NEGATIVE INTEREST RATES: WHAT IF ?

By hendrixnuzzles, April 2, 2016

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.

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71 Comments on " NEGATIVE INTEREST RATES: WHAT IF ?"

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Gr8Full!
Irregular
11289

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)

Gr8Full!
Irregular
11289

Suggest search NIRP here: http://www.zerohedge.com/ and ZIRP or NIRP here: https://www.armstrongeconomics.com/

alanh
Member
4085
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%… Read more »
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alanh
Member
4085
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… Read more »
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frankw17
Member
1191
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… Read more »
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arch1
Irregular
7782
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… Read more »
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alanh
Member
4085

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.

alanh
Member
4085

Tax pays the countries police/military etc bills. Savings avoid tax. NIR allows Uncle Sam to put your savings back into circulation.

1paglee
Irregular
228
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… Read more »
alanh
Member
4085

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.

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arch1
Irregular
7782
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.… Read more »
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alanh
Member
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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)

alanh
Member
4085

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.

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1paglee
Irregular
228

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?

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alanh
Member
4085

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.

arch1
Irregular
7782

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.

alanh
Member
4085

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,

arch1
Irregular
7782

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.

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alanh
Member
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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.

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alanh
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Platinum is useful given diesel catalysers…..but with the move to electric cars, Id avoid platinum. Silver still has an industrial use.

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arch1
Irregular
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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.

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alanh
Member
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I didnt know that…thanks.

billywade88
Irregular
123
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… Read more »
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1paglee
Irregular
228
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… Read more »
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alanh
Member
4085

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.

Lawrence Lieberman
Guest
0
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… Read more »
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alanh
Member
4085
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.… Read more »
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arch1
Irregular
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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… Read more »
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1paglee
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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… Read more »
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1paglee
Irregular
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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… Read more »
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