Why Nirp (Negative Interest Rates) Will Fail Miserably

[wonderpup]

Almost every day now we see some 'expert' or another suddenly waking up to the dangers of cash money as an enabler of crime or worse and calling for it to be abolished. A cynic might say that this sudden awakening to the civic dangers of cash four or five thousand years after it's invention may have less to do with concerns about crime and more to do with concerns about leaving a back door open in a future NIRP environment- the whole point of NIRP being that there is no back door, nor front door either- it's a locked room.

But even if these 'experts' get their way and manage to abolish cash is there any guarantee that this will produce the outcome they desire?- this article from Charles Hugh Smith suggests it may not;

The last hurrah of central banks is the negative interest rate policy--NIRP.The basic idea of NIRP is to punish savers so severely that households and businesses will be compelled to go blow whatever money they have on something--what the money is squandered on is of no importance to central banks.

All that matters is that people and enterprises are forced to spend whatever cash they have rather than "hoard" it, i.e. preserve and conserve their capital.

That this is certifiably insane is self-evident. If an economy depends on bringing future spending into the present by destroying savings, that economy is doomed regardless of NIRP, for eventually the cash runs out and spending declines anyway.

But NIRP will fail completely and totally due to another dynamic-- one I addressed last month in Another Reason Why the Middle Class and the Velocity of Money Are in Terminal Decline. As correspondent Mike Fasano noted, negative interest rates force us to save even more, not less:

http://charleshughsmith.blogspot.co.uk/2016/02/why-nirp-negative-interest-rates-will.html

What always seems to elude these 'experts' is that human beings have the capacity to act in a way that might be described as 'irrationally rational' in the sense that they can do things that seem to defy rational expectations when viewed objectively because their behavior is being governed by subjective reasoning.

If we define a 'saver' as someone who places a higher value on preserving capital for the future rather than consuming it today we will not alter this value system by introducing a negative interest rate on those savings- all we will do is force this person to save even more to offset the loss.

So even if the advocates of NIRP get their way they may find that instead of more demand being the outcome they get less demand, as more income is diverted into saving to cover the losses created by negative interest rates.

Perhaps the real problem with Central Bankers is that while they claim to be in the financial business they are now actually dabbling in the psychology business- a field in which they are both unqualified and- having been trained in economics- perhaps uniquely incompetent. Ultimately NIRP is not an economic theory, it's a theory of mind- brought to you by the folks who gave us the 'rational market' theory -

So while-in theory- NIRP should bring about a surge in demand as all those savers undergo a radical shift of psychology and overnight turn into spendthrift wasters- in reality this will not happen, those savers will remain for the most part savers and will simply quietly plot their revenge on whichever political party took away their freedom to exit the system via cash.

[999house]

Yes I think you are right. The more negative the rate, the more I would save. Why? because a negative rate destroys any confidence.

[interestrateripoff]

I would also argue it's impossible to maintain interest rates higher than the growth rate perpetually.

[winkie]

They could give people money to spend but a. why would some want to spend more than they are capable of earning to push debt due to be paid into the future, meaning they will have to work for longer or their time will not be theirs for longer..... b. money you spend that you have not yet earned is not free.....there will always be a cost for having and spending it before having earned it unless bought the right thing at the right time.....or default on it.....never to borrow again, not such a big deterrent for many......

[MrMonkey]

Anyone who wants any stability in retirement, reducing the burden on the state, would need to save more as a result of a NIRP as their savings would see no growth (or more likely a significant loss after fees). Even if it does generate growth now, it contributes to a financial time bomb down the line as people find themselves relying on the welfare state when DWP have to pick up the pieces of today's fiscal policy.

[ChewingGrass]

Unfortunately most people in this country cannot see further than next week or next month, never mind next year or the next decade. Once they realise what a thoroughly miserable retirement is in store for them it will be too late. Why do you think the BBC is constantly pedalling the line that 70 is the new 50, they are subconsciously manipulating your expectations for retirement backwards.

Many people are starting to realise this and adjusting their spending now in order to 'get the man off their back' and get their lives back in time so they don't have to get up a ridiculous AM and compete with all the other plebs to get to a job they would rather not have to do.

I'm sure most people aspire to some sort of retirement, so that they can at least do what they want before they can't.

[zugzwang]

Almost every day now we see some 'expert' or another suddenly waking up to the dangers of cash money as an enabler of crime or worse and calling for it to be abolished. A cynic might say that this sudden awakening to the civic dangers of cash four or five thousand years after it's invention may have less to do with concerns about crime and more to do with concerns about leaving a back door open in a future NIRP environment- the whole point of NIRP being that there is no back door, nor front door either- it's a locked room.

But even if these 'experts' get their way and manage to abolish cash is there any guarantee that this will produce the outcome they desire?- this article from Charles Hugh Smith suggests it may not;

http://charleshughsmith.blogspot.co.uk/2016/02/why-nirp-negative-interest-rates-will.html

What always seems to elude these 'experts' is that human beings have the capacity to act in a way that might be described as 'irrationally rational' in the sense that they can do things that seem to defy rational expectations when viewed objectively because their behavior is being governed by subjective reasoning.

If we define a 'saver' as someone who places a higher value on preserving capital for the future rather than consuming it today we will not alter this value system by introducing a negative interest rate on those savings- all we will do is force this person to save even more to offset the loss.

So even if the advocates of NIRP get their way they may find that instead of more demand being the outcome they get less demand, as more income is diverted into saving to cover the losses created by negative interest rates.

Perhaps the real problem with Central Bankers is that while they claim to be in the financial business they are now actually dabbling in the psychology business- a field in which they are both unqualified and- having been trained in economics- perhaps uniquely incompetent. Ultimately NIRP is not an economic theory, it's a theory of mind- brought to you by the folks who gave us the 'rational market' theory -

So while-in theory- NIRP should bring about a surge in demand as all those savers undergo a radical shift of psychology and overnight turn into spendthrift wasters- in reality this will not happen, those savers will remain for the most part savers and will simply quietly plot their revenge on whichever political party took away their freedom to exit the system via cash.

The flipside of CHS's argument is apparent already in the behaviour of European commerical banks who've sought to evade the imposition of NIRP by paying down their LTRO loans early and extinguishing their offsetting reserve deposits with the ECB. Rather than act as an incentive for balance sheet expansion NIRP has had the opposite effect. Taken together, a double whammy is implied. Savers sheltering an increasing share their income to maintain their savings principals and banks lending progressively less to escape the reserve tax.

[billybong]

If it's because they want you to spend savings then that has to be the best reason of all not to - they're never on the side of the average person so their "encouragements" oppose the average person's best interests.

Spend less and save more.

Whatever - the ZIRP etc has been an abject failure for the general economy (the central bankers have officially admitted that it hasn't worked and it doesn't work) and of course NIRP will be even more so - its failure is already baked in.

Edited February 12, 2016 by billybong

[nnails]

The people with low amounts of money will keep it a home and hide it or buy somthing small that hopefull wont go down in price.

the well off people it far more tricky. they cant really keep large amounts of money at home, safe boxes may be used more, classic cars.

either way it could destory the banks balance sheets as there desposits will go down.

[renting til I die]

Yes I think you are right. The more negative the rate, the more I would save. Why? because a negative rate destroys any confidence.

Agree, I will do the same. I think there are signs of this with the resent rise in the price of gold.

[stormymonday_2011]

Almost every day now we see some 'expert' or another suddenly waking up to the dangers of cash money as an enabler of crime or worse and calling for it to be abolished. A cynic might say that this sudden awakening to the civic dangers of cash four or five thousand years after it's invention may have less to do with concerns about crime and more to do with concerns about leaving a back door open in a future NIRP environment- the whole point of NIRP being that there is no back door, nor front door either- it's a locked room.

But even if these 'experts' get their way and manage to abolish cash is there any guarantee that this will produce the outcome they desire?- this article from Charles Hugh Smith suggests it may not;

http://charleshughsmith.blogspot.co.uk/2016/02/why-nirp-negative-interest-rates-will.html

What always seems to elude these 'experts' is that human beings have the capacity to act in a way that might be described as 'irrationally rational' in the sense that they can do things that seem to defy rational expectations when viewed objectively because their behavior is being governed by subjective reasoning.

If we define a 'saver' as someone who places a higher value on preserving capital for the future rather than consuming it today we will not alter this value system by introducing a negative interest rate on those savings- all we will do is force this person to save even more to offset the loss.

So even if the advocates of NIRP get their way they may find that instead of more demand being the outcome they get less demand, as more income is diverted into saving to cover the losses created by negative interest rates.

Perhaps the real problem with Central Bankers is that while they claim to be in the financial business they are now actually dabbling in the psychology business- a field in which they are both unqualified and- having been trained in economics- perhaps uniquely incompetent. Ultimately NIRP is not an economic theory, it's a theory of mind- brought to you by the folks who gave us the 'rational market' theory -

So while-in theory- NIRP should bring about a surge in demand as all those savers undergo a radical shift of psychology and overnight turn into spendthrift wasters- in reality this will not happen, those savers will remain for the most part savers and will simply quietly plot their revenge on whichever political party took away their freedom to exit the system via cash.

In the mid to 1970s the UK effectively had negative interest rates because inflation was running at a higher rate than interest rates for most of that period.

The only other time this occured prior to the current crisis was during the two world wars

http://www.economicshelp.org/blog/2647/economics/history-of-inflation-in-uk/

I believe counterintuitively that the experience of the mid 1970s was that people actually saved more even though inflation was running at nearly 30% at some stages

It seems that when crisis come in whatever form people natural instinct is to either save more or to stockpile essentials (another feature of the 1970s crisis)

http://www.economicshelp.org/blog/848/economics/savings-ratio-uk/

Trying to scare them into consumer spending is simply not going to work. All that will happen is that people will start piling up huge supplies of toilet rolls, sugar and beans. Moreover, unless borrowers are actually paid for taking on creditt then the other thing people will do at at a time of NIRP is to liquidate personal debt which will be deflationary.

Edited February 13, 2016 by stormymonday_2011

[stormymonday_2011]

NIRP is a charge on reserves to encourage bank lending.

What we have yet to witness is how banks try to maintain profitability.

If you pass on the cost to savers obviously cash usage will increase.

Other alternatives include the bank reducing dividends, cutting costs etc.

We also have the possibility of raising lending rates which, in theory, will also REDUCE lending which is counter to the desired policy outcome.

Finally, in concert with and a counter to the effects of higher lending rates is lowering lending standards.

It seems that at low rates of NIRP, the latter is what we are likely to see combined with more cost cuts.

The other possible impact of passing on costs to savers is to make payment in any form of specie that is subject to NIRP undesirable to the recipient.

Therefore one likely outcome would be employees no longer being willing to work overtime or do anymore than is necessary to meet their most basic needs as any saving for the future would be effectively punished. In fact there are some signs that this has already started. The rational approach to NIRP appled to individuals would be to pay down debt, stockpile essentials and then reduce economic activity to the minimum needed to survive on a day to day basis. I cannot see it being anything other than deflationary

Edited February 13, 2016 by stormymonday_2011

[XswampyX]

These are all great 'n' that, but why, say 10 years ago would we have all been saying that negative rates would be inflationary and destroy the currency?

What's changed?

[scepticus]

These are all great 'n' that, but why, say 10 years ago would we have all been saying that negative rates would be inflationary and destroy the currency?

What's changed?

When I started this thread in 2011 what everyone was saying is that I was mad to predict it could ever happen. Wrong.

Then later when it didn't seem so mad after all, inflation and currency repudiation was the response. Wrong.

Now, people are saying it won't cause inflation but will some how destroy fiat currency. This will also be proven wrong over the next few years.

In due course I will start a thread making a few #scepticasts for the new reality, about what actually will happen. Who knows whether I'll be right, but so far, so good.

[scepticus]

We also have the possibility of raising lending rates which, in theory, will also REDUCE lending which is counter to the desired policy outcome.

I don't think that's right. The goal of the policy is to ensure markets clear regardless of stock metrics. Its when that doesn't happen stuff goes quickly pear shaped. As long as markets clear the system is still standing, whatever the rate.

Sure, they/we/you/them might want to see lending increase or at least hold steady, but its a secondary objective.

[Bland Unsight]

When I started this thread in 2011 what everyone was saying is that I was mad to predict it could ever happen. Wrong.

Dude, this is a thread pup started yesterday.

[doomed]

In due course I will start a thread making a few #scepticasts for the new reality, about what actually will happen. Who knows whether I'll be right, but so far, so good.

I would like to hear your opinions on what might happen.

Fair play calling it as I personally could not ever see it happening but here we are. I still think it will all end in hyperinfation.

[“Nasty Piece of work”]

Has not this been tried in several countries already, and been as successful as QE?

[Saving For a Space Ship]

I don't think that's right. The goal of the policy is to ensure markets clear regardless of stock metrics. Its when that doesn't happen stuff goes quickly pear shaped. As long as markets clear the system is still standing, whatever the rate.

Sure, they/we/you/them might want to see lending increase or at least hold steady, but its a secondary objective.

scepticus, on 13 Feb 2016 - 8:39 PM, said:

When I started this thread in 2011 what everyone was saying is that I was mad to predict it could ever happen. Wrong.

Dude, this is a thread pup started yesterday.

They meant this thread,,

Nirp Warning, Nirp Warning

http://www.housepricecrash.co.uk/forum/index.php?/topic/167478-nirp-warning-nirp-warning/

Edited February 13, 2016 by Saving For a Space Ship

[stormymonday_2011]

I don't think that's right. The goal of the policy is to ensure markets clear regardless of stock metrics. Its when that doesn't happen stuff goes quickly pear shaped. As long as markets clear the system is still standing, whatever the rate.

Sure, they/we/you/them might want to see lending increase or at least hold steady, but its a secondary objective.

Monetary policies don't work out in a political vacuum.

All current participants in world markets will look to defend their particular interests.

Given that trade and capital flows from debtors to their creditors have got massively out of balance that process will need to unwind on a global scale.

Somehow I can't see that happening without a lot of friction between nations and maybe more than a little bit of war.