Tag Archives: Negative interest rates

The Road To Serfdom… Via Credit Markets, by Peter Earle

Current monetary abominations like negative interest rates can only lead to disaster. From Peter Earle at The American Institute for Economic Research via zerohedge.com:

On the morning of Monday, September 15, 2008, at 6:55 a.m., I arrived at my turret on the trading floor of a Manhattan-based hedge fund and flipped on my Bloomberg terminal. As the head of trading, I was in the habit of looking at sovereign debt markets before checking our positions from the previous trading day. But on this morning, reviewing world bond markets took on a particular urgency. Lehman Brothers was filing for bankruptcy and the entire world was in the throes of the worst financial crisis in 75 years.

What I saw was that, all over the world, short-term debt markets – “bills,” in industry parlance – showed negative yields. In virtually every industrial nation, firms and individuals were seeking the safety of the printing press, effectively handing $100 to governments for the assurance of receiving $98 in four weeks.

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Negative Interest Rates are the Price We Pay for De-Civilization, by Jeff Deist

In the absence of central banks there would be no negative interest rates. From Jeff Deist at mises.org:

Do central bankers really think negative interest rates are rational?

“Calculation Error,” which Bloomberg terminals sometimes display1, is an apt metaphor for the current state of central bank policy. Both Europe and Asia are now awash in $13 trillion worth of negative-yielding sovereign and corporate bonds, and Alan Greenspan suggests negative interest rates soon will arrive in the US. Despite claims by both Mr. Trump and Fed Chair Jerome Powell concerning the health of the American economy, the Fed’s Open Market Committee moved closer to negative territory today — with another quarter-point cut in the Fed Funds rate, below even a measly 2%.

Negative interest rates are just the latest front in the post-2008 era of “extraordinary” monetary policy. They represent a Hail Mary pass from central bankers to stimulate more borrowing and more debt, though there is far more global debt today than in 2007. Stimulus is the assumed goal of all economic policy, both fiscal and monetary. Demand-side stimulus is the mania bequeathed to us by Keynes, or more accurately by his followers. It is the absurd idea, that an economy prospers by consuming and borrowing instead of producing and saving. Negative interest rates turn everything we know about economics upside down.

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Here’s What I’m Worried About. And It’s Not a Recession, by Wolfe Richter

The bond market is the riskiest market on the planet. When all the greater fools who think they can buy bonds with a negative interest rate and sell it to someone (a central bank) at a still greater negative interest rate discover they can’t and head towards the exits, the market move to the downside will be explosive. From Wolfe Richter at wolfstreet.com:

The locker room at my swim club has become the litmus test. When a complex topic, after years of being absent or ignored, suddenly crops up in conversation, and not just sporadically but all the time, it means that there is some kind of peaking going on. This suddenly hot topic now is a “coming recession.”

Just about everyone is talking about it. This means that fears of a recession or thoughts of a recession have now penetrated into the core of the previously recession-free zone: the swim-club locker room. It means that these recession fears might be peaking.

It makes sense. Recession-fear headlines are popping up everywhere. You cannot escape the drama. It’s not that there is a recession in the United States – far from it. It’s all about a comingrecession.

And another term has penetrated into the musty locker room at my swim club, perhaps for the first time ever in its illustrious 100-plus-year history: “Inverted yield curve.”

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The Disaster of Negative Interest Policy, by Thorsten Polleit

Negative interest rates are a creature of central banks and an indictment of their policies. From Thorsten Polleit at mises.org:

hose who had hoped that things could not get worse with the monetary policy of the European Central Bank (ECB) have been proven wrong. At its last meeting on 25 July 2019, the Governing Council of the ECB kept interest rates unchanged: the main refinancing rate was kept at 0.00% and the deposit rate at -0.40%. At the same time, however, ECB President Mario Draghi has prepared the ground to lower interest rates even further in the coming months. What is the reasoning behind that?

According to the ECB Governing Council, inflation is too low, and the euro area economy is too weak. It was precisely this assessment that signaled to the markets to expect a rate cut in the near future. It has now become very likely that the deposit rate will be lowered by 0.2 percentage points to -0.60% at the next ECB meeting in September; and the main refinancing rate could drop to -0.20%. The continued path into the negative interest world, however, has quite dramatic consequences.

The Essence of the Interest Rate

This becomes clear when considering what the interest rate stands for. In short, it represents the value discountthat a later satisfaction of a want suffers compared to an earlier satisfaction of the same want (under otherwise identical circumstances). The “pure” or “originary” interest rate is positive — always and everywhere. It cannot disappear, it cannot go to zero, let alone fall below the zero line; the logic of human action informs us that the pure interest rate cannot be thought away from human actions and values.

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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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