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BOE revives negative rates talk


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Hello, long term lurker here (10 years+). 

I don't tend to join in the conversations as my ability to understand and debate has been dwindling with age so I generally just observe from the sidelines.

Saw this and noticed it hadn't been posted yet, so here it is: https://www.msn.com/en-gb/money/business/bank-of-england-facing-covid-slump-revives-negative-rates-talk/ar-BB14eGyg?li=AAwnS0s&ocid=MIE8HMPG

 

 

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Japan have tried it.. and it's a disaster.

I suggest this excellent lecture. He covers NIRP in detail and why its crazy. (Skip to 24:40)

The Failure of Monetary Stimulus | Kevin Dowd

 

 
 
Edited by Warlord
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Many banks couldn't cope with negative rates. I worked for a large bank 4-5 years ago that did an analysis. A large number of their 1000+ systems couldn't even accept a negative rate, systems couldn't import/export negative values to each other in aggregate, and when data from more than one system was compiled centrally the negatives would cause chaos in the over night batch runs as the processes would generate weighted averages not expecting some values involved in the calculation to be negative.

Many systems making adjustments, an area negatives were anticipated, would look at the signage of the financial amount as opposed to the signage of the rate for example. 

And these are linked to tens of thousands of access databases and excel spreadsheets that may not have been written to accommodate negatives.  

https://www.temenos.com/news/2017/01/24/banks-legacy-systems-struggle-with-negative-rates/

For some older banks its a problem as serious as the millennium bug. 

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30 minutes ago, Warlord said:

Japan have tried it.. and it's a disaster.

I suggest this excellent lecture. He covers NIRP in detail and why its crazy. (Skip to 24:40)

The Failure of Monetary Stimulus | Kevin Dowd

 

 
 

Interesting video that. Thanks.

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Just now, Chunketh said:

Interesting video that. Thanks.

I love a free lecture. YouTube and Google is your friend. You can learn so much! :)

This professor explains why banks collapse under NIRP and it is stupid. It wouldn't surprise me though if they dd it! 

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If

1 hour ago, regprentice said:

Many banks couldn't cope with negative rates. I worked for a large bank 4-5 years ago that did an analysis. A large number of their 1000+ systems couldn't even accept a negative rate, systems couldn't import/export negative values to each other in aggregate, and when data from more than one system was compiled centrally the negatives would cause chaos in the over night batch runs as the processes would generate weighted averages not expecting some values involved in the calculation to be negative.

Many systems making adjustments, an area negatives were anticipated, would look at the signage of the financial amount as opposed to the signage of the rate for example. 

And these are linked to tens of thousands of access databases and excel spreadsheets that may not have been written to accommodate negatives.  

https://www.temenos.com/news/2017/01/24/banks-legacy-systems-struggle-with-negative-rates/

For some older banks its a problem as serious as the millennium bug. 

A quick way around it for the banks is to introduce monthly fees on accounts to make up the difference. It's already happening in Switzerland.

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1 minute ago, adsk said:

If

A quick way around it for the banks is to introduce monthly fees on accounts to make up the difference. It's already happening in Switzerland.

That would never work on a mass scale. Why keeping your money in the bank and pay for it? 
Negative rates are for the governments, they need to roll the debt and they need lower yields now. There won’t be any investment demand, no one is going to take any money, even for free, to invest in a project without any return. NIR only serve the purpose of governments now. 

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1 minute ago, Neapolitan said:

That would never work on a mass scale. Why keeping your money in the bank and pay for it? 
Negative rates are for the governments, they need to roll the debt and they need lower yields now. There won’t be any investment demand, no one is going to take any money, even for free, to invest in a project without any return. NIR only serve the purpose of governments now. 

The professor in the video says the government becomes authoritarian and will ban cash/steal deposits. This is very concerning to me if the BoE do go ahead I will be forced to put my cash into physical gold or silver and HIDE it from the criminals.. which I should be doing anyway.

 

 

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1 minute ago, Warlord said:

The professor in the video says the government becomes authoritarian and will ban cash/steal deposits. This is very concerning to me if the BoE do go ahead I will be forced to put my cash into physical gold or silver and HIDE it from the criminals.. which I should be doing anyway.

 

 

Or property ;)

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negative rates don't generally mean the bank pays you to have debt, it just further reduces the cost of the debt.
and hammers savers even more.

 

2 hours ago, stuckmojo said:

Cash will then keep MORE value than if rates were high, as people won't spend it. 

this is incorrect. 

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20 minutes ago, jiltedjen said:
2 hours ago, stuckmojo said:

Cash will then keep MORE value than if rates were high, as people won't spend it. 

this is incorrect. 

Let's say you have an income of £1,000 per year, which is fixed.

Your fixed expenses such as food, clothing and shelter amount to £900 per year.

This means you have £100 excess which you can spend or save every year.

3 scenarios. (1) High interest 10% (2) Zero interest (3) Negative interest -1%

1) If you save all your excess, you will have £110 per year, plus compounded interest. This means that you can spend £10 or more per year and be no worse off, while still saving for a rainy day. You feel wealthy and secure You may as well spend some now.

2) If you save all your excess, you will have £100 per year you save. You earn no extra for saving. You can't afford to spend as much, especially if you want a rainy day fund, so you keep more money in the bank. You feel less secure. Cut back on spending in the economy generally.

3) You save all your excess. You still lose money on it. You can't get a return on saved capital, so you cannot build a rainy day fund in the bank without seriously cutting back spending. You are worried about saving enough and feel like you could quickly find yourself broke. You may withdraw your cash to avoid being robbed if the rates go negative enough, but either way, your spending falls as much as possible to preserve some wealth for the future.

 

Statist propaganda holds that low interest rates drive spending, but that is simply not true.

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17 minutes ago, Locke said:

 

3) You save all your excess. You still lose money on it. You can't get a return on saved capital, so you cannot build a rainy day fund in the bank without seriously cutting back spending. You are worried about saving enough and feel like you could quickly find yourself broke. You may withdraw your cash to avoid being robbed if the rates go negative enough, but either way, your spending falls as much as possible to preserve some wealth for the future.

Or as the professor hypothesises they come and steal your deposit or limit transactions/ban cash.  It would not surprise me. We need to be bloody careful here. This is dangerous stuff IMO.

Edited by Warlord
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From memory didn't Cyprus steal depositors money during a crisis? And Argentina did it too..

Don't think they wont rob you blind because they bloody will!

 

Edited by Warlord
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5 minutes ago, Warlord said:

From memory didn't Cyprus steal depositors money during a crisis? And Argentina did it too..

Don't think they wont rob you blind because they bloody will!

 

For sure, but that doesn't say anything to people's response to interest rates.

And, well, people in Cyprus had plenty of warning and still left their cash in the banks.

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Each economic crisis makes NIRP more difficult to avoid - we came quite close after the GFC.

Economically NIRP is perfectly logical, however psychologically and ideologically its problematic. 

But the logic of NIRP is not something dictated by policy, its a natural outcome when the desire to save significantly exceeds the desire to borrow. 

That video is from the Mises Institute, so does not qualify as an ideologically unbiased source of information.

You could think of NIRP as a tax on money, like a tax on petrol, or VAT or whatever. But that somewhat misses the point because it frames the issue as a fiscal one. In fact, whenever credit demand falls below savings demand then NIRP will result as a market force, unless some entity (which really can only be the state) decides to provide some kind of vehicle (e.g. cash) that can be used for saving at rates well above the market rate. This in itself represents a government intervention, so really ought to be opposed by Mises et al.

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1 hour ago, Locke said:

Let's say you have an income of £1,000 per year, which is fixed.

Your fixed expenses such as food, clothing and shelter amount to £900 per year.

This means you have £100 excess which you can spend or save every year.

3 scenarios. (1) High interest 10% (2) Zero interest (3) Negative interest -1%

1) If you save all your excess, you will have £110 per year, plus compounded interest. This means that you can spend £10 or more per year and be no worse off, while still saving for a rainy day. You feel wealthy and secure You may as well spend some now.

2) If you save all your excess, you will have £100 per year you save. You earn no extra for saving. You can't afford to spend as much, especially if you want a rainy day fund, so you keep more money in the bank. You feel less secure. Cut back on spending in the economy generally.

3) You save all your excess. You still lose money on it. You can't get a return on saved capital, so you cannot build a rainy day fund in the bank without seriously cutting back spending. You are worried about saving enough and feel like you could quickly find yourself broke. You may withdraw your cash to avoid being robbed if the rates go negative enough, but either way, your spending falls as much as possible to preserve some wealth for the future.

 

Statist propaganda holds that low interest rates drive spending, but that is simply not true.

But people borrow, and spend like there's no tomorrow, especially if the cost of doing so is so low, don't they?

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3 minutes ago, scepticus said:

Each economic crisis makes NIRP more difficult to avoid - we came quite close after the GFC.

Economically NIRP is perfectly logical, however psychologically and ideologically its problematic. 

But the logic of NIRP is not something dictated by policy, its a natural outcome when the desire to save significantly exceeds the desire to borrow. 

That video is from the Mises Institute, so does not qualify as an ideologically unbiased source of information.

You could think of NIRP as a tax on money, like a tax on petrol, or VAT or whatever. But that somewhat misses the point because it frames the issue as a fiscal one. In fact, whenever credit demand falls below savings demand then NIRP will result as a market force, unless some entity (which really can only be the state) decides to provide some kind of vehicle (e.g. cash) that can be used for saving at rates well above the market rate. This in itself represents a government intervention, so really ought to be opposed by Mises et al.

Professor makes it clear in the video what he'd like: No Fed/No BoE and a gold standard. 

NIRP 'logical' and 'natural' ? As the professor says its not been done in 5000 years of money.so where do you get that from ?

 

Edited by Warlord
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1 hour ago, Locke said:

Let's say you have an income of £1,000 per year, which is fixed.

Your fixed expenses such as food, clothing and shelter amount to £900 per year.

This means you have £100 excess which you can spend or save every year.

3 scenarios. (1) High interest 10% (2) Zero interest (3) Negative interest -1%

1) If you save all your excess, you will have £110 per year, plus compounded interest. This means that you can spend £10 or more per year and be no worse off, while still saving for a rainy day. You feel wealthy and secure You may as well spend some now.

2) If you save all your excess, you will have £100 per year you save. You earn no extra for saving. You can't afford to spend as much, especially if you want a rainy day fund, so you keep more money in the bank. You feel less secure. Cut back on spending in the economy generally.

3) You save all your excess. You still lose money on it. You can't get a return on saved capital, so you cannot build a rainy day fund in the bank without seriously cutting back spending. You are worried about saving enough and feel like you could quickly find yourself broke. You may withdraw your cash to avoid being robbed if the rates go negative enough, but either way, your spending falls as much as possible to preserve some wealth for the future.

 

Statist propaganda holds that low interest rates drive spending, but that is simply not true.

Very well put. Exactly my point. 

 

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28 minutes ago, Orb said:

But people borrow, and spend like there's no tomorrow, especially if the cost of doing so is so low, don't they?

People aren't rational. You can justify almost any position with economic reasoning, which is why it is such junk science.

People's response to incentives comes down to their psychology (which is cultural, but also strongly biological).

The Japanese response, in general, to negative rates, was to pull their cash and stuff it in the mattress. I am sure plenty of Japanese went on debt binges, but the behaviour in the main has a certain direction.

Interest rates are just one factor in an economy, with things such as supply of food, technology and supply of money relative to the value of goods and services all interplaying. 

 

I will also point out that we are living in fundamentally manipulated markets, because the State has control of the money supply and forces us at gunpoint to use their money.

 

I am increasingly of the opinion that we should all just boycott this ******** by checking out. Work out what fiat currency you need to run your day to day life, deduct a small fund for emergencies and then spend the rest on gold (50%), silver (25%) and bitcoin (25%) every paycheck.

Then get on with your life.

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37 minutes ago, Warlord said:

NIRP 'logical' and 'natural' ? As the professor says its not been done in 5000 years of money.so where do you get that from ?

Bought into pure propaganda.

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29 minutes ago, Warlord said:

Professor makes it clear in the video what he'd like: No Fed/No BoE and a gold standard. 

NIRP 'logical' and 'natural' ? As the professor says its not been done in 5000 years of money.so where do you get that from ?

 

Another unmarried marriage guidance counsellor.

Quote

Kevin Dowd is a member of the think tank, Economists for Free Trade, and a supporter of Brexit. He is a regular contributor for the pro-Brexit lobby group Brexit Central.

Privatisation, globalisation, deregulation... same old neoliberal numberwang.

Global Britain = China First.

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1 hour ago, Locke said:

 

1) If you save all your excess, you will have £110 per year, plus compounded interest. This means that you can spend £10 or more per year and be no worse off, while still saving for a rainy day. You feel wealthy and secure You may as well spend some now.

Who is paying you the interest? Someone must be borrowing that money. Bear in mind, that in this scenario, there are MORE people wanting to save/lend than wanting to borrow. You posit a magic money tree that just provides interest income to anyone that wants it.

1 hour ago, Locke said:

2) If you save all your excess, you will have £100 per year you save. You earn no extra for saving. You can't afford to spend as much, especially if you want a rainy day fund, so you keep more money in the bank. You feel less secure. Cut back on spending in the economy generally.

People saving for a rainy day have different motivations for saving than investors. Rainy days will come no matter what the interest rate on saving is, so if you wish to hedge against future income or expenditure shocks then you will do so whatever the circumstances.

Investing is a luxury, but some level of saving is a necessity - don't confuse the two. However it is true both require a borrower to step up and match your saving. 

1 hour ago, Locke said:

3) You save all your excess. You still lose money on it. You can't get a return on saved capital, so you cannot build a rainy day fund in the bank without seriously cutting back spending. You are worried about saving enough and feel like you could quickly find yourself broke. You may withdraw your cash to avoid being robbed if the rates go negative enough, but either way, your spending falls as much as possible to preserve some wealth for the future.

NIRP is a deflationary scenario, so although you might be losing savings in nominal terms the inflation adjusted outcome would not look so bad and could even be positive. For example, if house prices decline 20% in 4 years and you pay 1% NIRP on your STR fund over the same period, are you a winner or loser, assuming you wish to purchase property?

1 hour ago, Locke said:

 

Statist propaganda holds that low interest rates drive spending, but that is simply not true.

You betray ideological bias here. Think about it, if NIRP does come, and it well may, would it not be better to logically think through the implications and possibilities for our individual circumstances rather than rabidly tilting at windmills?

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