Posted on 02/12/2021 7:45:36 AM PST by SeekAndFind
Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists who start from a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.
Inflation and growth are not low due to excess savings, but because of excess debt, perpetuating overcapacity with low rates and high liquidity and zombifying the economy by subsidizing the low productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.
Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it, they do not strengthen the credit capacity of families, because the prices of non-replicable assets (real estate, etc.) skyrocket because of monetary excess, and the lower cost of debt does not compensate for the greater risk.
Investment and credit growth are not subdued because economic agents are ignorant or saving too much, but because they don’t have amnesia. Families and businesses are more cautious in their investment and spending decisions because they perceive, correctly, that the reality of the economy they see each day does not correspond to the cost and the quantity of money.
It is completely incorrect to think that families and businesses are not investing or spending. They are only spending less than what central planners would want. However, that is not a mistake from the private sector side, but a typical case of central planners’ misguided estimates, that come from using 2001-2007 as “base case” of investment and credit demand instead of what those years really were: a bubble.
The argument of the central planners is based on an inconsistency: That rates are negative because markets demand them, not because they are imposed by the central bank. If that were the case, why don’t they let rates float freely if the result was going to be the same? Because it is false.
Think for a moment what type of investment, company or financial decision is one that is profitable with rates at -0.5% but unviable with rates at 1%. A time bomb. It is no surprise that investment in bubble-prone sectors are rising with negative rates and non-replicable and financial assets skyrocket.
Public debt trades at artificially low yields and, instead of strengthening economies, negative rates make governments more dependent on cheap debt. Politicians abandon any reformist impulse and prefer to accumulate more debt.
The financial repression of central banks begins with a misdiagnosis, assuming that low growth and below-target inflation is a problem of demand, not of the previous excess, and ends up perpetuating the bubbles that they sought to solve.
The policy of negative types can only be defended by people who have never invested or created a job because no one that has worked in the real economy can believe that financial repression will lead economic agents to take much more credit and strengthen the economy.
Negative rates are a huge transfer of wealth from savers and real wages to the government and the indebted. A tax on caution. The destruction of the perception of risk that always benefits the most reckless. The bailout of the inefficient.
Central banks ignore the effects of demography, technology and competition on inflation and growth of consumption, credit, and investment, and with the wrong policies generate new bubbles that become more dangerous than the previous ones. The next bubble is to increase again the fiscal imbalances of the countries. Even worse. When central banks present themselves as the agent that will reverse the effect of technology and demographics, they create a greater risk and bubble.
Protect your savings with gold, silver, inflation-linked instruments and stocks in sectors that do not suffer from negative rates.
Good post. Big Brother is watching — closely.
Anyone who goes into stores and shops on a regular basis knows that inflation is rising, especially food prices.
The elites don’t spend much, if any, time in stores trudging up and down the isles and waiting in check out lies. Oh no, they’re special and they have others do these mundane chores for them. Besides, they get routine cost of living adjustments, annual raises, bonuses and passive income. They’re far removed from the financial effects of the policies they impose on us.
I have too but we have the high inflation but not the high rates to choke the money supply. Inflation runs wild.
Building supplies have more than doubled in some cases and the price for a house package of materials has gone up 50% in the last 6 months. They say short supply but I see people working to make the stuff. They have gone back to work.
Part of it is price gouging and the other part demand and a hole in the stock from no manufacture for a few months but goods are now being made. I guess there is the whole restocking thing.
The thing about inflation that is so worrisome is that, except for some commodities, the price of manufactured goods almost never goes down. Instead it just stays at the same rapidly inflated price until the normal rate of inflation resumes, whatever that is.
>>who’s going to PAY for the inconvenience of having to deal with a financial institution when you can be financially ahead by storing your money at home in a safe (or coffee can, or mattress?)
Why do you think they are pushing for a cashless society?
Thanks. Indeed...Big Brother is always watching and increasingly tightening his grip.
To a degree, I’ve been doing that for a few years.
(from the article):" Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists who start from a wrong diagnosis:
the idea that economic agents do not take more credit or invest more because they choose to save too much and therefore saving must be penalized to stimulate the economy.
Excuse the bluntness, but it is a ludicrous idea."
"Inflation and growth are not low due to excess savings, but because of excess debt, perpetuating overcapacity with low rates
and high liquidity and zombifying the economy by subsidizing the low productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation."
"Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it, they do not strengthen the credit capacity of families,
because the prices of non-replicable assets (real estate, etc.) skyrocket because of monetary excess,
and the lower cost of debt does not compensate for the greater risk."
ANSWER: " Protect your savings with gold, silver, inflation-linked instruments
and stocks in sectors that do not suffer from negative rates."
Comments Welcomed !
Yikes
Why do I get the feeling that while I’ve done everything RIGHT, they’re moving the goalposts on me once again? ;)
Me and mine will be fine; it’s the rest of the unwashed masses that I fear for. :(
I think we’re on that exponential curve already.
The actions of the Federal Reserve Bank/Government Policy during my lifetime has reduced the value of the dollar by about 98% and it's about to plunge some more.
If you have credit card debt, paying that off is kinda like earning whatever rate they are charging you.
Stocking up on food that you eat routinely is also good, because when the gasoline prices go up so does food. If the food is good for 18 months, buy enough for 18 months etc.
However, note that most canned foods are considered edible past their use by date — they just might suffer from taste or nutritional degradation.
During the last big inflation, real estate taxes rose so fast that people had trouble paying them. So some gold or silver might be a good hedge against that. However, like stocks, precious metals fluctuate-so buying low is preferred.
Land also is a great investment-but again there's cycles to deal with as well as taxes.
I am thinking that a big pot of money is wrapped up in 401ks. So stay alert to what CongressCritters are doing on taxes etc. Congress will likely be looking at that money and thinking about ways to take it for "your own good".
I like to buy stocks when they are undervalued, and sell half when the value has doubled. That returns my principle and allows me to have money to invest for another under valued stock.
In Dec. 2007, I was looking for some good stocks to buy, when I realized that there were none fitting my criteria and the stocks were really basically overvalued. So I sold off a bunch of stuff — just taking a few chips off the table.
When the 2008 crisis hit and everyone was selling right and left, I was buying — stuff like Ford @ $3/share. Buy 200 shares for example and hold until you get it to $6 per share, and then sell 100 shares-maybe or maybe wait-depends on the outlook.
When investing, it's an individual preference. If you can't sleep at night due to market fluctuations - you need to rethink your strategy.
>>Who gets these negative rates?
Not the little guy, I assume.<<
Not negative for consumer credit of any kind but you can borrow at below 3% for mortgages and car loans.
I am cash only for everything now (including houses) so the rates only affect what I can earn. I am a conservative+ investor and have been able to maintain an 8+% return across 20 years, which included the 2008 and 2020 “V”s so all told I am OK with that. Few bonds but IU have dividend paying stocks that pad my cash line nicely and were good friends to have when the stock market skidded.
Not interesting or fun or political but steady and alawys moving forward in the long run.
Answering your question:
Banks don’t ordinarily borrow from the Federal Reserve except as a window of last resort. They are required to keep a % of their customer deposits on deposit in the Federal Reserve System, which is used to clear transactions between banks.
Sometimes banks need more funds on deposit, and sometimes they have too many funds at the Fed. They are allowed to purchase Fed Funds from the other banks having excess for an overnight period. Settlement tends to happen in late afternoon.
Regardless of the Fed’s announced interest rate, the Fed Funds market rate generally is more than that. The banks selling the funds make money on the overnight interest.
The Feds control the money supply by raising or lowering the % amount of deposits that have to be kept at the Fed.
Unless there’s a huge financial disaster, and they can’t get money from anywhere else, banks don’t get loans from the Fed’s discount window.
Frankly, the interest rates should be HIGHER, not lower, and government bond revenue should be subject to tax. Otherwise, we’ll continue this debt driven spiral, with governments spending and spending and spending . . .
No . . . Negative . . . RATES!!!
PING!
I’m certain real inflation is at least 5 percent. It has to be, with farmers destroying so many crops to accommodate COVID restaurant closures last year.
Pay off your debts. The return is equal to the interest rate of the loan.
Maybe. But in a SHTF situation where the banks implode the Feds will have to offer up some sort of sacrifice to show the public that they are bailing out the banking system and not the bank owners. Like say holders of the banks’ common stock, unsecured debt and junior in priority debt. The preferred stock and senior debt will get a haircut and the small investors will be beheaded.
is it time to pay off the mortgage with some of our retirement nest egg?...
if the markets, tank at least some of our money will have gone to a good cause....
Hopefully, you are 50 or under.
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