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From ZIRP To NIRP - Accelerating The End Of Fiat Currencies
Submitted by Alasdair Macleod via GoldMoney.com,
The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).
Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.
Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.
Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.
Here is a brief summary of why, based on pure economic theory, NIRP is a preposterous concept. It contravenes the laws of time preference, commanding by diktat that cash is worth less than credit. It forces people into the practical discomfort of treating physical possession of money as worth less than not possessing it. Suddenly, we find ourselves riding the train of macroeconomic fallacies at high speed into the buffers at the end of the line. Of course, some central bankers may sense this, but they are still being compelled towards NIRP through lack of other options, in which case holding cash will have to be banned or taxed by one means or another. This would, Haldane argues, allow them to force interest rates well below the zero bound and presumably keep them there if necessary.
One objective of NIRP will be to stimulate price inflation, and Haldane also tells us that economic modelling posits a higher target of 4%, instead of the current 2%, might be more appropriate to kick-start rising prices and ensure there is no price deflation. But to achieve any inflation target where ZIRP has failed, NIRP can be expected to be imposed for as long as it takes, and all escape routes from it will have to be closed. This is behind the Bank of England’s interest in the block-chain technology developed for bitcoin, because government-issued digital cash would allow a negative interest rate to be imposed at will with no escape for the general public.
Fortunately for the general public this remedy cannot be implemented yet, so it can be ruled out as a response to today’s falling stock markets and China’s credit contraction. What is deeply worrying is the intention to pursue current interest rate policies even beyond a reductio ad absurdum, with or without the aid of technology.
In considering NIRP, Haldane’s paper fails to address an even greater potential problem, which could easily become cataclysmic. By forcing people into paying to maintain cash and bank deposits, central bankers are playing fast-and-loose with the public’s patient acceptance that state-issued money actually has any value at all. There is a tension between this cavalier macroeconomic attitude and what amounts to a prospective tax on personal liquidity. Furthermore, NIRP makes the hidden tax of monetary inflation, of which the public is generally unaware, suddenly very visible. Already ZIRP has created enormous unfunded pension liabilities in both private and public sectors, by requiring greater levels of capital to fund a given income stream. Savers are generally unaware of this problem. But how do you value pension liabilities with NIRP? Anyone with savings, which is the majority of consumers, is due for a very rude awakening.
We should be in no doubt that increasing public awareness of the true cost to ordinary people of monetary policies, by way of the debate that would be created by the introduction of NIRP, could have very dangerous consequences for the currency. And once alerted, the public will not quickly forget. So not only are the central banks embarking on a course into the unknown, they could also set off uncontrollable price inflation by creating widespread public aversion to maintaining any cash balances at all.
The only reason any particular form of money has exchange value is because people are prepared to exchange goods for it, which is why relative preferences between money and goods give money its value. Normally, people have a range of preferences about a mean, with some preferring money relative to goods more than others and some preferring less. The obvious utility of money means that the balance of these preferences rarely shifts noticeably, except in the event of a threat to a complacent view. For this reason, monetary inflation most of the time does not undermine the status as money of central bank issued currency.
The trouble comes when the balance of these preferences shifts decisively one way or the other. At an extreme, if no one wants to hold a particular form of money, it will quickly become valueless, irrespective of its quantity, just like any other unwanted commodity. This is the logical outcome of negative interest rates, and subsequent increases in interest rates sufficient to stabile the purchasing power of currencies is no longer an option, given the high levels of public and private debt everywhere.
Therefore, we need to watch closely how this debate over NIRP develops. If the Bank of England is looking at ways to overcome the zero bound on a permanent basis, it is a fair bet that it is being looked at by other central banks in private as well. And if NIRP gains traction at the Top Table, the life-expectancy of all fiat currencies could become dramatically shortened.
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It will never ever be the end of fiat currencies as long as believers have faith in their Pope/Fed.
Pitchfork time
No way
No how
Piss on'em
'em? As in analysts who neglect to point out that the monopoly on currency and therefore the flushing of Capitalism has absolutely everything to do with a moral premise? No mention, at all, of what is fundamentally, to the most irreducible primary, logical? ...belief abounds, but that's ok with ABC Media,right?
Can anyone think of a time in the last 50 years that we haven't had NIRP? It seems to me that inflation has always exceeded bank interest rates - taxes on interest.
True that. But it's more stealthy. If you earn 5% interest in a 7% inflation environment, it feels much different from paying 2% for having savings. Damned weird times we're living in.
The only way out is for US to stop borrowing and issue government full-reserve fiat regulated by decree. Everything else is doomed to builtin failure of the fractional reserve.
If the people were just the least bit educated as to the simplicity of what money is and how it functions, this inevitable outcome that we're all witnessing today would have been apparent 100 years ago when the Fraudulent Reserve Scam was enacted into law. Whatever arises after the collapse, education of the masses about this topic must be paramount in all school curriculum. It's not hard to grasp. It just needs to be overtly disseminated... not covertly coveted as secret knowledge by the evil usurers. Knowledge is power... and that's the only thing that will overthrow them.
I have already overthrown the entire Western World empire, but the one per cent refuses to grasp that fact because they are collectively living in abject fear that they have lost control. By 12:00 noon March 10th 2008 Bear Stearns time New York Shitty it was game over for their parasitism. Frankly, I am at a loss to explain how the financial system could possibly still be holding up on paper let alone in the real world? I expect the mother of all crashes any day now which will most certainly manifest given QE Infinity, a tapped out middle class, zero growth, dead dry bulk, killed mining sector, dead oil, and subprime student loans, plus subprime auto loans gone awry. Sooner, rather than later, this bitch is going to have puppies.
John Q Public or Joe Sixpack is a different animal...
The Central Bank jig is coming to a close. More people are awakening every day and educating themselves. Like you say, it is not that hard to understand, but there does have to be a spark to make an individual focus on what is a hard concept to grasp: Money = Debt. Once that sinks in, the lies, manipulation, and graft become very clear.
Everyone should watch this 12 year old girl explain how central banking robs us all with inflation and will eventually make the citizens debt slaves.....remarkable.
Help make it go viral. Share it with friends, family, and even your children. My wife watched last night, and I do believe she had an epiphany.
https://www.youtube.com/watch?t=372&v=JHQOX8EVNmE
So simple, even a child can see it.
Weird is right, but we have the double whammy of NIRP draining 2 or 3% from any cash 'savings' we have along with the real, unreported inflation (per http://www.shadowstats.com/alternate_data/inflation-charts) of 4%, so we don't lose 2%, we lose 6%. I only keep enough cash in the bank to pay immediate bills via online or on automatic billpay. Not a penny more.
The rest I've deposited in the Bank of Serta and nice shiney pet-rocks.
I lived through the 70's and 80's and can remember slowly crawling from abject poverty into middleclassdom. I went days without eating so my son and wife had enough. We fought the battles without welfare or food stamps, though wife had WIC when she got pregnant with the second son.
We lived in Panama City, Florida reknowned for it's college parties and beachfront and bars and shit. Back then our entertainment was driving out to the strip and watching everyone else have a good time. We couldn't afford a couple beers in one of those bars. I have a feeling that this last, desperate grab for our money, just before the ultimate collapse, is going to be even worse.
Completely agree.
The day they try to pull shit like this is the day it goes up in flames.
I mean, imagine what we're talking about here...
A outsourcing-decimated middle class, poorly employed (in all too many cases), lousy wages, no real income growth, usually heavily indebted, fighting insane health care costs and health insurance costs...and more...
And after YEARS of warping and additionally-injurious Fed policies (QE and zirp)--that failed--would actually add MORE injury with NIRP?
NIRP?
That would HAVE to be the last straw...
m
lost in translation?
Jamie Dimon & Lloyd Blankfein are your GODS.
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Henry Ford
nuh, uh. not if we put a totem pole in the corner of every living room
"... in which case holding cash will have to be banned or taxed by one means or another."
In which case they will also need to ban/confiscate metals and make it illegal to use them...
precious metal detectors placed upon the threshold of every business?
They are gonna' ban/tax cash. They've already banned gold.
Long coffee and brandy and sugar and TP.
That was my point - it simply doesn't work; in fact it is a nuclear bomb to the whole system. Once the riots and bank runs stop, pretty soon all activity will be in barter and the black market. In the meantime, I switch my cash between 4 banks in different jurisdictions leaving it where it is best for me - otherwise I'll buy all the firewood I can find and trade you some for that brandy you got.
Hmmmm. I forgot the brandy.
Have to add that to next week's list. I need to refill the CO2 bottle and pick up another keg anyhow.
Their plan for my future and my plan for my future seem to be radically different.........
I use a lot fewer dollars now that bitcoin is being accepted. I also get a discount from using bitcoin when I buy gold. I don't know why people use dollars. They are like bankers--dirty.
You can't hack gold. (Well ok, you can - ETFs, but still...)
Gold has been hacked, jacked, thrashed, sliced, nuked, and still commands a premium.
The biggest mistake paper gold traders ever made, was thinking that they could pay the deliverable asset off, in fiatskis'.
There's no paper market when the spread between physical and paper grows so wide, that the ponzi exposes itself.
@ YC
Perhaps we should be calculating in different formats, say...
$20.00 USD fiatskis' per $1.00 ASE.
Canadian, Mexican, Australian, etc spreads all lined up for the best deal.
Premiums, shipping, and insurance part of the calculations.
Hmmm...
Edit: Gunbot.net can do it with Pb and Cu, so why not?
Sounds good to me. As long as it doesn't require electricity. ;-)
The Canadian Mint does brisk business I assure you.
Their plan for my future and my plan for my future seem to be radically different. - A Lunatic
I second that thought.
consumer strike - STOP BUYING
"The only reason any particular form of money has exchange value is because people are prepared to exchange goods for it, which is why relative preferences between money and goods give money its value"
And to buy listed stocks with high ROE's, no?
nirp is just begging for deflation. the revenue banks get from deposits will be lost by early repayment of loans. even people with no debt will go looking for asset backed loans of friends and family to pay off. deposits will disappear cash controls or not. debts outstanding will be reduced which will lower the clownbux in circulation. it will not spur investment it will encourage the bunker mentality which will devastate the real economy.
From ZIRP to NIRP...
Now that ain't workin' that's the way you do itYou play the ZIPR and then the NIRP
That ain't workin' that's the way you do it
Money for nothin' and and you pay the interest
Money for nothin' and bankers get a free ride...that's the way you do it
From ZIRP to NIRP...
Now that ain't workin' that's the way you do itYou play the ZIPR and then the NIRP
That ain't workin' that's the way you do it
Money for nothin' and and you pay the interest
Money for nothin' and bankers get a free ride...that's the way you do it
This is just a sick joke propagated by academia..nobody else could dream this stuff up...
So years ago you saved your money and put it into a bank and earned interest..
Then Greensparkle, Burrnanknee, said..lets keep their money and not give them any interest...
The Janet ( I can lower rates below zero but I can't raise them) Yellin said..why give then anything..they can pay us!
Did these people take "stupid" pills when they were growing up? All in the name of new economic thinking...what is pathetic is that it will not stop until the train runs off the track..
That`s it! Staring you right in the face, there is no disscussion, theft pure and simple.
Excellent piece. Compelling and cogent argument that NIRP will finally wake people up to what is being done to their money. And the idiots pushing for it are necessarily blind to the ramifications.
When shit gets retarded, throw all of your money into shares of companies that sell basic things. There will always be demand for Coca Cola. There will always be demand for razor blades. There will always be demand for toilet paper and soap. Negative interest rates would cause an explosion of asset inflation.... sort of like what we're already seeing. Coke's PE is 23, Procter & Gamble is 24. These are ridiculous prices.
That Mike Norman idiot likes to trash gold, but he correctly points out that common stocks are the best hedge against inflation. Coke can always just raise the price of the product they sell.
You should think about that concept a little more. Companies like Coke and P&G may no go out of business, but their stock value, and dividends, can and will plummet on reduced sales and declining profit margins. Just because something is considered "basic" doesn't mean people can't either reduce consumption, or discontinue it altogether. Big difference between basic item you like to have and a necessity you must have.....and even necessities can be reduced to bare minimum.
Not that I disagree with allocating some excess capital in safer companies, but anytime I hear the word "all", as in "throw ALL of your money into shares of companies that sell basic things", it sets off alarm bells in my head.
I do believe it's long past time for people to stop playing the bankers' game. Go to your bank and withdraw every fucking penny on deposit that isn't needed to pay bills.
If these crooks are going to charge us for holding our own cash, take it from them. Crash this corrupt system.
Probably better to select a single day to coordinate action on. Kind of like the giant flow of water from all the toilets being flushed at halftime of the Super Bowl.
With Reserve Requirements down in very low single digits, having 5% of the depositors demand cash on the same day ought to scare the hell out of them. If the same withdrawls take place over a week or month, not so much of a worry to the system.
Unfortunately, I can't be of much help unless I put some money back in the bank beforehand. In the words of the Eagles... I'm already gone.
I remember when all of Salt Lake flushed their toilets at the same moment at halftime in the Superbowl and wrecked the Salt Lake sewers....
Convert all fiat into physical gold and silver (and other physical goods you can store for an extended period). That's how to crash this corrupt system.
Use it before you lose it.
Spend it before it is worthless.
Sure makes you want to buy US savings bonds huh?
401k confiscation through the backdoor.
no escape for the general public? really? HANG THE BANKSTERS AND THEIR POLITICIAN SOCK PUPPETS!!! NIRP=THEFT punish them
Crack up boom:
http://winteractionables.com/?p=25442
Bitcoin and Local Currencies
increasing public awareness of the true cost to ordinary people of monetary policies
Too late, the Keynesian system robs the poorer at a faster rate than elites because if your income has excess you can reinvest this excess to keep up with the forced central banker growth. The poor with no excess and minimum wage does not produce an excess of notable worth to reinvest so you become poorer -->> END GAME POVERTY OR REVOLT.
Fiat currencies could only ever occur under a Keynsian system because it required the concept of infinite resources and now because we borrowed against resources that do not exist we can never pay the debt EVER so locked into this economic cycle forver until -->> END GAME REVOLT.
Final piece of the puzzle is under the great depression many elites lost vast amounts of wealth in the collapse closing the gap between them and the poorest. They are not prepared to allow this to happen this time so all economic policy tools will be used to preserve their position and that includes wiping out vast populations if needed. THEY WILL KILL YOU FIRST IF NEEDED TO PRESERVE THEIR POSITION AS GODS.
In all case it never gets better just an obfusication by central bankers to keep it going a little longer.
It's negative interest rates and QE to infinity for the Federal Reserve.
There a 100% chance of another QE4
Money printing until market traders wake up that the Fed won't ever raise rates on their own. They can't.
The US, Japan and Europe have become Zimbabwe pigs with lipstick.
Its fucking pathetic isn't it ZH'ers.
The thought that some day soon, one is going to have to walk into their bank and close out their savings, and in doing so, start to bring onto yourself all sorts of risk and frustration and uncertainty. Sure I know, transfer it all into PMs and such. But, just the thought of actually having to do that, invoking all the forward uncertainty and insecurity that such an action necessarily brings, and the knowledge of just how fucked up life has become, and how ridiculous financial economics turns the thought of financial indepencdence into financial chaos.
We are all aware of course, of the stealth robbery that occurs against the savers as a result of price inflation. But actually charging folks a preium for holding cash - does that not constitute a taking of private property which, according to the takings clause of the 5th Amendment, requires compensation from the state, given that such a monetary policy would be said to be in the "public interest"?
In a seminal article written by Frank Michelman (1967), "Property, Utility, and Fairness: Comments on the Ethical Foundations of 'Just Compensation' Law," 80 Harvard Law Review, Michelman povides for us a conceptual vision of what the framers to the takings clause had in mind by imposing such a constraint on the public interrest doctrines (that were back then few, but, are now many). Indeed out of the 100 pages or so of discussion on when and under what circumstances ought the state be constitutionally obligated to compensate owners of property lost to the public interest, perhaps nothing is more elucidating than Michelman's swift appeal to the notion of "demoralization" costs as really the key driver to the takings clause. Not so much because it attempts to quantify losses imposed by state action, rather, it paints for us a picture of what truly unproductive, or destructive behaviour looks like when the state, "goes too far".
The cost of demoralization, according to Michelman, are costs entailed by singling out a particular group through state action not paying compensation...."the total of . . . the dollar value necessary to offset disutilities which accrue to losers and their sympathizers specifically from the realization that no compensation is offered, and . . . the present capitalized dollar value of lost future production (reflecting either impaired incentives or social unrest) caused by demoralization of uncompensated losers, their sympathizers, and other observers disturbed by the thought that they themselves may be subjected to similar treatment on some other occasion."
It speaks, in my opinion to the heart, of why a rule of law exists and that when such a rule is abused or ignored, the effects are more than just a trivial redistributive result. The idesa of NIRP, for example, eviscerates the idea that one's expectations of future value in their savings will ever be realized in that, "More sympathetically perceived, however, the test poses not [a] . . . loose question of degree; it does not ask "how much," but rather . . . it asks "whether or not": whether or not the measure in question can easily be seen to have practically deprived the claimant of some distinctly perceived, sharply crystallized, investment-backed expectation." For the case of savers simply protecting their savings, such an expectation is severed from the start under NIRP. The problem with this, which is Michelman's greatest contribution, in my opinion, is that incentives change as a result, where the effects of such incentive changes are felt and seen through demoralization.
As Michelman concludes his discussion we begin to understand in very simple terms that the cost of demoralization, is really just the cost of unfairness and its precursor to economic chaos, in that "as long as individual possession continues to be the norm, there is serious disvalue in the spectacle of any encroachment on possession by public authority which is suggestive of arbitrary exploitation of a few at the hands of the many. The mind moves from such a spectacle, by a short and easy mental transition, to the idea of that mutual disregard for the possession of others which, by ingrained mental habit, in turn invokes the dire idea of social disintegration - with an attendant sensation of unease (Michelman, Frank, 1967, p, 1211).
I don't really know what NIRP will look like, but, i know it will be neither productive, or good. And it is both ignorant and arrogant to think that human behaviour will not change as a reuslt of it.
Stop the insanity. End the FED.
Isn't NIRP just banker's collecting a tax on savings.
Close down tax havens and get that money back into the economy.
The timeline for the collapsing global economy.
Japanese banks had been on a maniacal lending spree into real estate and the bubble popped in 1989. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.
Japan then had the rest of the world to trade with that was still doing well but it never really recovered.
US banks went on a maniacal lending spree into real estate and the bubble popped in 2008. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.
US banks used complex financial instruments to spread this problem throughout the West.
"It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world" (pg 404, “All the Presidents Bankers”, Nomi Prins).
Rather than own up to losses and admit their bankers were fools, the UK and Euro-zone covered up the problems with loose monetary policy.
Japan, the UK, the US and the Euro-zone had the BRICS nations to trade with that were still doing well but they never really recovered.
The BRICS nations are now heading for recession.
Doesn’t look good does it.
Bailing out banks with loose monetary policy just doesn't work.
Japan is nearly 20 years ahead and looks like the first one to blow up.
Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.
After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.
When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.
The end result 2008.
With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.
Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy. The broad brush effect has blown bubbles everywhere.
There is no easy way out, the bubbles are inflated and they only ever burst, they never deflate slowly.
'Bailing out banks with loose monetary policy', as you put it, is the precise purpose for which Central Banks were created.
The 'elastic money supply' they were chartered to create could as easily...and more accurately... be called 'bailing out banks with loose monetary policy'.
To idict that purpose is to indict the very edifice that is goverment credit and currency.
From ZIRP To NIRP - Accelerating The End Of Fiat CurrenciesPlease give an example of a "non" fiat currency. While you're at it, tell us how it's created and destroyed.
If we're accelerating to the end of fiat currency, we're going to presumably have to switch to "non" fiat currency ... or do without altogether.
And if NIRP gains traction at the Top Table, the life-expectancy of all fiat currencies could become dramatically shortened.
Only mention of "fiat" in the whole article ... and it at the end. That is not good writing.
"In considering NIRP, Central bankers are failing to address an even greater potential problem, which could easily become cataclysmic."
As Mises said, there is no preventing the final crash of a debt fueled boom.
Whether the debt becomes worthless or the money becomes worthless, the effect is the same.
"Already ZIRP has created enormous unfunded pension liabilities in both private and public sectors, by requiring greater levels of capital to fund a given income stream. Savers are generally unaware of this problem. But how do you value pension liabilities with NIRP? Anyone with savings, which is the majority of consumers, is due for a very rude awakening."
But who else is going to be in for a rude awakening?
They think that they can ignore Gresham's Law, but it is called a law for a reason:
https://mises.ca/posts/articles/keep-your-old-dimes-safe/