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.
Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.
This is the US with our Federal Reserve and printed, fiat money.
Every time you see Nancy Pelosi, AOC, James Comey, etc.., just remember this is how they have power over you.
“. . . stocks in sectors that do not suffer from negative rates.”
What sectors are those?
“It’s time to go to the mattresses.”
One “investment” everyone should make is to stock up on every non-perishable item you use and could use for barter in a pinch.
That includes non-perishable food, clothing, furnishings, alcohol, tobacco, and firearms.
Get spare parts for any machines you have and need, even if you won’t need them for many years.
The great thing about this investment is that you take possession of it and do not have to depend on the stability of financial markets.
The less money you _need_ to spend in the future, the lower the impact inflation will have on your life.
A certain amount of savings should not be subject to market risk. About 2-6 months of spending, is what I have seen advised. If the banks go to negative interest rates, I would take money that should not be subject to market risk out of the bank in cash, and put it in a safe deposit box.
Who gets these negative rates?
Not the little guy, I assume.
Big financial institutions?
If there are negative federal interest rates, why can’t I take out a loan for a house and pay back less than I borrowed?
“One “investment” everyone should make is to stock up on every non-perishable item you use and could use for barter in a pinch.”
My wife says that is why she stocks up on purses and shoes.
Some home loans available at 1.8%. For highly qualified folks.
Or not pay your taxes and owe less after “interest and penalties.”
👍
Personally, I don’t see gold and silver as inflation protected. I remember when the price of gold was set by government and it could not be traded.
Craftsmen, warriors, and farmers are historically able to survive. They aren’t necessarily free, but even dictators need to eat
Wouldn’t the immediate and natural result be a huge huge run on the banks?
I mean 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?)
RELATED BONDS - DOMICILE
NAME PRICE CHANGE YIELD
U.S. 1 Month Treasury Bill 0.003 0.036%
U.S. 3 Month Treasury Bill 0.005 0.048%
U.S. 6 Month Treasury Bill 0.000 0.060%
U.S. 1 Year Treasury Bill 0.005 0.079%
U.S. 2 Year Treasury Note 0.002 0.113%
U.S. 3 Year Treasury Note 0.004 0.185%
U.S. 5 Year Treasury Note -0.016 0.479%
U.S. 7 Year Treasury Note -0.038 0.828%
U.S. 30 Year Treasury Bond -1.224 1.978%
Hah hah good one. I have a friend like that!
“One “investment” everyone should make is to stock up on every non-perishable item you use and could use for barter in a pinch.”
Your idea quoted above is IMO a very sound one compared to the bottom line of the thread’s article quoted below:
“Protect your savings with gold, silver, inflation-linked instruments and stocks in sectors that do not suffer from negative rates.”
If things really, really get bad, that gold or silver will be worthless as a medium of exchange for everyday needs.
We are working it both ways, stocking up like you suggest and keeping our IRA in tact.
Negative rates are the destruction of money, an economic aberration
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We seem to be living in an era of aberrations. An upside down world.
I’ve been expecting increasing interest rates and high inflation. Jimmy carters 2’nd term.
I am not a fan of gold and silver.
I like them in theory, but in practice the time you _really_ need them is when the financial system collapses, and when the financial systems collapses what you _really_ need are items to barter.
Folks around here will want food, clothing, alcohol, tobacco and firearms—not silver and gold.
A small personal stash of silver and gold is reasonable—I don’t have one, but I can understand the logic of folks that do.
However, paper gold and silver are similar to stocks and bonds imho—very very risky in the current environment—would much rather spend the money of stuff that I can touch.
I have zero trust in financial markets at this stage in our history.
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