formation.
Without being doctrinaire or argumentative, we can see this NEGATIVE INTEREST RATE policy taking shape. Without being doctrinaire or argumentative, I one can agree that such a policy will undoubtedly affect us little people and our investments in a major way.
As investors we will have to deal with the consequences, intended or otherwise.
So I we are presented with a “thought problem”: What are the likely consequences of this particular government policy ?
Now I happen to agree with Milton Friedman about “helicopter money”. In fact, I think that distribution of currency to the masses by helicopter would actually be a more direct and effective way to “stimulate the economy”, drive consumption, and create inflation than the current methods of the central bankers.
The problems are that the current method benefits a few interest groups that are now
entrenched and enriching themselves. These groups are the bankers and the beneficiaries of the asset bubbles who are standing in front of the open spigot of Fed largesse. The second reason that helicopter money would not be the method is that the action is too honest. It bares naked the underlying philosophy and aims of the policy…debase the currency, inflate prices, drive consumption, transfer wealth from savers to debtors.
A third reason is that “helicopter money” would not reduce the Federal debt or improve the ability to sell US Treasury debt, and the increases in tax revenues would be incidental. But it would be an effective way to get inflation and drive consumption.
It is more convenient to hide behind obscure academic rationalizations and jargon, and theoretical constructs, than to come out and distribute $ 20 bills to the masses.
The allusions to Weimar Germany are apt. We are on the same course but the denouement will be unique and unpredictable, a history always is. If one thinks that Powers That Be know all the consequences and can control the fallout from these policies, then one is a fool. What we need to do is watch them, try to understand what is likely to happen as a result of these policies, and act in our own best interests.
The policies are the natural extension of academic and theoretical ideas, which are great in theory but are failing in reality. We’ve had a whole bunch of these failed ideas in recent decades, but that won’t stop the academics, politicians and demagogues from acting out more policies that are not going to work.
Look how the younger generation is embracing Bernie Sanders. One asks why the educational establishment has managed to create a generation of people who are unaware that socialism and communism are failures, who despise wealth and free enterprise, who demonize successful people, who feel entitled to money they have not earned, who think that government will solve their problems for them, and who eagerly accept tens of thousands of dollars in debt to obtain college degrees of dubious value.
Hi Alan,
“They” can think of generalities and “the economy”. WE have to think of ourselves and how to protect ourselves from the consequences of the policymakers. So I don’t see where I am wrong about any of this, just yet anyway. As you confirmed, the NIRP should
encourage consumption and discourage savings and capital formation.
Without being doctrinaire or argumentative, we can see this NEGATIVE INTEREST RATE policy taking shape. Without being doctrinaire or argumentative, one can agree that such a policy will undoubtedly affect us little people and our investments in a major way.
As investors we will have to deal with the consequences, intended or otherwise.
So I we are presented with a “thought problem”: What are the likely consequences of this particular government policy ?
Now I happen to agree with Milton Friedman about “helicopter money”. In fact, I think that distribution of currency to the masses by helicopter would actually be a more direct and effective way to “stimulate the economy”, drive consumption, and create inflation than the current methods of the central bankers.
The problems are that the current method benefits a few interest groups that are now
entrenched and enriching themselves. These groups are the bankers and the beneficiaries of the asset bubbles who are standing in front of the open spigot of Fed largesse. The second reason that helicopter money would not be the method is that the action is too honest. It bares naked the underlying philosophy and aims of the policy…debase the currency, inflate prices, drive consumption, transfer wealth from savers to debtors.
A third reason is that “helicopter money” would not reduce the Federal debt or improve the ability to sell US Treasury debt, and the increases in tax revenues would be incidental. But having said the reasons against doing it, the fact is that it would be an effective way to achieve inflation, drive consumption, and redistribute wealth (if that is an objective). Ultimately it is a tax by inflation.
It is more convenient to hide behind obscure academic rationalizations and jargon, and theoretical constructs, than to come out and distribute $ 20 bills to the masses.
The allusions to Weimar Germany are apt. We are on the same course but the denouement will be unique and unpredictable, a history always is. If one thinks that Powers That Be know all the consequences and can control the fallout from these policies, then one is a fool. What we need to do is watch them, try to understand what is likely to happen as a result of these policies, and act in our own best interests.
The policies are the natural extension of academic and theoretical ideas, which are great in theory but are failing in reality. We’ve had a whole bunch of these failed ideas in recent decades, but that won’t stop the academics, politicians and demagogues from acting out more policies that are not going to work.
Look how the younger generation is embracing Bernie Sanders. One asks why the educational establishment has managed to create a generation of people who are unaware that socialism and communism are failures, who despise wealth and free enterprise, who demonize successful people, who feel entitled to money they have not earned, who think that government will solve their problems for them, and who eagerly accept tens of thousands of dollars in debt to obtain college degrees of dubious value
while they consume the savings of their parents and spend four years having a good time. Oh by the way, the teachers and administrators have it pretty good under this arrangement. You can count on them to perpetuate the status quo, and to support whomever the Democratic party puts forth as a candidate.
I realize this is a digression. But look at the situation…policymakers are actually discussing negative interest rates as a policy, and there is nary a peep from the brainwashed populace, which is now full of people who have supposedly got an education and can think for themselves ! What a joke !
Who’s this ‘WE’. The only time theres a ‘we’ is at the ballot box. But you only get there once every 4yrs…….meanwhile your mute, so ‘they’ can play.
Yes the helicopter is another way, but where do the $20 bills come from? Yes, your/our governments need to spend money internally so that you earn enough to buy a TV and they get their tax, then they can spend yet more internally…..loop!
Britain has a big prob right now. It has a whole ONE steel plant which is about to go bust, because they have allowed China to dump cheap steel here (and the EU) so that the steel users can make cars cheaply. If it goes and a next war starts, where will we get steel to build boats/tanks etc? Meanwhile 20k people will be drawing benefits. What cost that added to the cost of imported steel? Why oh why cant they see that exporting money for some short term gain will bankrupt the country?
FREE TRADE…another excellent theoretical concept, that in its implementation has produced some questionable results. The logical underpinnings are persuasive and correct. I myself was persuaded in Chapter 1 of Econ 101.
But often the results are undesireable, such as when our country loses its industrial base. Or when we have to rely on foreign countries for critical technology and manufacturing. Regardless of the theoretical benefit, I am not sure it is in the interest of our country to lose employment and industry to the degree we have. Over the last few decades, entire industry sectors have been wiped out; and while it is true we get the benefits of cheaper flip-flops and large screen TVs, I am no longer so sure that it is entirely a blessing.
The benefits of the concept are lost to us, sometimes because the trade is not really “free”, but is subsidized or distorted in some way by one side or the other.
–What if one side protects intellectual property, and the other side does not ?
–What if one side practices organized industrial espionage?
–What if one side is aiming at economic domination or destabilization of their trading partners, by any means necessary, and the other side is not ?
–What if the other side does not share our values with respect to human rights, the environment, or political or religious principles ?
There seems to be the unspoken belief that free trade and the American Way will ultimately help achieve other international political and social objectives. I am not so sure anymore. There seems to be a carrot-and-stick method to the application of free trade in practice, and I am not persuded we are getting our money’s worth.
The other sides do not always play by our rules.
Indeed ! We are gradually working toward ‘one world’, like the UK is working its way toward the United States of Europe. But that means, labour wise, we will all have to compete with the equivalent Rumanian and Pakistani labour rates. If commodity costs are global….whats else differentiates?
Old Chinese proverb: May you live in interesting times.
Hi HN, Alan et al..
Free trade has benefited humanity, but the benefits are not universal. In the under developed & developing nations, over a billion poor have moved to middle class, in the developed nations the multi nationals that cater to the growing middle class & their stakeholders have done well. The labor in developed nations are the losers. So it has moved the parity scale to the middle for a large swath of populace.
30 years back, a surgeon in India used to make less than a tradesman in US.
OMG…..I 200% agree with you. But while that is good for mankind as a whole, do you imagine for one second that the 1st world tradesmen are happy about the shift. In 1970’s, I could buy a house in London on my wages…..now I cant afford to buy a house in Grenada. Do you imagine that Im sooooo noble that Im happy about that?
Theres a piece of me that knows its right…..but theres another piece of me thats really really p issed off.
These are anomalies that will always be corrected in the long run. There are millions who today would like to put on your shoes.
True….but Im not sure I want to share their shoes, thanks very much.
Naggers……I so hate this modeation stuff. Is the site being run by puritans? I know the vulgarity limits, but this is stupid.
Hi Vijay, I agree that free trade policies have benefitted humanity immensely, and that free trade should be expanded. But doubt arises when there are governmental, political, or cultural distortions that impinge on the true operation of free trade principles. And all the governments have their special interests, and in many cases there is not a balanced reciprocity in international trade.
For example, if the Chinese do not respect copyright laws or intellectual property, I am not so sure free trade applies willy-nilly.
If the Russian government owns Gazprom, does free trade apply to purchase of natural gas by Europeans from Russia, when we have a concern for the political and military intentions of Russia?
If the impoverished people of country X get uplifted, but America loses jobs and entire industries, I see that there is an economic benefit to country X…and it may be a humanitarian thing to do…but should that be the policy of elected American officials, who are supposed to protect our interests ?
There is also the underlying assumption that economics should overrule social, political and religious issues in international trade, and also that free trade policies will
spread desireable political and social values around the world . I am not so sure of this.
Nor am I sure that the welfare of people on the other side of the ocean, as humanitarian as the concern may be, should be of primary interest to United States policymakers.
The success of free enterprise on a national level has been amply proven by the United States. Other countries can follow the example if they care to. We do not need to
impoverish ourselves in the process.
BOJ http://www.bloomberg.com/news/articles/2016-01-29/bank-of-japan-s-negative-interest-rate-decision-explained
The government in Greece attempted to
acquire the bank savings from the populace to finance
their national debt. There have been rumblings about
our government confiscating our 401K’s. NIR appears
to be the most recent ploy by governments to fund their
growing national debts. Our national debt will reach
$20T by the end of Obama’s regime and that doesn’t
include the unfunded Social Security or Medicare debts.
I’ve seen figures north of $200T when all of the above obligations
are included. Now how on “God’s green earth” are we
going to pay that obligation back? It would take virtually
10 years of our whole GDP to cover $200T and that assumes
we wouldn’t spend another dime during that time frame.
Is that realistic? Of course it isn’t. So, we have at least
3 choices; continue on our merry way, tell all of our bond
holders TS, or use a ploy such as NIR to eventually cover
our outstanding debts. Up till now, the politicians have
(surprise) taken the easy way out by utilizing the first
approach, however sooner or later the party will end
and we’ll have to pay the piper.
Or we can vote for Bernie and party like it’s 1999!
Regards,
Frank
It is impossible for any government to increase total wealth of a nation. No amount of financial hocus pocus, tax diddling. interest monkey work or money/currency printing produces wealth. If the production of goods,food, shelter, clothing and the like do not keep up with population growth the people become impoverished. Once basic needs are provided there may be room to supply wants or luxuries. But first goods must come from this Earth though human effort, even hunter gatherer societies had to expend effort in hunting and gathering. Those goods are what we call wealth, or what contributes to the weal or well doing of mankind. A commonwealth was an association of community of all the residents of a given area.
You can create the illusion of wealth by borrowing or printing money but that cannot last forever and “payback is a blitch”.
Alanh gave a good example of fractional banking theory along with Keynesian math,,, it is a pity it cannot be sustained. If you look at both that which is not hidden and that which is, you will discover the attempt is similar to a poker game that runs for a time with no new money coming to the table. Those that rake in winnings early, cash out and leave do win but all those that remain will lose.
Two hundred years ago Frederic Bastiat exposed this in his “broken window fallacy”…
http://www.econlib.org/library/Bastiat/basEss1.html
In short every time banks now issue credit either by a card or a mortgage they in essence are adding to the money supply. Governments add by printing currency. Neither adds to the world pool of wealth, although the borrower may get some of that wealth by exchanging those worthless notes for it,,, If someone will accept them on the promise to pay later. A comparatively minor default can snowball and crash the whole scheme
and that money is found to be no more than a vapor, miasma, so much swamp gas.
But the band plays on,,,, as we all know the Titanic is unsinkable. 🙂
What is that annoying creaking and snapping heard during the quieter passages???
The question really is ”What sets the value of fiat money?” A $ is only valuable coz the world believes in it…..but its just a piece of paper, like all other fiat currencies. But that gets off the subject. The subject here is the effects of NIR. I think the main effect of NIR is to get savings back into circulation.
Tax pays the countries police/military etc bills. Savings avoid tax. NIR allows Uncle Sam to put your savings back into circulation.
Lowereig the inteerest rate is supposed to boost the economy by making it lest costly for businesses to borrow money needed for expansion Raising rates tends to cool the economy by making it more expensive to borrow.
Janet Yellen has implied that the Fed’s rate rise last December was premature causing a sharp falloff of the equity markets. Now she is backing off on her promise of four more rises this year — maybe one in June and another in December. She says with rates as low as they are now, if there is an economic downturn it may become necessary to go to negative rates.
With negative rates, bankers who are hoarding cash are charged a fee, and this is supposed to encourage lending of the funds withdrawn. Maybe it’s better than pushing on a string, but probably not much.
NOOOOOO! They have exhausted that route and people are still not spending/borrowing, which means they cant tax you. This is the new world. Now they want to tax you for NOT spending…..for saving. Its sooooo obvious. They have to have endless tax income or the system crashes.
At some point you make it more likely thst people will stop trying to amass wealth as they see it being taken and decide to just go fishing,,, or surfing etc. an live on whatever the govt. supplies as goods of survival. I think that point has already been
reached in the US and much of Europe. Leisure and living on largesse,,,,for many that is the ideal solution if you do not need to raise a family or accept responsibility to help another.
Maybe pick up an odd pence or so frying potatoes,,, Just do not trigger the taxmans notice.
Operate strictly cash or barter. No need to worry about a huge college loan as you have nothing lender can take. Nearly a third of those who could work in the US are officially unemployed and obesity may be the biggest health problem.
See,,, the system does work for those,,, and the government class with all its make work for a loyal group at election time. For how long will it last???
Till the next election….by which time people will forget.
The people on benefits are not a problem for the economy. They have no choice but to spend their money, which wil be taxed, taxed, taxed till its a vanishingly small amount. (they cant afford to save)
The ONLY problem is when that money moves abroad in greater quanties than the countries income. International cash flow is really all that matters. The rest is a merry $ go round…..and a few holes in the ground where the natuaral resources used to be.
I may not understand al the issues about negative rates, but I believe this applies only to deposits by banks that are parked with the Fed — this doesn’t affect my (little) cash parked at my two local banks. With rates so low for months, the interest that’s been paid on my money-market account has been trivial, so recently I put a tiny bit into very risky private-equity for LYFT and DocuSign. Is moving to more risky assets another way to suffer from low interest rates?
Im sounding like the bad guy here, but I think (hope) I see the light. If money doesnt move, it cant be taxed…..that cripples the economy. You moved some money into private equity. That caused something/someoneone to be taxed. Thats the aim. Get you to move your savings to where it can be taxed, rather than somewhere where it cant be taxed. ‘They’ dont care where you stick it so long as you stick it somewhere. They tax the profit on that movement.
That is true. It also has the effect of moving more trade into the underground economy. Which is the main reason governments want a cashless society. A trail is left when money moves electronically. That is why you need to see the hidden as well as the unhidden movement of goods to understand the economy.
Spot on Arch1. Cash is untraceable so cant be taxed…..why would they want cash? Do away with cash, and every cent is traceable. Natch, they want to do away with cash. You diddle them out of a $….they fine you $100. Nice work if you can get it,
In my opinion the primary aim of governments in encouraging consumption is to “stimulate” the economy. The sales and income taxes generated as a result are positive from the Establishment point of view, but I believe these are secondary considerations.
I think the bigger issue for the governments is that with inflation and devaluation of the currency, their debts are rendered manageable; and it is also true that they can tax nominal gains in income and wages that are due to inflation. In contrast, the purchasing power gained by individuals in a deflation is not subject to tax.
This is why the governments are desperate to generate inflation and will pull out all the stops to avoid a deflationary crisis. Deflation would be wonderful for those who have saved and have managed their debt. Unfortunately that appears to be a minority of the population. By the way, have you noticed the plethora of advertising for finance companies offering to reduce the rates on student loans, which are crushing the next generation ?
Debts and especially government debt will become impossible in short order if there is widespread deflation.
“Negative interest rates.” Think about it…what does this really mean ?
It means that someone is willing to lend something valuable, with the expectation that the repayment will be less than the amount loaned in the first place !!
Who is willing to do this ? Yet this concept is gussied up with fancy terms and unintelligible jargon to cover up what is happening, and passed off as a credible and responsible, even “necessary” national policy. This is what the policymakers are trying to do, while reassuring everyone that everything is OK and the move is going to make things better.
If this is what they are teaching at those fancy economic graduate schools, the country would be better off demolishing them and forbidding their graduates from positions of responsibility in our government. And we sure shouldn’t be lending teenagers money, guaranteed or subsidized by the public, so they can go into debt while becoming indoctrinated with this stuff.
Honest to God, if these guys think such a move will make things better,
The money velocity is at decade low rates. Despite current policies people are holding onto it or retiring debt. The multiplier effect is not working as expected. Thus, the results of easy money policy are not being obtained.
Meanwhile I get dozens of offers in the mail to lend me money at high rates from all types of finance companies. No thanks. But it’s not bad for them…borrow at zero and charge the consumer 24%.
And why are they holding on to it and retiring debt?….. coz they have all the tv’s they need so arent spending their spare cash. And if they arent spending, they have the spare cash to pay off debt. Jez….its not meant to work that way….youre supposed to spend ! If you dont spend, they cant tax,,,,unless, of course, they tax your savings.
Precisely. Or you go and buy real assets that you think will hold value.
And perhaps thats where we are headed….invest in commodities rather than hold fiat $ ? Im starting to think that way…..much to my previous thinking.
People are not as stupid as the government class thinks,,,despite how they vote.
http://www.bloomberg.com/news/articles/2016-03-31/what-s-this-startup-worth-mutual-funds-can-t-get-their-stories-straight
Spot on. Banks are paying negative interest now if you calculate actual loss of $ buying power on money parked.That would also make it a good time to hold physical gold and silver, platinum etc. As time value means nothing if zero or negative interest rate.
I have often written on SG that I HATE the stupid, archaic idea of gold. But Im beginning to think I may have been wrong. Still, I prefer silver when push comes to shove.
Platinum is useful given diesel catalysers…..but with the move to electric cars, Id avoid platinum. Silver still has an industrial use.
Actually platinum has a wider industrial use than silver in comparison to availability. The corrosion resistance is amazing especially under high temperature.
Makes great contacts for circuit interrupters and other electronics in mission critical areas.
Silver is useful for smaller transactions. Like buying a days food for an ounce.
I didnt know that…thanks.
Since when has is it become archaic ?
Since WW2 ? Since some PhD said so in 1974 ?
Since the invention of the ATM ?
Since the Feds decided to stop redeeming it for dollars at a fixed rate ?
Alan, if you will lend me 100 Kruggerrands, I will promise to pay you back 99 of them
of them within twelve months. I will even pay postage and insurance.
May I give you my mailing address ?
And the same for
No No my friend…the question is whether I will give you 100 KR (presently valued at say $100 each (I cant be bothered with the math) and you will return 99 valued at $150 each. You can get that deal any day on FOREX. Its called trading.
I have always said (perhaps wrongly) that you cant go down to the Mall to buy a loaf of bread with a bar of gold, and shave off a few flecks. Apart from anything else, youd get mugged on the way home. Gold doesnt work as day to day currency…..fiat or plastic does.
Absolutely. If they want or NEED a return on capital, people have no choice but to move to riskier assets. They cannot get decent returns in dividends or government paper because the rates are too low. Hence bubbles are being formed in many asset classes outside of cash accounts.
As far as Lyft and Docusign are concerned, both seem like pretty good concepts although I have not looked at their fundamentals.
I can see youre angry….but please dont lose it with me. I dont make the rules. I just tell it as I see it. I may well be wrong……only you sign the cheque.
I’m not angry with anyone at SG !
Well if they decide to go NIRP, what’s probably going to happen – – and I know it will with me even more than I already am – – I will put everything I have out of every Institution and put it in my safe, and so will millions of other people.
I already pay cash for most of my endeavors and I work for cash sometimes also. I also barter heavily trading goods or services for goods or services. The problem with going to negative interest rates is that the damage to the banking system is going to be almost irreparable. The only way to repair that is to go back to the gold standard. THAT problem is the amount of gold the government owns matched to the enormous amount if money these idiots have injected into the monetary system would mean that the price of gold in dollars would be pegged at about $9,100 an ounce… So I’m thinking of increasing my gold hedge from 10% to 30%. Is that the correct move? Don’t know but gold has historically held its value when fiat money has been inflated. Disclaimer: I am not an investment advisor and do not play one on TV, although I did stay at a Holiday Inn Express last night.
But I doubt the Fed will need to go to negative rates for some time — maybe years, because more likely it will soon recognize a need to continue with rising rates.
I have a theory that the ugly, almost vertical collapse in oil prices has dealt a sledge-hammer blow to our economy hitting not only a large sector of the oil industry itself, but many industries that supported it. For example, almost nobody is ordering new drill pipe, and this is depressing steel producers and its related suppliers. And there are lots of peripheral sufferers.
Meanwhile, low fuel prices are positively affecting many industries that benefit from low fuel prices, auto production /sales being an obvious one. New technology that has brought down the cost of gas is benefiting the producers of carpets, fertilizers and even some steel-making. But there is a HUGE LAG between the blow suffered by fuel-producers and the improved fortunes of the economic beneficiaries, e.g., the steel-workers building a new factory to supply the expanding auto industry.
My theory is that the sudden collapse of a major industry EVENTUALLY spawns new endeavors that more than compensate for the initial losses. And then the Fed will rapidly raise rates again after it recognizes that the lag between cause and effect has been resolved.
Menwhile, many industries are
We all overcomplicate this stuff. Really, it all works on the KISS principle. We have to tax someone or the economy crashes.
If we cant tax spending, we will have to tax your saving. The banks will charge you to hold your savings safe, so we will tax the banks on the fee they charge you.
Alan, no crashes to the economy have ever occurred as a result of reduction in taxes. Crashes to government finances, maybe…but never to the economy as a whole.
Taking resources away from the government will not hurt the economy, it will benefit the economy.
Hi Lannas, re post 7 above on Bank of Japan:
LET”S GET READY FOR NIRP !
Very timely article that I think confirms my thinking. Surprise action, yen depreciating, attempting to stimulate investment and consumption, commentators saying the move is unexpected and suspecting impact on markets is underestimated.
Two things. First, our closest allies, after friends of Alan Harris, are Japan and EEC.
So if they are doing negative rates, it’s likely we will follow. BOJ and EEC may even be doing it as a trial ballon for US policymakers. Do you think they did this with the US Fed unaware it was coming ? Why is there no comment from US policy makers on unprecedented fiscal actions by our closest allies ? It’s because everybody is waiting to see what happens.
Second, the fact that the BOJ negative rate is so minor indicates they are testing reaction.
It is a toe in the water. BOJ hints at further action in the same direction but they want to see what happens.
We seem to be straying off topic and somewhat into the terratory of ‘.. other Unmentionables’. No matter.
Before we can create a personal strategy for how to prepare for life in a NIR world, we first need to undersatand why on earth any government would want/need to go down such an unprecidented route. My belief is that all governments endlessly want more tax…..there is no limit to how much a politician can spend given 1/2 a chance ! But simply electing to up the tax rate is guaranteed to get you unelected. So wheres the dosh gonna come from. Historically its come from taxing profits (albeit the profit you gain from your own employment). But 1st world countries no longer have the technological advantage to dominate the markets, plus our labour force is relatively expensive. In an ultra mobile, communicating competative world, we are being priced out of the game. The only way to combat this is to develop a cheaper, more efficient labour force, than even the 3rd world has…..ie robotics and 3d printers. But these advances will impact on the human employment figures, and less people employed = less income tax to pay out an increasing social security bill. The government faces two choices: spend less (which is whats happening in UK/EU via ‘Austerity’) or find a new source of revenue. No good will come from taxing the have nots, so that only leaves the ‘haves’. Anyone who has savings is a ‘have’. But again, levying a tax on savings would be political suicide. Devaluing a currency is also unacceptable, so they invented inflation….which is really just an insidious form of devaluation that mostly hits the ‘haves’. So if they cant tax savings directly, bring on NIR which is just another insidious back door way of taxing savings. Its a sort of redistribution of wealth. Those that ‘have’ the dosh will have to make up the tax shortfall for those that cant be taxed.
Theres a series of Open letters to the next president by John Mauldin. They contain some pretty scary graphs about the state of the US economy. Heres letter 4, but its WELL worth you reading the other 3 lurking on the site. Its free access. http://www.mauldineconomics.com/frontlinethoughts/?utm_source=newsletter&utm_medium=email&utm_campaign=frontline
John has some ideas on how to balance the books. But personally, I dont see any way to avoid NIR…..its too tempting for the taxman and banks to ignore.
Once the inevitability of NIR is accepted, the next thing to sus out is what you can do about it. Ill leave that to other wiser folk.
If the governments are acting from the motivations you ascribe to them,
then their policies are failing so far because money velocity is at dramatic lows.
Contrary to their wishes that we spend the stuff, people are starting to be more cautious.
I am not campaigning against NIRP, as foolish as I think it is. And I am not trying to persuade anyone influential to change their idea on NIRP.
I am just trying to figure out how to insulate myself from the harmful effects of NIRP which are sure to come as a result of it.
Whew…between figuring out NIRP and avoiding unnecessary taxes, avoiding the pernicious impact of government attempts to take my money sure is taking a lot of time and energy…
alan you are forgetting all the hidden taxes that the have-nots also pay,
primarily consumption taxes. A few years ago a study was done and if I remember about 70% of the price of a loaf of bread is due to taxes along the way and some things are even higher as “sin” taxes are piled on, ie booze,tobacco, etc. Corporate taxes are really a hidden consumption tax as that is part of the cost of business and is passed into the selling price.
Consumption taxes hit the least wealthy the hardest as their entire income is usually spent each month or week buying consumables, including housing and related costs. Proportionally the rich spend much less except for what are called luxuries, which is behind the theory that they should be charged more profit tax to even that out.
Nirp is thought to be an inducement to inflation as your dosh is worth more today before tax than a year from now after tax,,, which would drive purchase today to avoid that and lead to inflation. Of course inflation is another hidden tax.
What these masters of schemes fail on is that people are not stupid as to seeing what
happens to their personal stash and will subvert their masters by underground economy,
smuggling, black market, barter, off the books, money under the bed etc etc.
The economy is always a product of many personal decisions, not government.
That is the main reason central planning or control always fails. People acting in their own self interest,,, a wonderful thing.
From what presumed harmful effects of NIRP,are you trying to insulate yourself? The jury may still be out on whether there may be any beneficial effects, but I suspect that at best they may be few and small.
A banker can’t force someone with good credit to take out a loan he doesn’t need, and will avoid those with poor credit who may need a loan to avoid going bankrupt sooner rather than later. NIR may tease some of the weaker banks in Europe and Japan into making a few more riskier loans while aiming to stimulate their economies, but it may take years to determine whether the scheme is economically beneficial or detrimental on balance.
I am presuming that NIRP could cause:
Discouragment of capital formation
Disruption of all major financial markets and instruments that are interest sensitive
Devaluation of the currencies of the participants
Transfer wealth from savers to spenders, from creditors to debtors
Massive inflation, possibly hyperinflation
Massive asset bubbles as millions of people move their money into safe places
Several of these outcomes carry undesireable social and political outcomes as well.
Is that enough for you ?
In addition, there is an aspect of the advanced G- countries picking on commodity- producing, less advanced countries that also have competing or unappetizing cultural values. In the advanced, phoney money camp we have the US, EEC, Japan, and now China. In the other camp we have Russia, OPEC, Africa including and especially South Africa, and anyone else not in the Club. India and South America are neutral. Australia and Canada are collaterally damaged but have to “take one for the team”.
We get to buy oil, natural gas, gold, diamonds, and the rest and pay it with printing press money. The Arabs, South Africans, and Russians can take a hike if they don’t like it. Who else are they going to sell their stuff to?
Thanks for the response HN. Your listing of possible problems from NIR is correct, but the one which would worry me most is inflation. However, we may be in greater risk of deflation now, although inflation could come later on. These cycles are repetitive.
As for our possible currency devaluation, a little bit now could be helpful by making our exports more competitive. But this can become a destructive contest involving the U.S., the EEC and Japan. Better if we can lower the prices of our exports by reforming our high corporate tax rate by making it similar to that of other exporters.
The following are severely edited excerpts from material published by Doug Casey. Darn, he’s reading SG and taking my ideas. Just call me Son of Doug.
EDITED EXCERPTS from Casey Daily Dispatch April 5, 2016 6:34 pm
Ivy League economists agree…The economy is struggling because central banks haven’t printed enough money.
[…. you know] this statement is absurd…central banks have printed trillions of currency units since the 2008 financial crisis… many world central banks have dropped interest rates to zero…mainstream economists (say) these easy-money policies (are) supposed to jumpstart the global economy. But this…has been a miserable failure…the U.S., Europe, and Japan are all growing at the slowest pace since World War II. (Chinese growth is) at its slowest pace since 1990.
• Many economists want to “double down” on the same failed policies…Nouriel Roubini (and) many ivory-tower economists (are) urging central banks to launch more stimulus. (Roubini is) not content with printing trillions of dollars and dropping interest rates below zero. He…thinks it’s time for “helicopter money.”
(Friday) Roubini wrote an article….“Central Bankers May Have to Fire up the Helicopters.” …Economist Milton Friedman coined the term “helicopter money” in the 1960s. (He suggested) the government could drop free cash from helicopters to stimulate the economy…Friedman likely never took this…idea seriously…but the idea of helicopter money is catching on today…the government wouldn’t actually drop cash from helicopters…it would print money…mail checks to people…or deposit the money directly into people’s bank accounts….Roubini says helicopter money would be a better version of quantitative easing (QE).
Roubini says:” [W]hile QE has benefited holders of financial assets by boosting the prices of stocks, bonds, and real estate, it has also fueled rising inequality. A helicopter drop (through tax cuts or transfers financed by newly printed money) would put money directly into the hands of households, boosting consumption…central banks…are the only game in town when it comes to supporting aggregate demand, lifting employment, and preventing deflation.”
—
…During the 2008 financial crisis…central banks began printing trillions of new currency units. The printing continues to this day…and it’s not just the Federal Reserve that’s doing it: Japan, Europe, China…all major central banks are [doing it]…
These reckless policies (will cause)…paper currencies [to fall] apart, as they have many times throughout history…Owning gold is the best way to protect your wealth…gold is money…Gold has preserved wealth for centuries through every sort of financial crisis…
…last year, inflation fell to its lowest level since the financial crisis. This worries central bankers [who] for the past eight years [have] done everything they can to stoke inflation…None of this has worked…Central bankers are becoming desperate to increase inflation….Owning physical gold is the best way to protect your money from these reckless government policies.
What Negative Interest Rates Mean for the World
As central banks worldwide take the plunge into negative rate territory, policymakers are keeping a close eye on the reaction across markets and economies
http://blogs.wsj.com/moneybeat/2016/04/14/what-negative-interest-rates-mean-for-the-world/?shareToken=st5ba017d518fb4a32b4371e3939bd06f4&mod=e2tw
DIVIDEND PAYING GOLD INVESTMENTS…one negative point often made about gold and silver is that they do NOT PAY INTEREST. Well, I have noticed something.
There are a number of gold and silver companies THAT PAY DIVIDENDS.
Tell me, which would you rather have:
Government paper with negative interest in a depreciating currency, or
a dividend-paying gold and silver stock whose price and dividend are related to the price of gold and silver ?
My single largest stock holding is in $HL Hecla a silver miner run very l;ow cost and making money now at depressed prices. Other metals , copper lead, etc pay the mining cost of the gold they also produce so their gold is free. They have a LOT of ore in the ground , mostly in Idaho but a lot in Mexico. They pay a small dividend yet. Currently cycling around $3.00 and has been,,,in 2011,,, $17.00 Long $HL
I am going to look more closely at the dividend histories of the miners. Before the dividends were so small, they did not mean very much to me compared to potential price appreciation of the stock. But the situation is different now. A fractional percent dividend at least is POSITIVE. Dividend returns even in the low single digits will stack up pretty nicely to negative rates on government paper…and the underlying ability to pay is based on the prices of real gold and silver.
Quick survey before writing this showed good dividend histories for FNV, AG, PAAS.
FNV already a large blip on my radar. No position in PAAS or AG.
I don’t know that this helps, but $MUX McEwen Mining has been giving a dividend for the 6-9 months of 1%. The dividend has now doubled with the share price. I will be adding to my position when the opportunity presents itself.
Maybe worth a separate micro blog HN ?
Here ya go: http://www.stockgumshoe.com/2016/04/microblog-72-the-rule-of-72/
Thanks for the suggestion but there are already too many blogs on gold, we should consolidate. First we had Myron Martin’s, then one started on account of Rickards, then one on Nick Hodges, and now Stansberry, who has joined the gold camp. Would prefer to see one blog on gold and one on silver. Maybe the one on silver could include lithium and uranium and the palladium/platinum complex.