Stocks, Gold, Silver, and the printing press.

[pudly]

Didn't they just raise rates recently?

Yes. And the stock market promptly tanked. The Fed is "exploring" the possibility of going to negative rates. The idea that the Fed sets interest rates is the purest violation of free market principals. Interest is the cost of money. It should be driven by supply and demand (savers and borrowers). Instead, it is being set by fiat control.

FYI- A lot of financial discussion has actually moved over to the INGO Investing Game. If you have an interest, you might want to either follow that thread or even join in the game. It is fun and free.

 

[pudly]

And if negative interest rates are news to you, then likely a related topic is as well. There is a lot of commentary coming out about eliminating cash. You see, much like every other form of freedom that government wants to restrict, they are now associating cash with terrorism.

Cash is also about privacy and freedom. Oh, and holding cash is one way to keep from being taxed via negative interest rates policies (NIRP). NIRP would likely cause bank runs as more people would want to avoid that tax. How do you keep that from happening? Eliminate cash. The two policies are inextricably linked.

Citi Economist Says It Might Be Time to Abolish Cash - Bloomberg Business
Bring On the Cashless Future - Bloomberg View
Chase restricting cash deposits
In Sweden, a Cash-Free Future Nears- NY Times

 

[IndyDave1776]

A note on Switzerland. It has been a NIRP country for decades, but the critical issue there is that when you put your money in a Swiss bank, the only thing you get automatically is that they charge you to park your money in the vault, as opposed to banks in most other places where it is a foregone conclusion that they will lend that money out as soon as it lands in the bank. The Swiss will reinvest your money if you make specific arrangements to do so, but it is not a presumed condition of depositing money. That should bring you back up into the black pretty easily.

 

[pudly]

That isn't the same thing. People were indeed paying for anonymous, safe storage. That is a fee system much like how you pay for safe deposit boxes.

Switzerland is now one of those countries offering negative interest rates on both their bonds and regular savings accounts.
Swiss bank ABS becomes first to hit savers with negative interest rates | This is Money

 

[IndyDave1776]

That isn't the same thing. People were indeed paying for anonymous, safe storage. That is a fee system much like how you pay for safe deposit boxes.

Switzerland is now one of those countries offering negative interest rates on both their bonds and regular savings accounts.
Swiss bank ABS becomes first to hit savers with negative interest rates | This is Money

OK, I'm following now.

In any event, I believe it bears emphasizing that you do not truly own anything of which you do not have physical custody, or in other words, there is a difference between having, say, $10,000 and having a statement from your bank that says you own $10,000.

 

[pudly]

Correct. Problem is, if you have say $50,000 in an account because you believe that FDIC insurance is worth something (that's another subject), there is no realistic way to pull that out as cash. Withdrawals over $10,000 get reported already and the bank will resist anyway because they only have a small percentage of their claimed deposits available as cash for withdrawals.

BTW, the same rule holds for precious metals. Please, please don't invest in the GLD and SLV ETFs. They looks like a very simple way to invest in PMs, but due to how they operate, are likely to fail when most needed.

 

[Jackson]

And if negative interest rates are news to you, then likely a related topic is as well. There is a lot of commentary coming out about eliminating cash. You see, much like every other form of freedom that government wants to restrict, they are now associating cash with terrorism.

Cash is also about privacy and freedom. Oh, and holding cash is one way to keep from being taxed via negative interest rates policies (NIRP). NIRP would likely cause bank runs as more people would want to avoid that tax. How do you keep that from happening? Eliminate cash. The two policies are inextricably linked.

Citi Economist Says It Might Be Time to Abolish Cash - Bloomberg Business
Bring On the Cashless Future - Bloomberg View
Chase restricting cash deposits
In Sweden, a Cash-Free Future Nears- NY Times

Well, that is disconcerting.

 

[Super Bee]

Yes. And the stock market promptly tanked. The Fed is "exploring" the possibility of going to negative rates. The idea that the Fed sets interest rates is the purest violation of free market principals. Interest is the cost of money. It should be driven by supply and demand (savers and borrowers). Instead, it is being set by fiat control..

And this right here shows the government knows where the economy is headed, despite BO getting up in front of the country and telling us the economy is sunshine and unicorns.

Obama applauds economic progress in January jobs report - CBS News

 

[rhino]

Yes. You buy a treasury bond, but you only get back $99.50 dollars for your $100 purchase. Or, your savings account is charged every month for the privilege of keeping money there. A lot of strange things happen when interest rates go negative.

There are about a half-dozen countries that now have negative rates in Europe and Japan. The US is headed in that direction.

That is insane.

INSANE.

Well, that is disconcerting.

Indeed.

 

[pudly]

That is insane.

INSANE.

Congratulations. You just captured the theme of an excellent article on NIRP by Charles Hugh Smith, one of my favorite economic analysts:

That this is certifiably insane is self-evident.

oftwominds-Charles Hugh Smith: Why NIRP (Negative Interest Rates) Will Fail Miserably

This article (and most of his others) are well worth reading.

 

[GodFearinGunTotin]

Annnnnd the market's up almost 300 points at the time of this writing.

Volatility...

 

[Jackson]

Annnnnd the market's up almost 300 points at the time of this writing.

Volatility...

I only look once a year.

 

[GodFearinGunTotin]

I only look once a year.

You miss all the fun, though.

 

[rhino]

I long for the days when a passbook savings account paid "only" 5.25% at a bank and 5.5% at an S&L.

 

[Jackson]

I long for the days when a passbook savings account paid "only" 5.25% at a bank and 5.5% at an S&L.

Didn't that come with 12% mortgage rates?

 

[Hohn]

A negative interest rate should theoretically never exist. When storing money in the mattress preserves capital better than putting it in the bank, why would you put it in the bank?

Now, if you are paying in 'insurance premium" of sorts to preserve money, then perhaps the negative interest would be seen as something like your FDIC premium charge. But the obvious implication is that there is NO other place where you can put money where it will be safe, so you accept the least bad of all outcomes and pay the 'fee' for the privilege of having an insured deposit.

The link PUDLY posted is correct that NIRP will fail miserably and produce the opposite of the intended outcome. Think of interest rates as thermometer, not as thermostat. It represents the balance of power between lenders and borrowers and relative supply and demand. Normally, the lenders have the leverage, so the borrower has to pay a fee for the time value of money for the funds he borrows. This assumes also that there is a limited supply of lenders, such that competition among them cannot push rates lower.

A negative interest rate necessarily implies that there is so much competition among lenders who are DROWNING in money to lend that they are willing to pay for the privilege of locking in a small loss to guard against the possibility of a larger loss.

The FED is pushing on a rope monetarily. Granted, it failed miserably to manage the financial crisis with all the passive tightening of money, and then mismanaged the right actions (QE) afterwards.


The high stock market and the disconnect between the market and the American economy in general show that the capital has left mainstream America and fled to Wall St. If there was actual, vibrant grown in the broader economy, then capital would disperse throughout all those small businesses and you'd not have the glut of money parked on Wall St. The market would be much lower, and it would be a good thing. Instead, initial capital flight to Wall St bid up prices and created the self-fulfilling prophesy that Wall St was the place to put capital.


Which underpins my suspicion that our primary impediment to economic expansion is not monetary. It is regulatory and a crisis of confidence. It is the fear that the rule of law is in danger, and that any investment made is subject to an executive order re-arranging things after the fact (mortage loan forgiveness, Detroit bailouts, etc).

In other words, our GOVERNMENT is the main cause of all our woes. And the more it tries to solve problems, the worse the problems get because the solutions are the problem.

 

[pudly]

In other words, our GOVERNMENT and the Fed are the main cause of all our woes. And the more it tries to solve problems, the worse the problems get because the solutions are the problem.

Good post, but I'd modify your conclusion a little. The Fed is also an important part of the equation due to their flood of liquidity and control of interest rates and they are a private organization.

 

[IndyDave1776]

A negative interest rate should theoretically never exist. When storing money in the mattress preserves capital better than putting it in the bank, why would you put it in the bank?

Now, if you are paying in 'insurance premium" of sorts to preserve money, then perhaps the negative interest would be seen as something like your FDIC premium charge. But the obvious implication is that there is NO other place where you can put money where it will be safe, so you accept the least bad of all outcomes and pay the 'fee' for the privilege of having an insured deposit.

The link PUDLY posted is correct that NIRP will fail miserably and produce the opposite of the intended outcome. Think of interest rates as thermometer, not as thermostat. It represents the balance of power between lenders and borrowers and relative supply and demand. Normally, the lenders have the leverage, so the borrower has to pay a fee for the time value of money for the funds he borrows. This assumes also that there is a limited supply of lenders, such that competition among them cannot push rates lower.

A negative interest rate necessarily implies that there is so much competition among lenders who are DROWNING in money to lend that they are willing to pay for the privilege of locking in a small loss to guard against the possibility of a larger loss.

The FED is pushing on a rope monetarily. Granted, it failed miserably to manage the financial crisis with all the passive tightening of money, and then mismanaged the right actions (QE) afterwards.


The high stock market and the disconnect between the market and the American economy in general show that the capital has left mainstream America and fled to Wall St. If there was actual, vibrant grown in the broader economy, then capital would disperse throughout all those small businesses and you'd not have the glut of money parked on Wall St. The market would be much lower, and it would be a good thing. Instead, initial capital flight to Wall St bid up prices and created the self-fulfilling prophesy that Wall St was the place to put capital.


Which underpins my suspicion that our primary impediment to economic expansion is not monetary. It is regulatory and a crisis of confidence. It is the fear that the rule of law is in danger, and that any investment made is subject to an executive order re-arranging things after the fact (mortage loan forgiveness, Detroit bailouts, etc).

In other words, our GOVERNMENT is the main cause of all our woes. And the more it tries to solve problems, the worse the problems get because the solutions are the problem.

Quoted to afford you the chance to read this excellent post again!

 

[Hohn]

Good post, but I'd modify your conclusion a little. The Fed is also an important part of the equation due to their flood of liquidity and control of interest rates and they are a private organization.

Is it possible for excess liquidity to push DOWN rates rather than up? Like most readers, I would expect an excessive amount of money creation to cause inflation, and in turn, raise natural interest rates. Indeed, that was the entire purpose of QE.

But the classical model makes the assumption that money created is money circulated. The only way to explain the presence of persistent low rates and near ZIRP or actual ZIRP in an environment of QE is that velocity in the economy is not generating its own money-- velocity is not only low, but perhaps moving downward at a rate sufficient to offset additional QE.

This is why I argue that our obstacles are primarily regulatory and related to rule of law-- USG rather than FED functions.

The only way you can really fault the FED is if you first assumed that the FED should have targeted an elevated inflation rate (of 5% or so) and done QE-infinity until that target was achieved. Then you could say that the FED failed to create enough money to drive inflation fears high enough to overcome the excess liquidity demand that is crashing spending. Announcing both an explicit inflation target and that QE would continue until that target was hit would have lurched the markets awake and put in circulation all that idle money.

Instead, we had inflation hawks step in before any real traction was gained.


In other words, people are fearful more of spending than of not spending. Only with a credible fear of high(ish) inflation-- a punishing of savers-- could the FED realistically hope to have overcome the problems caused by the non Monetary functions of government.

As long as the Fed refuses to create interest rates high enough to offset the "regulatory risk premium" as I call it, we will have this stagnant, sideways economy with inflated market values and inflated market volatility.

 

[IndyDave1776]

While you both bring more understanding to the table than I do, my perspective is that if the feral government would get back inside its constitutional box which would include the elimination of regulations it either plainly does not have constitutional authority to impose and those imposed with claimed authority which is at least as flimsy as the Wickard v. Filburn standard--including and especially the elimination of the Federal Reserve as the Constitution assigns authority to the Congress to coin money and regulate its value, and significantly DOES NOT grant authority to delegate this to any other person, persons, or organizations, much of the problem would go away as a natural consequence. That said, I am very interested in hearing your thoughts on the matter.