Tag Archives: Negative interest rates

Europe is so weak it can’t even handle 0% interest rates, by Simon Black

Europe is probably already in a recession. The US won’t be far behind. From Simon Black at sovereignman.com:

Europe’s leading economic policy makers have officially thrown in the towel.

Last week, the European Central Bank admitted economic conditions are so dire that it already has to reverse its monetary policy.

I’ll get back to that in a minute…

Following the Great Financial Crisis in 2008, central banks printed trillions of dollars and pushed interest rates to their lowest levels in human history. Low interest rates (and lots of new money sloshing around the system) mean people should go out and buy things that would otherwise be out of reach… new houses, new cars, businesses, etc.

And, in theory, all of that activity creates jobs and helps the economy grow… in theory.

Ten years into this monetary experiment, central banks did create growth…

US Gross Domestic Product (GDP) was about $15 trillion in 2008. Current GDP is about $22 trillion. That’s $7 trillion of economic growth.

Impressive… until you figure the cost of that growth.

Over the same period, the US national debt increased from $10 trillion to $22 trillion.

So, it took $12 trillion of debt to create $7 trillion of economic growth.

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Larry Lindsey Warns “Nothing Will Change Until The System Collapses Under Its Own Weight”

For those betting on what will prompt massive change, system collapse is undoubtedly the odds-on-favorite. From Larry Lindsey of the Lindsey Group via zerohedge.com:

Negative Rates and the Austrians’ End Game

Our training and bias have always been toward policy activism — that tweaking this or changing the dial on that can always make things better. [But] critics of activism, often lumped into the ‘Austrian School,’ argue that this will inevitably end badly.

Tweaking and dialing are addictive, both to the policymaker and to the governing class. Inevitably, this will lead to an unsustainable amount of tweaking and dialing and an endgame in which policymakers become powerless as the state’s monetary and fiscal dials are no longer functional and the state is, in effect, bankrupt. But as states never go bankrupt, they then must seize the assets under their dominion through either inflation, taxation and confiscation.

Our activist training tends to lead us away from these thoughts until [a] more-worldly individual — in this case, an Italian friend and client (and a history buff) — reminded us of this theme.

The Roman Empire tried all three. The medieval popes had their Jubilee Years in which all debts, particularly their own and those of other sovereigns, were forgiven. Debasement, grinding taxation, and confiscation from disfavored groups (often the Jews) were all part of the process.

So, there is nothing new under the sun that shines in the Policy Activists’ Universe. Negative interest rates sound new and ‘unconventional,’ but they are nothing more than an extension of this nostrum. Undertaken in the name of promoting inflation, they are really nothing more than taxation of (and ultimately confiscation of) liquid wealth. They are ‘unconventional’ only in the context that as time goes on, the policies of state acquisition of wealth must become ever more creative.

A 40- or 50-basis point ‘tax’ on wealth doesn’t sound like much, but in a world in which the ‘normal’ real return on capital might be 2%, this is a tax on income equivalent to 20 to 25%. Add to this a modest ‘inflation tax’ of 1% (below the target of 2%), and the new, effective rate on the normal return on capital becomes 70 to 75%.

Done in ‘moderation,’ inflation, taxation and confiscation can go on for a long time. They persist until the institutions that are the long-term-savings vehicles of a society and provide the investment capital collapse under the burden. How can one offer a pension — except through a Ponzi scheme — when the accumulation of assets is subject to such taxation? Long-term life insurance (as opposed to renewable term insurance) becomes impossible as well.

In the process, the growth of societies trying these schemes diminishes. Long-term capital moves from growth-enhancing productive investment, which dries up as it increasingly gets channeled into the hands of the state. The fibers of the economic morality that drive growth get frayed, particularly the bourgeois impulse to save for a better tomorrow for oneself and one’s children.

To continue reading: Larry Lindsey Warns “Nothing Will Change Until The System Collapses Under Its Own Weight”

The Empire Will Strike Back, by Robert Gore

SLL WILL BE ON A BUSINESS TRIP FROM 3/2 TO 3/6 AND WILL BE UNABLE TO POST. POSTING WILL RESUME 3/7.

The populist revolt fueling non-mainstream political movements in both Europe and the US flows from a single source: you can not fool all the people all the time. The central lie of our time is that governments can and should forcibly assume control of individuals’ lives, in the name of vague and always shifting greater goods. The Command and Control Futility Principle holds that governments and central banks can control one, but not all variables in a multi-variable system. The number of variables global governments and central banks have arrogated to their purported control has grown beyond measure. Breakdowns are visible everywhere, and as those failures exact their ever-increasing toll on the masses, the masses are pushing back.

The last financial crisis was a watershed. Capitalism’s rough justice was obviously, and gallingly, not allowed to play out. Favored financial institutions didn’t face the consequences—insolvency and bankruptcy—of their promotion of various bubbles and their leveraged business models. They were bailed out with taxpayer funds. Especially galling was that they knew they were going to be bailed out. More salt on the wound: improvident homeowners and housing speculators who took on too much mortgage debt were, other than a few spotty government programs, not bailed out or even offered appreciable relief. Since the crisis passed, banks have operated on the assumption they will be bailed out again during the next crisis. Despite all the hype about improved capital ratios and cleaned up loan books, fractional reserve banking is still fractional reserve banking; a leveraged business model that is wiped out if enough loans and speculations go bad.

Still more salt: despite unprecedented government debt and spending, new programs, particularly Obamacare, central bank debt monetization, and ultra-low interest rates, the purported recovery is the weakest on record, with the labor force participation rate at a multi-decade low, the number of people on food stamps recently reaching a record high, and real incomes back where they were in the 1970s. Those ultra-low interest rates have destroyed the incentive to save and forced retirees back into the workforce (the one group whose labor force participation rate has increased), but provided cheap funding to the carry-trade set, stock options-laden corporate executives, and Silicon Valley moguls. Their trophy art, cars, mansions, and spouses grace the media. That’s beyond salt, it’s rubbing people’s noses in it.

The messes the globalist powers that be have made outside their jurisdictions are even larger than the ones inside. Led by the US, the Western powers have bestowed unending chaos on the Middle East and Northern Africa. They have achieved none of their goals, (see “How To Defeat Your Enemies”) but have created massive blowback with the spread of terrorism and the refugee inundation of Europe. Not only have the war-torn lands not been reordered along liberal democratic lines, but mountains of money and barrels of blood continue to be spent in perpetual war. Meanwhile, ordinary citizens in Western homelands, not the elites, are left to contend with terrorist attacks, refugees burdening already strained social welfare systems, and obnoxious and illegal behavior by some of the new entrants. The elites shun even acknowledging these problems.

It comes as a surprise only to the elites and their media mouthpieces that the peasants are revolting, tired of their prevarication, arrogance, and ineptitude. Don’t, however, expect them to pay attention to anything so insignificant as the popular will; they won’t go gentle into that good night. In the US, the establishment can live with Hillary, and if either Trump or Sanders—the revolution’s candidates—wins, the new president will soon learn who actually runs the government. Or he will have an unfortunate accident or heart attack. However, the Empire is leaving nothing to chance; it has already initiated a preemptive counterattack.

The counterattack has three overlapping fronts: war, the economy, and civil liberties. “The Quagmire to End All Quagmires” stated that “the US faces the danger of being dragged into World War III.” That phrasing may have been an error (SLL reserves the right, in perpetuity, to make mistakes, see “On Failure”). The US government most likely won’t get “dragged” into World War III; it will probably initiate it. If Turkey and Saudi Arabia invade Syria, assume they’ve been green-lighted by the US government, which will join them in the carnage.

As the economy goes down in flames, central bankers and the usual totalitarian creeps are embracing negative interest rates and bans on cash. Negative interest rates self-evidently destroy the incentive to save, the foundation of honest capitalism and progress. Many commentators have pointed out that negative rates lead to an increased demand for zero return cash, so the monetary Dr. Strangeloves have to ban it to drive money into the banking system. Although negative interest rates are patently absurd and counterproductive, always strong selling points for the Strangeloves, the real reason for locking money in the banking system is to prevent a systemic run. As in the last crisis, on a mark-to-market basis the leveraged banking system—with the largest US and European banks still massively exposed to derivatives—will be recognized as insolvent and subject to a run unless money is kept locked in the banks and expropriated.

This assault on financial freedom goes hand in hand with the war against civil liberties, a specious battleground in the concocted “War on Terrorism.” The mainstream media and even some of the non-mainstream blogosphere have been filled with articles about the “complexity” of the Apple-FBI standoff on encryption. The word “complexity” is often a tip-off that someone’s about to pull an intellectual fast one.

Encryption is simple. It’s one of those issues most people dread: an either-or. Either one’s computer communications are encrypted and safe from prying eyes, or they are not. There is no middle ground, and Apple is ostensibly cutting its throat asking Congress, of all people, to come up with one. Encryption that has been compromised, for any reason, is useless. At Apple and the rest of Big Tech’s behest an encryption “compromise” will emerge that fatally compromises encryption, cementing Big Tech’s partnership with government. Lovers of liberty and privacy will be left searching for quite possibly illegal encryption developed by smaller, guerrilla software outfits.

Many will say that deliberate war, economic destruction, and technological repression are inconceivable; such a strategy is contradictory, counterproductive, depraved, deranged, diabolic, deadly, pathologic, sociopathic, psychotic, and out-and-out evil. All of the above, but if that’s your reaction, read, or reread, “Life, Or Death?” SLL recently posted Matt Bracken’s “Burning Down the House in 2016.” Bracken shares SLL’s forebodings of impending disaster, and it’s an excellent article, but he makes a mistake: granting the destroyers their stated intentions.

The proto-Marxist Jacobins of the French Revolution put it this way: “Out of order, chaos.” But first the Jacobins had to create the chaos, with an artificially engineered grain shortage leading to food riots, which they exploited for their revolutionary ends. Vladimir Lenin put it this way, when told that bread riots were breaking out in Russia: “The worse, the better.” The better for creating the optimal revolutionary conditions. The Black Panthers, revolutionary Marxists of the 1960s, said, “Burn, baby, burn.”

The currently existing social compact has to be burnt to the ground before the new world economic order can be built up from the ashes. This will be as true in 2017 as it was in 1917.

Regardless of the rhetoric—Liberté, égalité, fraternité; Dictatorship of the Proletariat; The Thousand Year Reich; The New World Order—the truth is that the means—destruction and death—are the ends. Psychopaths kill millions of people because…they enjoy killing millions of people. As SLL posited in “Life, Or Death?”, citing Ayn Rand, a malevolent desire to kill others is, at root, a desire to kill one’s self. The slogans, the supposed omelets that justify cracking all those skulls eggs, are dross.

That imparts analytic clarity to the future. When one understands that one’s life is on the line, one must fight with everything one has. Or else.

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Racked Markets Hand Verdict to Central Banks on Sub-Zero Rates, by Ye Xie, Lu Wantg, and Eshe Nelson

From Ye Xie, Lu Wang, and Eshe Nelson at bloomberg.com:

More than $8 trillion erased from global equities this year

Negative rates hurt banks as unconventional policies backfire

It seemed like a good idea at the time: Cut interest rates below zero to revive growth.

But as policy makers from Tokyo to Stockholm embrace the notion, investors are close to panic mode. Far from buoying financial markets this year, negative rates have helped global stocks enter a bear market, sent the cost of protection against corporate defaults soaring and driven investors to havens such as U.S. Treasury bonds and gold.

Fueling the turmoil is fear that negative rates will slam the world’s banks. In theory, they could be the panacea to cure sluggish global growth: by charging lenders fees for parking money at central banks, policy makers hope banks will use that cash to make loans, jump-starting their economies. In practice, investors worry it may squeeze bank profits and rattle money markets.

“We’re here in an environment where central banks have to learn one message, and that is that negative interest rates are not desirable and they are not workable,” Hans Redeker, head of global foreign-exchange strategy at Morgan Stanley in London, said in a Bloomberg Television interview. “When you cut into negative interest rates you have to think about the profitability of the banking sector.”

About a quarter of the world economy is now in negative-rate territory with more than $7 trillion of government debt offering yields less than zero.

On Thursday, Sweden’s central bank lowered its key interest rate even further below zero, cutting the repo rate to minus 0.50 percent from minus 0.35 percent. Last month, the Bank of Japan joined counterparts in the euro area, Denmark, Sweden and Switzerland with the same policy.

Federal Reserve Chair Janet Yellen said this week that the Fed was taking another look at negative interest rates as a potential policy tool if the U.S. economy falters.

To continue reading: Racked Markets Hand Verdict to Central Banks on Sub-Zero Rates

Banning Cash: Serfdom In Our Time, by Paul Rosenberg

A good article as far as it goes, but Paul Rosenberg misses the third reason to ban cash: to prevent bank runs, which are surely coming. From Rosenberg at freemansperspective.com:

Over the last few months a stream of articles have crossed my screen, all proclaiming the need of governments and banks to eliminate cash. I’m sure you’ve noticed them too.

It is terrorists and other assorted madmen, we are told, who use cash. And so, to protect us from being blown up and dismembered on our very own street corners, governments will have to ban it.

It would actually take some effort to imagine a more obvious, naked attempt at fearmongering. Cash – in daily use for centuries if not millennia – is now, suddenly, the agent of spring-loaded, instant death? And we’re supposed to just accept that line?

But there are good reasons why the insiders are promoting these stories now. The first of them, perhaps, is simply that they can: After 9/11, a massive wave of compliance surged through the West. It may not last forever, but it’s still rolling, and if the entertainment corporations can pump enough fear into minds that want to believe, they may just get them to buy it.

The second reason, however, is the real driver:

Negative Interest Rates

The urgency of their move to ban one of the longest-lasting pillars of daily life means that the backroom elites think it will be necessary soon. It would appear that the central banks, the IMF, the World Bank, the BIS, and all their backers, see the elimination of cash as a central survival strategy.

The reason is simple: cash would allow people to escape from the one thing that could save their larcenous currency system: negative interest rates.

To make this clear, I like to paraphrase a famous (and good) quote from Alan Greenspan, back from 1966, during his Ayn Randian days: The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

That was a true statement, and with a slight modification, it succinctly explains the new war on cash:

The preservation of an insolvent currency system requires that the owners of currency have no way to protect it.

To continue reading: Banning Cash: Serfdom In Our Time

Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks, by Wolf Richter

From Wolf Richter at wolfstreet.com:

And there’s a bitter irony.

The Bank of Japan’s surprise Negative-Interest-Rate party for stocks set a new record: it lasted only two days.

Today a week ago, the Bank of Japan shocked markets into action. As the economy has deteriorated despite years of zero-interest-rate policy and Quantitative and Qualitative Easing (QQE) – a souped-up version of QE – the BOJ announced that it would cut one of its deposit rates from positive 0.1% to negative 0.1%.

Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe – the Eurozone countries, Switzerland, Sweden, and Denmark. But it was just another desperate move, a head fake, and once the dust would settle, the hot air would go out [read…QE in Japan Nears End: Daiwa Capital Markets].

Now the dust has settled and the hot air has gone out.

On Thursday, January 28, the day before the announcement, the Nikkei closed at 17,041 down 19% from its Abenomics peak of 20,953 in June 2015. Today, it closed even lower.

To continue reading: Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

Anti-Value: Europe’s Rape of Savers, by Robert Gore

According to Bloomberg, $1.9 trillion worth of Euro-area bonds are trading at negative yields (“Euro-Area Negative-Yield Bond Universe Expands to $1.9 Trillion,” bloomberg.com). Purchasers of negative-yield bonds receive less money that what they put up; they are paying the issuer for the privilege of lending to it. Like some of the more bizarre aspects of quantum physics, negative interest rates will probably lead to not intuitively obvious, perhaps mind-bending, economic effects. On an easier to grasp level, they also represent yet another monstrous undermining of the ethical foundation of capitalism, and may come to symbolize the inflection point of Europe’s descent into an unrecognizable, dystopian hell of its own making.

When cave people first saved seeds rather than eating them, planted and later harvested them, they inaugurated not just agriculture, but capitalism. Seeds are capital—an excess of production over consumption that can be used for future production—and planting them implicitly incorporates the fundamental premises that make civilization possible. Planters have the self-restraint not to consume all that they have, and the foresight to make provision for the future. They are free enough from the threat of violence to believe that they will be around for the harvest and that the fruits of their labors will not be stolen from them. It is not surprising that early religions were based on planting and the harvest: the cycle leads not just to sustenance, but to an increase in wealth that enables learning, commerce, production of non-essential and luxury goods and services, the arts, and government. Civilization rests on the pillars of saving, investment, and production.

Negative interest rates are like a seed that develops into a weed, destroying part or all of the planter’s crop. No planter would knowingly plant such a seed. In modern finance, there is a theoretical possibility that creditors in a free market would accept negative interest rates if they were assured that rising real value of money (from the rising productivity of the economy) meant that a unit of money repaid would buy more than a unit of money originally lent. Europe is not within field goal range (or free kick range, because they play soccer) of being a free market; negative interest rates are the result of central bank intervention. Europe’s creditors have no assurance their loans will be repaid by euros with more purchasing power. Indeed, it is the stated goal of the European Central Bank to increase inflation and depreciate the euro. Those who consume less than they produce, to then be faced with the prospect of investing at negative rates, are being penalized for their virtue.

Honest savers flee such an arrangement, preferring to keep their savings in cash at zero interest (not surprisingly, there are proposals from thieves masquerading as economists to eliminate cash). Those who flock to it are debtors availing themselves of ultra-low or negative rates (getting paid to borrow—it’s almost as good as Midas’s touch) and speculators, who have been told by the ECB that it will buy their bonds, regardless of price. With out-of-thin-air money, the prices the central bank will pay for bonds—some issued by governments which already have one foot in the insolvency grave—virtually guarantee it losses. Negative sovereign debt interest rates have dragged down the curve for non-sovereign debt issuers as well, and opportunistic corporate borrowers are shoveling as much as they can into the market (Warren Buffet’s Berkshire Hathaway is issuing its first eurobonds).

Speculation and debt are not essential for economic progress; savings are. Whatever the noble intent behind the European Union—if there was one—it has evolved into a bureaucratic monster that stifles and kills rather than promotes markets and production. Generating savings in Europe should be an easy matter. The continent has a well-educated, potentially productive population and world-class companies, and its common market, even as encumbered as it has become, is roughly the same size as the US market. Under the US defense umbrella, European nations spend much less than the US on defense, although they have devoted that saving to expansion of the welfare state rather than investment. It’s tempting to invoke a cliché and say that by assaulting saving, Europe is shooting itself in the foot, but that’s not correct. It’s shooting itself in the head. Destroying saving, the cradle of Western civilization is destroying itself as we now know it, leaving Eurocrats, fat cats, out-of-work youth, out-of-luck pensioners, crazies, lazies, grifters, drifters, dopers, mopers, latte-heads, pâté-heads, crooks, schnooks, hookers, and incoming Islamic hordes to one day scavenge the corpse.

VALUE:

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