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.
There ought to be a way for FR to get paid when infomercials like this are posted.
There ought to be a way for FR to get paid when infomercials like this are posted.
Big financial institutions?
**************
Prolly safe to invest in an industry that the government goes to great lengths to protect. Big financial institutions have their people deeply embedded in the Swamp. Just saying.
So does this mean there will be negative interest rates on loans, too?
Be nice to get paid to borrow money that I won’t spend anyhow.
As far as negative rates on savings, tie it up in a CD. The rates are fixed, even though they are practically zero.
Prepper ping.
RE: What sectors are those?
Banks will definitely suffer.
Negative interest rates can seriously affect the profitability of commercial banks, raising the risk of bank failures and financial crisis.
Banks find it difficult to cut interest rates on customer deposits below zero, because customers have the alternative of moving their funds into physical cash, which does not bear interest although it can incur storage costs.
But because larger businesses can borrow from capital markets instead of banks, banks need to cut interest rates on larger loans or face potentially crippling loss of business.
RE: There ought to be a way for FR to get paid when infomercials like this are posted.
What sort of product is this guy trying to sell anyway?
He generically mentions gold but doesn’t tell his readers to buy it from him.
when it gets here (and it will), it will be unexpected/surprise on the evening news
Yep!
Trumps fault/s
“Banks find it difficult to cut interest rates on customer deposits below zero, because customers have the alternative of moving their funds into physical cash, which does not bear interest although it can incur storage costs.”
Can’t banks borrow from the federal reserve at next to nothing? So what if I don’t loan them $1,500 per year?
If not arguing the point, just hoping someone will explain it to me in a way I understand.
I was looking at Gold earlier this AM (also cuz I think inflation could easily go crazy with this “regime”), so ran a portfolio backtest on IAU (ETF that follows the price of gold)..
CAGR was 8+% and standard deviation was ~17+%..BUT - there were multiple periods “underwater” (where the value of the portfolio went negative for some time) since 2006. The longest of these was almost NINE YEARS. Max drawdown was negative 42.5%..So, no thanks! Don’t have any desire to watch any investment be less in value than I had for almost 9 years, or to watch a negative 42+% “return”..
Makes me look at all those “Goollllllld!!!!” commercials in a whole new light.
Especially the little guy. These are not borrowing rates, but rates paid on low-risk investments like CDs and savings accounts. You're paying somebody to hold on to your money for you, which seems crazy. Borrowing rates are also relatively low but still positive.
I'm inclined to invest in tangible assets and that does not include gold or silver to any appreciable extent. I try to avoid liabilities, which I think is anything that is nice to have, but doesn't really help if things continue to unravel. For example, I like antiques, but to me, they are like jewelry, nice to have and look at, but really won't help much in a clutch situation.
What is remarkable to me is how very, very quickly things have unraveled already. Personally, I wonder if this unraveling begins to compound and then slide into exponetiality.
Rates are low because elites in power can't afford to pay back debt to China if rates go up... Cryptocurrencies will destroy that power elites hold now.
The problem for average folks is that the elite have rigged the system so you can’t withdraw $10,000 or more of your own funds at one time without having the bank snitch on you to the feds. The rules about what you can withdraw when and where are mind-boggling, all in the name of preventing “money laundering” which is something politicians do all the time with their PACs. And you can’t deposit more than $5000 without the bank getting suspicious. Keeping large amounts of cash at home during a period of high inflation isn’t helpful either.
https://tickertape.tdameritrade.com/market-news/negative-interest-rates-fed-powell-17690
from link:
Negative Rates Already Here, So How Should Investors React?
“Negative rates would likely be favorable to the real assets, like commodities and real estate, and would potentially help some Material sector stocks as well,” Cruz said. “It would not be beneficial to the Financial sector.”
“All your ‘safe-haven’ assets like Treasuries have little-to-no yield” in a negative interest rate situation, Cruz continued. “Even investment-grade corporates would have little-to-no yield. Your high-yielding credit would be pretty risky, so people would go into lower-risk equities, including traditional lower-risk stocks like Utilities and more defensive stocks like Consumer Staples.”
Gold isn’t the bullet proof nest egg the commercials claim.
Things with real intrinsic value are hard to find.
In reality, we have had negative rates for years.
With 0 to 1 percent return on a savings account and a 3% o more inflation rate, you are losing 2-3% per year in purchasing power.
They just want to increase the profit margin.
Inflation is a wealth transfer from the Middle Class to the Government and the Wealthy. Always has been so.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.