Deutsche Bank Discovers Kuroda's NIRP Paradox

Tyler Durden's picture

Last October, BofA looked at Europe’s €2.6 trillion in negative-yielding debt and discovered something “stunning”: Savings rates were going up not down.

Don’t believe us, just have a look at these three charts:

But how could that be? By all accounts - or, should we say, by all conventional Keynesian/ textbook accounts - negative rates should force people out of savings and into higher yielding vehicles or else into goods and services which “rational” actors will assume they should buy now before they get more expensive in the future as inflation rises or at least before the money they're sitting on now yields less than it currently is.

Well inflation never rose for a variety of reasons (not the least of which was that QE and ZIRP actually contributed to the global disinflationary impulse) and nothing will incentivize savers to keep their money in the bank like the expectation of deflation.

Well, almost nothing. There’s also this (again, from BofA): “Ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.

Why that’s “perverse,” we’re not entirely sure. Fixed income yields nothing, and rates on savings accounts are nothing. Which means if you’re worried about your nest egg and aren’t keen on chasing the stock bubble higher or buying bonds in hopes that capital appreciation will make up for rock-bottom coupons (i.e. chasing the bond bubble), then as Gene Wilder would say, “you get nothing.” And that makes you nervous if you’re thinking about retirement. And nervous people don’t spend. Nervous people save.

Deutsche Bank has figured out this very same dynamic. In a note out Friday, the bank remarks that declining rates have generally managed to bring consumption forward.

The impact of interest rates (nominal or real) on consumption is generally derived from a two-period consumption model. Under a given budget constraint, declining interest rates front-load consumption in the current period at the expense of the second-period consumption (inter-temporal substitution effect). Japan's household saving rate has been constantly falling since the early 1990s.

 


 

But, there’s a limit.

Essentially, the bank argues that NIRP may be the shocker that wakes the public up to the fact that if negative rates exert a negative (no pun intended) effect on long-term household balance sheets, they will stop spending. To wit:

Even if inter-temporal consumption substitution occurs from now on, if the introduction of negative interest rates reminds households of a slower pace of their future accumulation of financial assets, namely suggesting a worsening of lifetime household budget constraints, households would be forced to cut back on consumption in both the current and next periods.

So there it is again. More evidence that Europe’s (and soon to be Japan’s) adventures in NIRP are destined to fail. Surprise, surprise.

But double-, triple-, and quadruple- down they most certainly will (starting this week with Draghi) until either one of two things happens: 1) they eliminate physical cash and take rates so punitively low that saving money in a bank will wipe out your nest egg in the space of a year, or 2) they drop money from the sky in a desperate attempt to inflate away all of this debt, a move which will be swiftly followed by the ultimate Keynesian endgame or, as one might call it, "a triumphant return to Weimar."

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gcjohns1971's picture

They wanted people to spend on disposables.

Instead they are buying non-disposable, and highly liquid items...ergo monetary substitutes to State-Issued toilet paper...and sharply curtailing other spending.

Keynesians have been drinking their own bathwater for so long that they actually have come to believe their own flatus is oxygen.

Fine.

Let them breath it.

NoDebt's picture

"They wanted people to spend on disposables."

They are.  Adult disposable diaper sales are at an all-time high.

Bumpo's picture

It's better to lose 1% than 50% on the rigged markets. In order to make up the difference on the lost 1%, Dan and Martha have to cut their cable bill. Or going out to dinner on Friday night, is getting dinner from Papa Murphy's.

NoDebt's picture

That's why you have to do it big.  -100% NIRP rate.  You wanna see money get spent?  Make it a use-it-or-lose-it situation.  It'll get spent.

Of course, that works great for Year #1.  Afterwards....

Omen IV's picture

same effect as Japan when they raised the VAT - one time increase in consumption to avoid the tax - taxing savings works the same way in the short term

but if people beleive it is now coming - no or reduced  Pensions / SS / Medicare - they will stop spending to survive

more importantly the Real Estate will be unloaded since it carries ever escalating Property Taxes

jakesdad's picture

"but if people accept inevitable mathematical certainty it is now coming - no or reduced pensions/ss/medicare - they will stop spending to survive"

ftfy 

buzzsaw99's picture

DB don't know jack except it's good to be fascist bankstas

_ConanTheLibertarian_'s picture

How about: people have very little currency to save or spend in the first place

 

lemontree2's picture

Transfer of wealth completed. Best regards, central Banksters and the establishment.

Ditch's picture

Kuroda was over heard saying to Dragi "Life is like a box of chocolates, we will take all the chocolates"

I despise these cretins for messing with our lives.

Dr. Engali's picture

It's clear that rates aren't negativer enough. 

Dassey4FedChair's picture

Get in the fuckin casino grandma!!! NOW!!!

Marco's picture

Oh no, consumption suffering in Japan while it does the same all over the world, keeping their trade slightly balanced (been in a deficit since the tsunami). The horror, the horror.

Only the US can play consumer of last resort for decades, if other countries try they become Greece. Japan's consumption HAS to go down.

Budnacho's picture

Oh, it'll be helicopter money....these fucks are getting real nervous of the unwasheded masses...

Who was that masked man's picture

Ah, the fly in the ointment of all central planners, the law of unintended consequences.

wildbad's picture

iNIRP-infinity negative interest rate policy.

thats when your interest pays your bank your money to not keep it onder the mattress

flyingpigg's picture

All muppets waiting to be crushed when the banks implode...why don't they buy gold if they get nervous instead of "saving" more?

FreeMoney's picture

When the only tool you have is a hammer, you tend to see every problem as a nail.

ramgold2206's picture

anyone willing to call a timeline on this one... 5 years, 1 year... few months....?? we need more time to stack!!

 

www.teamramgold.com

Marco's picture

Japan can keep this up indefinitely, if necessary they'll implement capital controls and they will mostly work too (because Japanese). They'll not be the first domino to fall.

DeadFred's picture

6 months. All my predictions are spot on. LOL. Actually it will last until 'the event', after that you have very short days to stack. Lots of 'events' flying around out there but so far none have landed. One or more will. Some of the events are on the radar screen, Israel nukes Damascus, NYC or an aircraft carrier are taken with a nuke by parties unknown. Others aren't looked at as often, Mt. Fuji explodes and the Tokyo exchange is closed forever. Most others are almost unknown, a 7.0 earthquake on the Concord fault in California would take out the fuel supply for Northern CA and much of Nevada, all those tech companies will need Solar vehicles to get their people to work... for a year. The house of cards won't survive a shaking. You'll know the shaking after the fact but we won't see it coming.

Herdee's picture

The bigger problem is that Japan holds a lot of American Government debt which is continually being bought with a currency that is a piece of shit.

Okienomics's picture

The training I received in economics was very long on rational behavior (responsing to price signals), and very short on psychology (what real people do).  Theory and models work to a point during unremarkable conditions, but they utterly fail to accurately predict human behavior during times of stress because, no shit, people batten down the hatches when there are storms.  Guilty.

katchum's picture

How about this?

https://4.bp.blogspot.com/-8eUuosaGVc8/Vt2bdqrPFgI/AAAAAAAAOOk/bpJgdbT29...

The fact is that the higher the interest rate, the more you save as it gives nice returns on the bank. But when the interest rate hits 0%, weird things happen. Suddenly people start to save more due to uncertainty (in physical cash of course). No normal person will buy stocks because banks will collapse as they see their deposits go up in smoke. No normal person will buy bonds at negative interest. And no person will leave their cash in the bank.

NoBillsOfCredit's picture

No one has "their" cash in the bank, it belongs to the bank once you put it in there. You are an unsecured creditor.

RedDwarf's picture

Sure, really push those rates down.  People will save more, but they'll stop doing so in the bank, they'll do cash in the cookie jar.  If physical cash becomes unavailable because you ban it or it's all in mattresses you'll have a bank run and/or they'll switch to PM's, canned foods, that sort of thing.  The more negative you go the more you make it obvious to even the most economically illiterate what is going on, what fiat really is, how precarious the banking system really is, and that collapse is coming.  Congratulations on burning your own business model to the ground idiots.

Crack-up boom then bust and reset in 3...2...1...

Calculus99's picture

I love a good paradox.

My favourite one at the moment is the paradox of choice.

wanderer9641's picture

To put it plainly and simply, people do not like being pushed into bad places.

moneybots's picture

"Negative rates are set to backfire in Japan as consumption likely to suffer."

 

So, why is it that the FED is even contemplating NIRP?

 

The FED says it is trying to avoid deflation, but is actually fueling it.

rahtidmon's picture

That middle chart looks like a swaztica, go figure, fascism hard at work for you!

Theonewhoknows's picture

Everything according to the plan - this plus bail in’s directive in EU http://independenttrader.org/are-we-waiting-for-another-2008.html

Strelnikov's picture

A nation of savers puts more away to compensate for lack of interest income.  

 

Shocking.

Grandad Grumps's picture

One of the first things I did was lend money that I would have saved for retiremeent to my grown children so that they could pay off their mortgages. The rate I get substituting for the bank is better than I could get from any savings account and the risk is in my children, not to a criminal market.

insanelysane's picture

Once rates go negative it is a strong signal that the economy sucks and the market is oversold.  The decision becomes do I lose 1% interest on my account with a negative rate or do I lose 25%, 50%, 75%, etc in the market?  Even -10% interest rate is better than a 10% correction because the loss is known from the start.