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Get Ready For Negative Interest Rates In The US
With Fed mouthpiece Jon Hilsenrath warning - in no lesser status-quo narrative-deliverer than The Wall Street Journal - that The ECB's actions (and pre-emptive collapse in the EUR) means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad, potentially slowing both U.S. growth and inflation; and Treasury Secretary Lew coming out his crypt to mention "unfair FX moves," it appears The Fed (and powers that be) are worrying about King Dollar. This suggests, as Mises Canada's Patrick Barron predicts, the Fed will start charging negative interest rates on bank reserve accounts as the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”. If savers won’t spend their money, the government will take it from them.
As The Wall Street Journal explains,
The European Central Bank’s launch of an aggressive program this week to buy more than €1 trillion in bonds poses important tests for the U.S. economy and the Federal Reserve.
Europe’s new program of money printing—and the resulting fall in the euro—means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad.
The stronger dollar could slow both U.S. growth and inflation, giving the Fed some incentive to hold off on its plan to raise short-term interest rates later this year from near zero.
...
A stronger dollar has three important implications for the U.S. economy, markets and policy makers. First, it tamps down inflation just as the Fed is trying to raise inflation closer to 2%. Second, it hurts exports and therefore economic growth. Lastly, the attraction of U.S. financial assets could heat up markets just as regulators keep watch for dangerous asset bubbles.
...
U.S. officials have been playing down that scenario, and, more broadly, resisting talk of a global currency war—competitive devaluations by countries eager to keep their currencies as low as possible to protect exports; but “The Fed faces a challenge having to navigate some pretty intense cross currents,” said Bruce Kasman, chief economist for J.P. Morgan Chase.
The U.S., in effect, is importing some of the world’s downward inflation pressure through currency movements.
Treasury Secretray Lew pipes in...
- *LEW SAYS UNFAIR FX MOVES TO DRAW SCRUTINY FROM U.S.
- *LEW SAYS STRONG DOLLAR IS GOOD FOR AMERICA
* * *
And Patrick Barron predicts (via Mises Canada)...
I predict that the Fed will start charging negative interest rates on bank reserve accounts, which will ripple through the markets and result in negative interest rates on savings at banks.
I make this prediction only because it is the logical action of the Keynesian managers of our economy and monetary policy.
Our exporters will scream that they can’t sell goods overseas, due to the stronger dollar.
So, what is the Fed’s option? Follow the lead of Switzerland and Denmark and impose negative interest rates in order to drive down the foreign exchange rate of the dollar.
It is the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”.
If savers won’t spend their money, the government will take it from them.
* * *
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Now Jack Lew is a flag-waving 100% American, a patriotic civil servant, a model for us all.
Give me a break. Jack Lew is a puppet working elbow to elbow with the international bankers and I do mean international, pretending to have America’s interests at heart. He is not American; these people are all internationalists.
There were no surprises in Draghi's central bank policy - from the U.S. to Europe - they all are on the same page, the Goldman Sachs’ page. And pretending to be surprised and requiring serious reaction is a joke. They all are puppet satellites of the Fed, from LeGuarde, to Draghi, to Fischer, and to Jack Lew.
Jack Lew is a treasonous fucking pig who should be hung from a lamppost
So let me see if I understand this correctly. As a small business owner I have to accumulate money to pay my quarterly estimated taxes. I can't do it in cash or when I deposit it to pay my taxes, they will say I am laundering money and take it leaving me with no way to pay my taxes. So I can also put it in the bank until it is time to pay my taxes and they are going to take part (maybe all later) of it before I can even pay the taxes. Sounds like my taxes just went up.
Nah, they'll accept yer cash deposit without question if it's to pay taxes. Either way, You didn't build that, and should be grateful.
Welcome to BIZZARROWORLD
Here, quintupling the money supply does NOT cause inflation (well, not officially... unless you're buying food)
Here, you PAY banks to hold your money (which THEY then invest in all kinds of risky endeavors, keeping the profits. If they LOSE your money, gov will cover the losses - maybe)
But what does money supply really mean? In a world where all money is created as debt, a positive interest rate means that the amount owed is always vastly greater than the aggreate amount of money people have. And if money velocity drops down low enough, new debt must be created at an ever faster rate to hold up the bubble. If debt payments immediately due are included in money supply, the sum total might even be negative.
What happens if negative rates become universal. In this world, all but the worst subprime debts have negative rates, and cash is taxed to have the same effect as a negative rate. It is hard to wrap one's head around this. Will total debt shrink or accelerate without limit?
I can see interest rates in the US and UK go to -5% when the next great (officially recorded) recession happens. Think about it, we are at ZIRP already and CBs must fight the bogeyman of deflation, and collapsing oil prices are that deflationary/recessionary death knell. Of course massive NIRP will cause even more deflation because everyone will either be invested in assets chasing yield, holding deposits or stuffing cash under their mattresses. Monetary velocity -- in the real economy -- will plummet even further and the depression will only deepen and deflation will only deepen.
They say hyperdeflation never destroyed a country or a economy. I think NIRP will give that notion a run for its money.
Well said.
Can NIRP self-accelerate and cause complete collapse - sort of like a star collapsing into a black hole
If you think about it, hyperinflation and hyperdeflation w/NIRP are almost identical. In both situations the currency is destroyed. In hyperinflation, the currency unit is inflated away to worthlessness. In hyperdeflation w/NIRP, the currency unit is taxed away with ever accelerating negative yield until you have none left. In both, you are left with nothing.
Its not that you are left with nothing, you are just left with more of it. Its a fixed game and they are showing thier hand if they NIRP it in the bud. If a client owes money from every angle including their savings, then the sum game is zero. Its just a game and its not rigged in you or I's favor.
"The Return of the Son of Nothing" tentative title for Pink Floyd's MEDDLE lp before its release in 1971
Hey, with hyperinflation, at least in the past, you at least wound up with a heat source and a source of toilet paper.
One of the big things, at least with this article, is that it is talking about charging the banks negative interest on excess reserves. That means that it will no longer be profitable to just keep them parked at the federal reserve. It will have to chase some sort of yield somewhere, and whether that is getting loaned out (that would be very inflationary,) or used in some other pyramid scheme is not something that I can answer. I will say that if it does come rushing out as loans, you're looking at $2.5T ballooning to $25T if all of it is loaned out. That is just the type of thing that is hyperinflationary.
NIRP and hyperinflation is not a nice combo.
Kinda like NIRP and cc rates of 28%
They've already figured out a way around that. They've been doing it in my inudstry for 6+ years now - the US Upstream E&P Industry. They will tell you teh only money available is thru thier "Private Equity Arm" which also gets the money for free, or close enough, from the Fed either directly or after cousin Abraham first "sterilizes it", and what they are basically doing is knocking out the self-employed entreprenuerial Petroleum Engineers and Geologists such as myself.
Those Joos are such middle men for a while, then they are the ONLY men, "men" obviously used in the loosest of context here.
I am just looking forward to complaining that the guvmint is giving me a Purple NIRPle.
Noogies and swirlies from our overlords are soon to follow.
Will the negative rate be applied to every acount or just those over a certain amount? I thought I read a figure of $200,000 some where. If this is the case then only the small fry- in this case those just over the magic number will be hit- all the connected people will be offshoring or have their cash spread over several bank accounts.
Nearly everyone on ZH seems to go on about bankers and policymakers like they were some criminal scum. They are not.
What is really interesting is that ZIRP (zero interest-rate policy) has lead to mortgages and lending at such low rates that ursury might not even exist. And when it comes down to it, ursury is the problem. So, ZIRP reduces and almost destroys ursury and even allows subprime borrowers to enter the market. Meanwhile...
ZIRP over an extended period has now led to negative rates, or NIRP, which affects savers.
You can't have it both ways people!
You can't have cheap loans AND high interest savings accounts. The two are mutually exclusive.
It has nothing to do with 'schemes for destroying savers'. It has everything to do with trying to get a population to more productively use wealth, to push them towards finding returns (read: Productive, competitive businesses).
The problem is the negative economy. A small business will still pay positive rates but with a soaring dollar and collapsing fracking industry to whom does he produce and sell?
Not so easy to fix. Where will the money really go?
Usury is defined as the making of unethical or immoral loans, not the charging of a fair rate of interest. The lender needs to be compensated for the risk of default as well as administrative expenses in evaluating potential borrower prospects.
Secondly, while it's true that more people can qualify for loans, they have to time it right in order to benefit. For example, around here, home prices have gone up so much (due to ZIRP) that even with very low interest rates homes are not a bargain. Near the bottom in late 2011, prices were reasonable, but you only had about 1 year to act. Mostly ZIRP benefits the well-connected and wealthy, although I'll admit that some small-time operators can also reap rewards if they follow markets carefully. Significant numbers of the middle-class lost their houses in the crash, and if they jump in now (at least around here), even with low interest rates, they'll lose again.
Some loans are really low, that's true.
Have you noticed how credit cards are still like 20% though?
And if you are looking for usery, go no further then the rent to own stores, or the payday loan stores. I live in a state where 4,000% interest, compounded daily, legally exists.
It's as if the most of the people who have enough in savings can get a loan with reasonable rates. People with good credit, but not savings, will get shafted. And if you have bad credit, it's better to sell a kidney.
Fuck off. Bankers protecting us from usury??? Give me a fucking break. The bankers are parasites and predators. We do not need them. They need us. Reality is more like: tax-payers forced at gun-point to protect/insulate the bankers from true justice.
In a truly free market, the bankers would never even THINK of trying to get away with 1% of the crap they do now. I would gladly take my chances on free-market usury over what we endure now, fuck you very much.
<<It has nothing to do with 'schemes for destroying savers'. It has everything to do with trying to get a population to more productively use wealth, to push them towards finding returns (read: Productive, competitive businesses).>>
If that is so, then why the hell do we need to be taxed? and Why has it not worked yet??
If it was not for the dirty rotten incestuous legal networks, the bankers would not have the freedom to print money because tax-payers would move away from the fiat/inflating currency.
"It has nothing to do with 'schemes for destroying savers'. It has everything to do with trying to get a population to more productively use wealth, to push them towards finding returns (read: Productive, competitive businesses)."
I have a tiny trash hauling business that I've run for thirty years. I own everything outright: four trucks, a maintenance/office building, a fleet of dumpsters, and a resident mongrel dog named Bullitt. The business has enough cash reserve cushion to weather any economic downturn, even if it lasts a decade. I answer to no bankers or shareholders. It took me three decades to get to this point, but I finally have things so I'm comfortable and can sleep at night without worry.
Personally, Mrs. Tippy and I own a modest house, a couple modest vehicles, and three cats. We own everything outright, and we have enough savings (and insurance) to weather any economic downturn, even if it lasts decades. It took us thirty years to get here, but we finally have things so we're comfortable and can sleep at night without worry.
The Krugmanites can go to Hell with their "perpetual exponential growth" philosophy. I don't want more trash trucks or employees or dumpsters. I don't want a bigger house or fancier cars. I don't want to borrow money from banks or shareholders to grow my business. I've been prudent and frugal (and fortunate) in both my business and personal finances for three decades; I've built up nice cash cushions that give me peace of mind (priceless in my book), and I don't appreciate some fucktards in Davos scheming ways to separate me from my savings in order to "stimulate" their global Ponzie scheme. Fuck 'em.
I take my responsibility to provide financial stability and security to myself, my wife, my employees, and Bullitt seriously. I feel no obligation to support banker or shareholder leeches. Fuck 'em.
I followed clownsonacid's suggestion above and used a spreadsheet I wrote a while back to calculate the net present value (NPV) of an income stream. Over a 30 year period, the NPV went from 42.6 at 1% interest to 49.5 at 0% interest, and 58.1 at -1% interest. So at the very least negative interest rates would keep overpriced income producing assets like stocks propped up, or even increase their value. That assumes the -1% interest rate would linger for 30 years, which isn't realistic, but over the short term it could expand asset bubbles.
You need to shut the fuck up, the peasants aren't allowed to know.. Kidding. Well stated, love that beach view BTW. Keep up disclosing the obvious. :p
I like your way of thinking, but wouldn't you expect company's or other assets future income streams to plummet in an environment with seemingly increasingly collapsing demand....therefore eventually seeing those assets values fall even with negative rates?
Yes, but it might delay it though. All other things being equal (not a realistic assumption), it would prop up asset values.
I guess the CB's would be buying close to a trillion dollars worth of QE a month by then to make sure nothing happens to their precious stock market.
Ahh...life in the bizarro world.
Sure, but the same is mostly true in most rate environments. You have to factor in risk when you own an "income stream" more risky than t-bonds. Explain that to a kid who wants to put $57 in a passbook account, now finds himself getting hit with a $2 negative charge every month (for bothering the bank with such small beer), that he should buy a diversified portfolio of dividend-paying stocks with his money instead.
Which in essence says screw the small investor with his $57 portfolio as he will be paying fees as well.
Bullshit. How van a NPV increase when your cash flow is more and more negative over time? And what actualisation rate do you use???? I am sure you confound actualisation rate with cash flow. With a negative interest of say 1% and an inflation of 6%, your capital looses 7% of its buying power every year, with a negative interest of -2% that would become 8%.
People can't wrap their heads around the idea that inflation and negative real interest rates can and do co-exist.
Prices of goods and services can still rise while debits are confiscated by monetary oppression.
To the untrained eye it will appear that deflation and inflation are walking around arm in arm.
Money is being destroyed because it is debt-based-credit/debits.
As debts are accepted as unpayable, as defaults occour, the 'money' vaporises.
Collateral cannot save the money because collateral cannot generate the vigorish -the interest.
The only collateral is Human Productivity. That is the only thing that can pay off debt.
Ultimately lower interest rates cannot stop this process.
Unless wages rise so that the inflated bubble loans can be paid back and keep the system running the 'deflation' of debt-money will continue. Productivity must be rewarded with wages high enough in real terms to offset the debt burdens and compounding interest. THAT had not been happening as labor has been arbitraged via globalism and merchantilism and monetary interventions, etc...
No wages to pay down debt and the debt gets defaulted. IT IS that simple.
ZIRP & NIRP are avoidance tactics implemented by CREDITORS trying to enforce austerity and seize real assets.
THAT cannot solve this probem.
Wages must rise. Money must be released to the productive so that the system doesn't collapse.
People need work, jobs, and more in their paychecks. Taxes must be cut.
The merchantilist exportation of deflation into the country by importation of cheap subsidized globalist corporations must cease and real goods and services must be produced and traded and sold domestically. Domestic production must be performed by the domestic population, it cannot be imported or outsourced; it has to happen here.
Work Progress Administration 2.0 is probably not the very worst thing that can be done, but, it has to be a tightly closed system: the jobs and the money cannot be allowed to leak out of the domestic economy into remittances to Mexico or purchase of chinese junk -and the funding has to be debt-free emission. The FED cartel has to be cut out of the loop and the skimming stopped.
IF the govenment is already insuring most loans the Banks probably need to be cut out of that too.
Banks need to loan to domestic industry, and they must be starved of other options in order to be forced to lend to that sector.
NO margin leverage, no mortgages, no auto loans. Get the banks the fuck out of speculation and funding consumption or depreciating assets with little or ROI.
Good stuff.
agreed
as Caveat Emptor aptly labelled it : its called BIFLATION.
Great comment.
"Wages must rise. Money must be released to the productive so that the system doesn't collapse."
This is the heart of it. The problem is that the assholes in charge of this monstrosity have convinced themselves and way too many of the gullible population that what they do is productive. As long as people think that the FIRE sector is net wealth productive (which in its current manifestation is simply no longer true), then TPTB continue to be able to steal through the printing press. The cultural assumption of "if they're making more money, they must be producing more in order to deserve it" has broken down. People need to be reminded of what real productivity means. It's not what we're being fed daily in the media.
Was just using the standard formula for NPV (= X*(k31-1)/(k-1), k=1/(1+i), i=-0.01 or 0.01; = 30*X if i=0) with a constant income stream of $X per year. Obviously one can change the assumptions to come up with a different result. I just wanted to see what would happen with negative interest rates. Maybe it would have been clearer if I had set X to 1.
It was initially used for a real estate calculation. Around here, rents are still increasing, although at not nearly at the rate of prior price appreciation.
I guess we shouldn't make weapons too expensive for the export market.
Of course Russian made weapons are a bargain, this girl loves a sale. AK-47sfor Christmas.
You know what this does? It makes saving really hard to explain to my kids. Last year I opened up a savings account at my credit union. A negative rate discourages saving for an ENTIRE generation. I've had to explaing what real money is. Christmas involved a few beautiful silver ounces - that's one easy way to impress kids! I've got them looking at dates to see if it's "real" money.
That's exactly what will happen : smart people will stop saving at a babnk account - they will reclaim their deposits and buy precious metals. And put them out of reach of government and/or bankers. Even now, I cannot understand why normally sane people leave their savings in the bank with an interest rate of say 0.25% and a real inflation of 6-7% ( according to shadowstats, who still calculates inflation rates as they did in 1980 while the government "statistics" systematically take out all items that grow more expensive and dump stuff into the index of which they are certain the value declines over time like TV sets).
The inventors of QE (and leading QE practitioner, except maybe China) complain, "Do what we say, not what we do". Imagine that.
Savers' interest rates are already effectively negative. Any move to charge depositors a fee for holding their money unsafely should be met with bank runs. If the banks refuse to handover savers' money in cash as demanded, that could be a trigger point that brings down the system.
"Should be" but wont. Remember you're dealing with the most brainwashed, propagandized population of people on earth.
So when does the shooting begin?
Probably all at once...
What happens to variable rate loans tied to index? For example, I know some older student loans 3-month Treasury index plus 1.75%.
If I understand neg rates, they apply to people who deposit money, not those who borrow money.
you men they dont offer discounts for borrowers? of course they do, they're called credit cards
I can't see how a discounted interest rate offered when you (eg) take on a new cedit card is equal to a negative interest rate for depositors?
Discounted rate is != to negative rate.
"you men they dont offer discounts for borrowers? of course they do, they're called credit cards "
The first hit off the crack pipe is always free.
But, don't worry! The Dealer is not going to go broke because he sells a lot of junk at very high mark-up to all those people who come back again and again and again...
Although I don't have much money in the bank to worry about I already consider myself to have negative rates. My chocolate bars keep getting smaller and I expect soom that my box of crackers will only contain a few grains of wheat when I buy them.
Dude - chocolate and crackers ? Do you want to look like Michael "Crisco" Moore? "Crisco" because he is "fat in the can".
Buy some fruit 'bro.
If they wanted to kick start consumption by helicopter dropping "free money" all over the world, why not directly give the money to the consumer instead of to the banksta who IMMEDIATELY puts at least 85% of it in his Casino economy to earn his BONUS and feed the 0.1 % Oligarchy's bank accounts in Caymans based on "can't lose" HFTd carry trades.
At least that would create consumption and some inflation.
These CBs are just feeding the bonfire of electronic money pumping a mirage called the WS asset pyramid that will just disappear one day like a mushroom cloud.
And the Congressionalist harem belly dances to their tunes along with Potus and world consorts, now caressing the beard of new Sheikh of obscurantist Oil patch, who along with the bankstas, holds the world by its nuts thanks to Ghawar's Garden of allah.
Its enuff to make a rebellious pagan out of the worst of us !
If they really wanted a old style Keynesian solution, they would have given the money directly to the people.
The fact that they gave it to Banksters who sat on it and profited from it shows that they only wanted to save the Banksters, not the serfs.
Agreed...... They could have given every family in the country 35,000$ for the amount they gave the banks and given everybody in the country a chance to work their way out of poverty.....
Of course most would have pissed it away but bets are we would have lots and lots more small buisiness around that would be paying taxes and employing people.
Instead we gave the whole pile to the 1000 families that needed it less than anybody else in the country and all they did is use it to wipe out our personal trading accounts.
Great move guys--- should be proud of yourselves mr. bernank and paulson and company...........
Why keep your money in a bank then? Why not demand cash?
The dollar is entering backwardation, where cash money in hand is going to be worth more than the electroninc digits shown in bank accounts.
BadDog - not exactly the classic definition of "backwardation" but I like your thinking. I would rename it "cashification" . I'll split the residuals with you now that the term has been copyrighted.
The outrage of Cyprus suggesting that the savings be taxed 10%...all at once.
But now, the inflation promoting Fed that keeps rates at zero or negative doest the same thing..
just in a slower fashion.
The VELOCITY of money will collapse...
the academics that are central planning are IDIOTS.
"If savers won’t spend their money, the government will take it from them."
So it's all us prudent savers fault. Meanwhile all the parasites get everything for free and they're off the hook. Time to take all my cash out of the taxing system and into silver and gold which can be sold under the table.
your money will be time dated, use it or lose it
I could see official adoption of something like bitcoin just for this purpose.
Then they could control the velocity of money by not allowing a particular unit to be used for more than one transaction a month, and if you dont use it within 2 months it's it's gone.
NIRP firs then you 401k. They will steal as long and as much as they are allowed to whle pissing down your back and telling you it's raining.
good idee the US Debt (trillion) Clock will paid itself
reverse dept!
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Guess what, Bitcoin users are not affected.