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QE vs Negative Rates: A Cost-Benefit Analysis Of The Monetary Twilight Zone
The world may be at (or near) ZIRP, and in many cases mostly in Europe, NIRP, but that does not mean rates can not go any lower. In fact, the topic of "absolute zero", or what is the very lowest interest rate central banks can go to, either outright via negative rates or synthetically via asset monetization, is the topic of the latest note by DB's Abhishek Singhania titled "In search of absolute zero: why ZIRP central banks can still cut rates."
In the past month the Fed finally confirmed what we said in January, namely that it is only a matter of time before NIRP crosses the Atlantic and lands in the Marriner Eccles building, the one section in the report we found most interesting is DB's comparison of the cost-benefit between QE and negative rates.
And since either NIRP, or QE, or most likely both, are about to cross the Atlantic and make landfall in the US before the Fed
is forced to launch the monetary helicopter, those who want to know what is
really coming - no, not rate hikes - are urged to read this.
Negative rates versus QE, a cost benefit analysis
If there is more room for policymakers to cut rates further into negative territory, what are the pros and cons versus other monetary policies?
1. Financial stability risks: Where an economy is highly leveraged or financial conditions loose, there may be an advantage to pursuing negative rates over asset purchases, at least in the short term. Asset purchases are designed to push down term premia and hence borrowing costs for the real economy. As we have seen, negative rates could actually help to reduce leverage by encouraging banks to raise borrowing costs. On the other hand, if central banks were to commit to keep rates negative for long periods, expectations of negative rates could become embedded and result in lower long term yields resulting in similar financial stability concerns.
2. Assets available for unconventional QE: Further cuts to deposit rates may be more attractive where an economy does not have enough assets to sustain a large-scale asset purchase program. In the case of Sweden, for example, the Riksbank asset purchase program will have bought 20% of outstanding Swedish government bonds by the end of the year. Switzerland’s outstanding stock of government debt is even smaller. This is particularly problematic where buying other assets would have unwanted side-effects, such as the Riksbank buying covered bonds and exacerbating housing market risks.
In the Eurozone, despite the concerns voiced by some ECB members over liquidity in Eurozone government bond markets, the ECB has much more room on a relative basis to extend its asset purchase program. At the very least the ECB can extend the current purchase programme by 12 months to Sep-17 without expanding the range of eligible assets or changing other parameters of the programme10.
A related but different concern would be where central bank balance sheets have become sufficiently large for them to become concerned about capital losses. This is only a theoretical constraint, as a central bank could in practice operate with negative capital. In the case of Switzerland, however, concern over losses arising from a large balance sheet played an important role in the decision to abandon the open ended FX intervention.
3. FX or credit conditions channel. Negative rates have tended to be a highly effective tool for weakening currencies. Short-end rates are more correlated to currency movements than long-end rates, likely because FX investors tend to fund positions using overnight or short-end rates rather than further down the curve (chart 31).
Negative rates have also proved to be more effective that outright currency intervention. The contrasting experiences of Switzerland and Denmark serve to underline this point. SNB’s approach of targeting the size rather than price of reserves failed to alleviate pressure on the EUR/CHF floor. It was only until the SNB finally cut rates into deeply negative territory that pressure on the Swiss franc has relented, and the currency has begun to depreciate. By contrast, the Nationalbank was able to effectively defend the peg between the Danish krone and euro by aggressively cutting rates at the same time as currency intervention.
Negative rates appear to be much less effective in relaxing credit conditions in the overall economy. As we have noted, the experience of the four economies under negative rates suggests that borrowing costs may actually rise, not fall, for households once negative rates are implemented. Moreover, insofar as markets do not expect negative rates to be permanent, pass-through into assets with longer maturities may be limited.
Finally, as Praet has argued, the impact of asset purchases in reducing term premium and via the portfolio rebalancing channel is likely to be maximized when the central bank has reached a lower bound11. In the absence of a floor on front-end rates and the potential for further rate cuts the scope for potential capital gains on fixed rate assets reduces the incentive for investors to move further out along the maturity and credit spectrum.
4. Fragmentation: In the Eurozone case, deeply negative rates in combination with an active expansion of the ECB balance sheet may be additionally problematic. The excess reserves created via asset purchases are likely to flow back to banks in the core countries. This would imply that the burden of negative rates will be excessively borne by banks in the core countries. Making the deposit rates more negative would not necessarily incentivize banks in core countries to lend to banks in periphery as the opportunity cost for these banks will be the difference between market rates and the deposit facility rate rather than the absolute level of negative rates. This spread is already minimal and likely to get even smaller as excess liquidity increases.
* * *
In retrospect, when we said that NIRP is the functional equivalent of the the "Monetary Twilight Zone", we were right: not only is there no getting out, but once you are in absolutely nothing makes sense any more. Good luck to anyone who still believes that "fundamentals" matter when making financial decisions.
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NIRP would reduce that pesky $10.89T in bank deposits significantly imo. It's just stupid enough to work.
Another interesting comparison. This one between an E Dollar concept and negative rates that shows that the E Dollar is much more effective for the powers that be. Said another way it allows the banks and government to get stronger, under the guise of progress.
What if the Fed is mistakenly trying to take us to a place we can never be…..again…. and bankrupting us in the process? With everything America wanning, what is the Fed's destination? Have never been sure of where the Feds economic utopia fits into this new global era? Or even what that utopia is?
If the Fed goes to NIRP then they have failed and house cleaning is in order. At some point justice, congress, somebody must step in to stop the theft and hold members accountable.
Inflation is on average since 2000 about 4% per year.
It's been a while since we got that from the banks.
So in a way we're there already a long time ago.
And they can raise inflation by printing even more while holding a 1% rate. It won't bankrupt America because they'll print the interest with the rest.
I always figure inflation at 7%-8% per year. But then again, I also look at my share of a claim on productive real assets when I figure inflation rates.
When my citizenship is deflated I adjust my inflation rate accordingly...
It's like a competition between Joan Rivers and Michael Jackson over who's plastic surgeon can make them uglier faster.
No, it more like being told you have cancer and faced with either surgery, chemo or radiation...or all three, and still dying, only most assuredly in more pain and much, much poorer.
There is no good outcome for this, and THAT is ultimately what we are being told.
It's terminal
Both QE qnd NIRP are unnatural. Same's bestiality
That must be the right answer then: Both QE and NIRP! Making the beast with two backs!
to hell with this whole "versus" pussyfooting 'round.
Yeah, well, they'll get around to it AFTER the big crash....good luck...not that it friggin works anyway,,,,we already know that!!!
Now hold on a minute...
Five stars for the article because the topic is a key point for consideration. My own view, however, which I've been posting ever since our criminal government bailed out the banksters in 2008, is as follows: There is no exit from objective mathematical reality. Zero is a hard wall. That means negative rates are a phantasm.
The central planners are in denial. They've lost control but they're telling themselves they've still got options they do not realistically possess. They can *try* to move to negative rates but it will not work for the same reason zirp did not work. All financial returns will seek the level of key rates. NIRP means all financial assets will converge to a negative return. What happens to markets when the average portfolio manager solves that equation?
ZIRP did not work? Seriously? Have you even glanced at the equity markets lately?
Now you will say it did not restore the global economy to sound fundamentals but I don't think that was ever the intention behind ZIRP. We have not enjoyed sound fundamentals for at least 30 years. Maybe, 130. And if you include the distorting influence created by the temporary availability of another kind of artificial injection -- being free energy fossil fuels -- we haven't seen sound fundamentals in 300 years.
I know, nobody likes to think about these things in just those terms. I don't know what to tell you people. It's been a ponzi of one kind or another for 250 years running. Nothing you see is real. None of it is sustainable, it was all a huge pump & dump since 1781 at least. It looks like normal, but it is not normal at all. It looks life forever, but it is not forever and it could not be and it is not going forward from here.
It was an illusion. The illusion did not start with Bernanke. It did not start with Greenspan. It did not start with the establishment of the US Federal Reserve System in 1913. It started many generations ago, the illusion is broad and deep and murky with wishful thinking and epic lies and misdirection. Don't look behind the curtain, or under the rugs, or around the corner, and certainly do not look in the mirror.
It does feel like the end of times.
Bernanke jumped the shark:-) What an idiot;-)
There is no doubt that a serial Ponzi has been going on for many years, all driven by human's need for "something for nothing", only effectively institutionalized. But that does not infer that it will continue infinitum. As habitual drunk drivers eventually learn, a series of close call, near death experiences can elevate our sense of indestructibility until that day when our gross stupidity ends us along with other innocent victims.
Good article by Daniel Amerman, just out. Average US citizen is going to get screwed even more.
.
US Regulators Mandate Next Stage Of Textbook Financial Repression
(a couple of his paragraphs don't explain things properly, but it doesn't detract from the point of the essay)
I was reading something today (TAE?) where a CB'er was theorizing recently that NIRP could go as low as -10% and people will only then start to pull money out of accounts and into cash.
A year ago everyone thought otherwise, that NIRP would be immediately answered with massive withdrawals from accounts. That money would be pulled at -0.01%. They were wrong.
If true this is a massively important observation. People will pay to have money in banks. And thus, NIRP is coming and it will never go away.
True at the inception of negative rates, then false at an exponentially increasing rate.
actually, the poorest have been paying the most to have money in the banks for quite some time now
And don't get started on "payday loans" or the costs of wiring money around the continent. And yet without those shady services a lot of the poor would have no access to a functional money system at all of any kind.
Sure they will pay.We are paying for "protection" already. What's a few percentage points? It is the large account holders that will likely make a run for it, as they are generally institutions that must show a return and the ones that ultimately seem to drive the "markets".
Interesting thought. Inertia and lack of information will likely get a lot of people waiting until -10%. But given that governments are trying to wean people off (force them off?) cash, people can't take cash out and put it under the mattress. They'll be forced into the treasury market (least risk/still NIRP, so a no sale), corporate bonds (maybe a positive rate/highly risky), alternatives like REITS (positive return/higher risk) or the Ponzi market (who knows the return of risk these days). The people that are going to wait until -10% aren't going to have any investment acumen as to where to put money and are going to be shorn. NIRP will ensure a two class country, if one even exists after such a program. There will be the ultra-rich and the desperately poor. Even the middle class people hanging on to that designation by their fingertips will be decimated by NIRP.
Which is precisely why these psychos will try it.
Why would they leave money on the table? You bet they'll take it.
Bring back POMO and repeat the fucking same mistakes. I'll wait and destroy the other bombshell that never seems to get mentioned.
It was policy used in the 1960's. We used it again after Alan Greenspan Federal Reserve implosion. Does anyone remember? I remember. Does the Zero Hedge family remember?
Liquidity and credit risks in the UK's financial crisis: How QE ...
What will be the macroeconomic effects of Federal Reserve NIRP?
Increasing the November 3, 2015 National Debt ceiling under negative interest rate installment program to fake GDP growth. If they can subsidize payment and extend and pretend. Debase the dollar holdings to increase commodity cost.
Remember California cutting back on water usage? Utilities just increased monthly charges for lost revenue projections. The cut back was a hike to generate false gains.
Thanks. Extend and pretend has been working for a long time.
The lie of inflationary deficit spending is a fine way to erase government obligations on Social Security, Pensions, Insurance Premiums and Savings while increasing obligations on people's indiscretionary expenditures.
Confiscation of weath through inflation ((deficit spending) is called the "shabby secret" of paper money.
The clowns are just going to keep making up rules and stay in power until 'that' day comes, if it ever does.
whoa, what a rush!
Stability is:
1) Unnatural
2) Prevents evolution
3) Harms younger generations for the benefit of fossil generations
4) Fragile
5) Rewards non-performance
the list is endless...
Just because you add financial to the front of it does not change the nature of stability.
Onward Soviet Amerika!
I think there is a difference between stability and sustainability. A system can be sustained in the face of winners and losers, but as you suggest, stability is death. When we reach a point of stability, of constancy and no change, we are no longer breathing.
#2 is already proven to be a joke by genetics; DNA mutation is a LOSS of information...it is impossible to gain new information. Get Christ; He tells the truth.
If there’s no secure money then there is no future for property rights because a tyrant that can fix the value of money can eliminate the value of property.
And, so, the lying continues: on inflation, on employment, on production, on corporate profits, on financial fraud, on QE, on NIRP and ZIRP...
If you can't used fundamentals then your days are numbered. A house built on sand will not stand. Neither will a nation.
"Oh banking establishment, how many ways can we help thee?
What I want from the financial meda is, Who's doing this and what can be done about it?
Reality is less important than we "feel" safe. Don't fuck with that, lest you be a terrorist.
We are fortunate to have such a vibrant and growing economy that they are willing to actually pay us to borrow money.
Who would have ever thunk it?
Twenty years ago one could build a treasury bond ladder that yielded 6.9% with an average maturity of 14.4 yrs. Something to think about while pondering the insanity of ZIRP.
Twenty years ago. People invested in the stock market and lived off dividend and bank interest as a way to contribute to purchasing under discretionary income. Thanks the Bill Clinton, NAFTA and Glass-Steagall wiped away that lifestyle.
That lifestyle was based on delusion as are all concepts dependent upon money for nothing. Why should anyone's money "work" for them? Real money in a real economy never works that way. If you accumulate enough capital to own things, assets and businesses that actually produce things is different that simply putting your cash into a magic box and it "creating" a return.
Unfortunately this country was establish on a 6% return rate of interest on money lent to the gvt and remain there for quite some time. This lead to an increased burden on it's citizens in the form of pain and suffering, once the industrial revolution was born the illusion of pain and suffering went by the way side but the taxation of keeping up with the jones and products which did not last the test of time morphed into todays competition of insanity of the fittest. it will take the trick of a magician the likes of which have not yet been seen to cure what ailes this economy, and then presto, you have utopia at the drop of a hat where he makes all, and freely gives it up to be managed by more sane and compassionate individuals, not willingly mind you, but freely just the same.
To hell with interest. Rat pack Gold/Silver and live off it when the time comes. No guarantees in life but it beats a depreciating fiat rectangle.
Gold Bitchez.....I pick up pennies
Gold was meant for spendin, not saving.
So the Cyprus haircut of 10% on savings was met with outrage and branded as theft.
But a Fed cheerleading inflation as it implements ZIRP or NIRP is met with glazed eyes and dropped jaws.
What time are the Kardashians on?
Never a borrower or lender be? Or is it Ever a borrower or a lender at be record low rates?
This is what killed the middle class. No savings and no return on savings.
We’re in a New Recession-John Williams
Interview with Greg Hunter October 11, 2015 on USAWatchdog.com
At the beginning of 2015, economist John Williams (founder of ShadowStats.com.) predicted the U.S. economy would continue to slow down to stall speed, but it is much worse than that. Williams explains, “I’ll contend we’re in a new recession and recognized likely to be timed from December of 2014. . . . The downturn in 2007 wasn’t recognized until the end of 2008. I think by the end of this year, people will recognize the economy turned down in December of 2014. I’ll tell you why I say that. There are a couple of very solid leading indicators . . . of the broad economy. One is industrial production. Industrial production contracted in both the 1st and 2nd quarter of this year. Those are the official numbers out of the Federal Reserve. Estimations for industrial production are for continued contraction. Industrial production used to be the GDP measure. . . . Retail sales contracted in the first quarter, adjusted for inflation. Year over year growth has dropped to levels you only see in a recession. It’s the same thing again with industrial production.”
So, what is the next move by the Federal Reserve? Williams says, “I think the Fed has lost control of the financial system. I don’t know quite what they are going to do, but they are not able to do what they want to do. They want to raise interest rates. They had an opportunity back in June . . . they announced rather formally . . . that they were going to raise rates in September . . . and that didn’t happen. The markets began to move around, and they said the economy is too weak and we’re (the Fed) not going to do it.”
For people who thought the economy was fixed by the Fed after the 2008 financial meltdown, think again. Williams contends, “In 2008, the system was in crisis and in a crash. The financial system was on the brink of collapse—no question. Most people recognize that, and people like to forget it. We have never recovered from that. The Federal Reserve and the federal government did everything they could to keep the system from collapsing. . . . They keep the system afloat, but they didn’t do anything to fundamentally address the problems that got us there. So, the economy is still in trouble. The banking system is still shaky. The federal deficit is still there, and long term solvency issues are still there for the United States and are still in place. None of the big issues were addressed.
What the Fed did with all of its bond buying and money printing did not fix the system, and Williams says, “I think we are going towards a QE4. . . . All that is bad for inflation. There is a point here where the dollar is going to take a tumble.
http://usawatchdog.com/were-in-a-new-recession-john-williams/
What's the notional value of derivatives? As i remember, in 2007 it was approaching a quadrillion in total according to the BIS. Has there been much deleveraging since then?
Very bad people Bill Clinton and Janet Yellen.
PDF versionNo. No deleveraging. It appears to be growing.
Steven Lendman writes in Global Derivatives: $1.5 Quadrillion Time Bomb that current “Bank of International Settlements (BIS) data show around $700 trillion in global derivatives.”
Keith Fitz-Gerald in 2012 wrote that the “risk in the $600 trillion derivatives market isn't evening out” but rather “it's growing increasingly concentrated among a select few banks, especially here in the United States.” Said Fitz-Gerald of MoneyMorning:
"In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller. The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).
http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/
Lendman reported on August 24, 2015:
“Along with credit default swaps and other exotic instruments, the total notional derivatives value is about $1.5 quadrillion – about 20% more than in 2008, beyond what anyone can conceive, let alone control if unexpected turmoil strikes.
“The late Bob Chapman predicted it. So does Paul Craig Roberts. It could ‘destroy Western civilization,’ he believes. Financial deregulation turned Wall Street into a casino with no rules except unrestrained making money. Catastrophic failure awaits. It’s just a matter of time.”
http://www.globalresearch.ca/global-derivatives-1-5-quadrillion-time-bomb/5464666
I agree with Lendman's assessment of these behemoths: “Civilization’s only hope is smashing them – dismantling them into small, impotent pieces, or ideally putting money back in public hands where it belongs.”
tedious.
.
Phish 2014 10 31 HALLOWEEN SET 2 - Chilling, Thrilling Sounds of the Haunted House
https://www.youtube.com/watch?v=4yKaZVKeF2A
.
bonus track.
Umbrella
https://www.youtube.com/watch?v=u8fo8Wv49Iw
.
John Prine : Blue Umbrella
https://www.youtube.com/watch?v=Af6_XP1IxNM
.
....
John Prine : You've Never Even Called Me By My Name
https://www.youtube.com/watch?v=_ap-GLcEixs
.
"money".
try this version blindman I like this one best
https://www.youtube.com/watch?v=XCdo2lQ-25c
real nice, but it is a prine and goodman song, they wrote
it and deserve mention. this version does scream,
thanks. it screams "money".
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Terry Adams - That's Neat, That's Nice - NRBQ TARRQ Smith's Olde Bar
https://www.youtube.com/watch?v=VNNEWQOUCdY
I love John Prine and all them guys but then I am a walking bum.
https://www.youtube.com/watch?v=Ez2-wZGbLvg
Jimmy Reed-Honest I Do
https://www.youtube.com/watch?v=J5o6t4fNDi4
Jimmy Reed - Big Boss Man
https://www.youtube.com/watch?v=Dd-o_kLONVI
NRBQ & The Whole Wheat Horns - That's Neat, That's Nice (Live on USA Hot Spots 1982)
https://www.youtube.com/watch?v=qC5RbPjxKdI
Not enough assets to purchase? Have ye little faith?
I am sure our fine fellows on Wall Street can dream up some wonderful financial products that the FED can eventually be forced to purchase. Problem solved!
So what you are saying is that right now NIRP can be thought of as being both good and bad at the same time when in reality it must be one or the other but its only by opening that box and taking a look inside can we know which is truly the case?
I'm gonna call it Shrodingers monetary policy.
PROJECT NIRP
FED rate will not rise. Too much leverage and debt. Nothing new there. Needs NIRP to keep the ponzi going. Agreed. At a certain negative rate, however, a socioeconomic cataclysm will manifest. People will rush to paper. Banks close. Only plausible scenario. You lose. Haircut. Bail-ins.
Another problem. US debt securities. If the yield across the board turns negative, who will buy? The FED will have to buy to keep the ponzi going. So the FED piles negative yielding debt securities onto its balance sheet. Operation - Hug the Tar Baby. Spiral of death. Meltdown. Can not continue into perpetuity!
QE4 and beyond, NIRP, these are the signs of something worse to come. That is hyperinflation.This mad science experiment, as far as my limited knowledge can forsee, will end cash and kill USD hegemony.
A geopolitical turning point, not seen since WWII, is approaching; and the death of cash is looking imminent. Gold will likely be made illegal. Been done before.
Once cash is dead, you can't take your 'money' out of the bank. You will have no recourse. What value is gold if it is illegal, and you are being carted off to a FEMA camp for political dissidence?
The Federal Reserve Bank of San Francisco published a working paper this month, "Measuring the Natural Rate of Interest Redux," in which it introduced the potential for using both negative short-end rates coupled with another round of quantitative easing (QE) focused at the long end, as a response to the next recession.
http://www.frbsf.org/economic-research/files/wp2015-16.pdf
Thomas Laubach
Board of Governors of the Federal Reserve System
and
John C. Williams
Federal Reserve Bank of San Francisco
October 14, 2015
Abstract
Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.