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Wednesday, March 16, 2016

Ready for Negative Interest Rates?

On a temporal note (the theme "provident living" being my excuse), here's a heads up on one of the craziest things on our economic horizons: negative interest rates. Desperate governments in Japan and Europe are turning to this ultimate expression of fiscal insanity in a bid to stimulate stagnant economies that haven't been stimulated enough by the massive market distortions created by artificially low interest rates. So now they want to force people to use their money to spend, spend, spend by essnetially taxing money saved in the bank. A negative interest rate means you pay the bank for the privilege of using your money. It's a vicious new tax on savings that no government should be able to impose on its people, disguised as just another carefully considered banking policy allegedly within the ever expanding powers given to the Federal Reserve Bank.

Negative interest rates haven't worked for Japan, and are likely to be a failure for Europe. So naturally, I expect the US to follow suit. The head of the US Federal Reserve bank, instead of mocking the insanity of such a move, recently said it was on the table for the Fed.

But won't negative interest rates just drive people to take money out of the bank and hide their cash somewhere? Yes, which is why some cynics think that it will be followed by a war on cash itself, making cash harder to use, so that everyone has to keep money in electronic form. In a world where thieves break through and steal with more power than ever before, that may very well be on the table also for our future monetary policy.

How do you prepare for a world with that kind of fiscal insanity? Turning some of your electronic bits into food storage is one way. Keeping cash on hand for now is also a very good idea, especially in light of the ability of hackers to wipe out accounts. I also think that it's smart to have some of your savings in precious metals such as silver or gold. I think over the long term these will grow dramatically in value, but make sure you are buying or investing in real physical metal and not just paper that someone claims represents gold. For retirement accounts, one vehicle that I like is the Central Fund of Canada (NYSE: CEF) where shares are backed by real gold and silver bullion.

Or you can just not worry about the future and trust someone else to watch out for you and your posterity. Your call!

10 comments:

James Anglin said...

Um, Jeff: these negative interest rates are central bank rates. Capitalist governments don't set rates for commercial banks.

Negative central bank interest rates mean that commercial banks may be able to borrow money, from the central bank, and not have to repay all of it. It's like a "buy 99, get 1 free" offer, on loans from the central bank to commercial banks. Central banks don't take savings deposits. So negative interest rates are not a tax on savings, for anyone.

bearyb said...

James,

I'm pretty sure you're wrong on this one. A quick google search will result in a basic explanation, like this one:

http://www.bloombergview.com/quicktake/negative-interest-rates

"The ECB cut rates again March 10, charging banks 0.4 percent to hold their cash overnight. At the same time, it offered a premium to banks that borrow in order to extend more loans."

Anonymous said...

Anyone who has banked with Wells Fargo knows what negative interest is like. They call it "fees."

James Anglin said...

Huh; I guess I was indeed wrong about central banks not taking deposits. Apparently they do (from commercial banks, not ordinary people). Thanks for the Bloomberg link, bearyb. It seems informative. I'm surprised that commercial banks would ever just park their cash with a central bank, because it seems to me that the business model of a commercial bank ought to be, you know, to be a bank, not to use one. But apparently, for whatever arcane financial reasons there may be, banks do sometimes do that.

As the Bloomberg piece explains, however, negative central bank rates still don't mean negative rates for people's savings accounts, and they are not a way of taxing savings. Commercial banks will just take their money out of the central banks, instead of paying fees to keep it there. The resulting flood of money looking for a new home will make a seller's market for investments, so interest rates will fall in general — though only the central bank rates are supposed to actually go negative. When interest rates fall, the whole world starts deciding that now is the time to spend, because saving is hardly worth it. The intended effect is indeed to encourage spending and discourage saving, but it's not as coercive as actually taxing people's savings accounts.

Mormography said...

Any savings account generating less than inflation plus the tax liability on interest earned is a negative interest rate. Therefore, negative interest rates are not coming, being they already arrived at least a decade ago.

This Posting’s obvious application to the Kirkland Safety Society aside, it glosses over the larger picture of the evolution of global trends in monetary policy with the simpler solution and wise counsel of individual preparedness. The KSS was no CEF, but a typical formation occurring in its time and place, displaying no better “provident living” of other “temporal” institutions. Frontier land speculation of 1837 showed 2008 housing prices what a bubble is, and the anti-central bank sentiment of 1837 was a real as it gets. The key difference of 19th-century economics to post depression ear economics is that periods of deflation and inflation roughly balanced each other out.

The correlation between abandoning the gold standard and recovering from the Great Depression is strong. This correlation may deceptively lead one to conclude that gold is bad. As Bernanke responded to Paul, gold is just another asset. When gold was at the astronomically historically high price of $1200 an ounce, Glen Beck was urging buy, buy, buy. He was right, and it went 50% higher. Of course, if at $1800 an ounce one started converting every direct-deposited paycheck immediately into a gold ETF (whether paper only or not), their savings would be down nearly 30% today.

Economists are beginning to realize that inflation and deflation are fantastically psychological phenomena. Ergo, the Central Bankers’ dual mandates of employment and inflation moderation are psychologically counterproductive to a single mandate of price stabilization. Commitment to price stabilization allows for predictability soothing to the human psyche.

However, an immediate transition from a dual mandate to a single mandate would upset current business models designed close to a policy of at least 2% inflation. Ergo, a broad announcement of a gradual transition to a single mandate of price stabilization (neither inflation nor deflation) that relies on individual preparedness and fiscal policy to solve the concerns of employment is the best way forward.

James Anglin said...

2% inflation is at least as soothing to the human psyche as stable prices. We like getting raises. We like being able to look forward to pay increases that will make our mortgage payments more manageable. If everyone can expect small but steady raises, then prices slowly but steadily rise as well. People have more money, so they spend more money.

Besides being soothing, inflation can even be reasonable. In an industrial capitalist economy, most products steadily improve over time. New cars have a lot of features that old cars didn't. In this sense, inflation may actually be price stability, in terms of value for money.

Mormography said...

So you also favor a single mandate and price stability. You just think the single mandate should be based on a stable 2% increase.

James Anglin said...

Nah, I think they've got to steer between two problems. I'm only a dabbling amateur in economics, but my impression is that flexible response is better than doctrinaire anything. So I'd give the central bank leave to do whatever it could best do, to deal with whatever seemed like the biggest problem at the time. Government can't do everything to improve the economy, but it should do whatever it can.

Mormography said...

So, if the Government and its Central Bank decided that the lesson from the 70’s is that the doctrine of a dual mandate can result in the Central Bank trying to solve orthogonal goals which only make stagflation much worse and that a division of labor with Congress addressing employment via fiscal policy and the Central Bank addressing inflation is a better solution, the impressions of dabbling amateurs should override such a decision, if only to be contrarian.

Anonymous said...

Let's face it: central banks are lame. Fed chiefs have fed the dotcom bubble, the real estate bubble, and the government debt bubble. It will all end badly. Problem is, no one knows exactly when or how, and no one has the will or government backing to stop it. Anglin once again sounds superficially reasonable but advocates a deeply flawed position. Cheers.