Thursday, September 15, 2016

Coming: Negative Interest Rates

The Federal Reserve Bank, or Fed, wants inflation.  Inflation lets the endless borrowing continue as it benefits the US by letting us pay off the debt with ever devaluing currency.  And we have debt.  Obama added more debt than all previous US presidents combined, from $6T at the end of W's term to the $20T today.  Thanks Obama.

10yr Interest Rate graph:

Inflation hurts the consumer but helps the debt-addled government.  Guess how those two are ranked in priority...

But Obama doesn't get all the credit.  He had a partner in Fed Chairpersons Bernanke and Yellen, and some of the debt can be pinned on the banking crisis of 2008.  But chairpersons Bernanke and Yellen abandoned steady monetary policy leadership for the super-fun paint-the-country-into-a-corner trick. It is called ZIRP, or Zero Intrest Rate Policy. They did this by dropping interest rates to near zero.  (A healthy economy should be around 5%.)  And keeping rates irresponsibly low for nearly a decade.  Shameful.

Lower rates did not trigger stimulus nor inflation as promised.

Nov. 2008:  So they did Quantitative Easing, or QE1 (printing money to inflate money supply and trigger inflation).  The Fed bought $600 billion in mortgage backed securities.  No inflation, and no stimulus.

Nov 2010: Then QE2 where they bought $600 billion in treasury securities. No inflation, and no stimulus.

Sept 2012 - Oct 2014:  QE3.  $1.6 trillion.  No inflation, and no stimulus.

The money supply was increased 4.5x under QE, from under $1 trillion to $4.5 trillion.

And inflation never came.

Oh, and Obama never objected.

Next - Negative Interest Rate Policy, or NIRP.  NIRP is the final step in the Fed's quest for inflation.  Force people and companies to take money out of the banks and spend it, or steadily lose their money by paying the banks an interest rate.  This artificial demand is supposed to drive prices up.  Inflation.  It may, or may not.

A reason to keep money in a bank when interest rates are negative is to consider that safer than the unknown.  The unknown includes the timing of a return to sound monetary policy, or the risks with putting the money into stocks or other unpredictable investments.  It is possible NIRP will fail as did ZIRP and as did QE1, QE2, and QE3.  But it is worth trying because it is easier than integrity.

Yellen mentioned NIRP last month at a conference in Wyoming.  She said she would not pursue NIRP.  To me, that was Yellen going on record as objecting to the next easy-out that she will face.  And embrace.

Former chairman Bernanke just said this (ZH):
. . . the fact that negative rates would be temporary and deployed only during severely adverse economic conditions would be an advantage. Like quantitative easing, which was also unpopular in many quarters, a period of negative rates would probably be tolerated by politicians if properly motivated and explained. We have some evidence on this point: Negative rates are disliked by many in Europe and Japan but central banks have been willing and able to use them without facing high political costs, at least so far
This is what fraud sounds like.

Take a listen to these two videos - both from today. 

The first is Mr. Trump accusing the Fed of being political - a very fair and, in my opinion, accurate charge.  1 minute.

Second, the Keiser Report show.  He and his co-host and guest talk about NIRP in the context of other topics, like inflation, gold and the burdens on Americans who live month-to-month.  25 minutes.

His guest metions Judy Shelton.  I had not heard of her before, but it appears her opinions should be known.  Here is a WSJ article has published last month.  She concludes:
It’s time to end the intellectual vacuum and focus on serious initiatives for global monetary reform. The goal is to maximize prosperity by harnessing the power of free-market signals across borders. Monetary clarity is the key to reconciling the principles of free trade with the promised benefits of an open global marketplace.

By focusing on currency manipulation as an unfair trade practice, Mr. Trump has not only identified the crux of the economic dilemma, he has also spotlighted the social and political tensions its consequences have fostered.

Obama is leaving America to Trump in a defeated, bankrupt state.  It took Reagan's policies three years to fix four years of Carter.  How long will Trump need to fix eight years of the most anti-American president in US history?

1 comment:

Anonymous said...

Waking up this a.m. to see Deutsche Bank tanking again ($75 trillion in derivatives) led me to this Stockman vid. I feel like we're waiting to storm the beaches of Normandy once it all collapses.