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BOE revives negative rates talk


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27 minutes ago, scepticus said:

Thanks - by all means share elsewhere as long as you post a link back to my original post, and promise to report back with what reaction you get.

Link to thread sent by pm...

Cheers

 

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57 minutes ago, scepticus said:

To return to the thread topic (and at the same time ignore the incredibly dull and repetitive libertarian zealotry).

The goal of NIRP is to ensure credit markets can clear and that money keeps circulating during contractionary and deflationary periods. In turn this serves to protect jobs, sustain innovation and to maintain a fair and balanced economy that is not predicated on eternal inflation and expansion. 


Here are some assertions about its effects. See if you agree.

   1. It is not a stimulus, it is a mechanism to accommodate deflation without preventing it.  
   2. It will only apply during a deflationary economic period; thus the negative nominal rate of return on money should be at least partly offset by falling asset prices.
   3. It cannot work unless banks pass negative rates on bank reserves onto retail customers in the form of a negative interest rate, or fixed banking fees.
   4. The income the central bank receives from the negative interest rate is not spent back into the economy, it is simply deleted. This in turn means that the money supply will shrink during NIRP - another reason why NIRP is not stimulative. In fact, there is no stimulatory way of spending this CB interest income back into the economy that is not contractionary.
   5. It does not hurt the poorest in society since the poorest in society who: have no savings, exist entirely on benefits, benefit the most from falling price levels. The most badly affected are the rich with large cash holdings or with assets that suffer losses due to deflation.
   6. NIRP is a free-market competition in a deflationary environment to see who can lose the least money in nominal terms, like PIRP is (or should be) a competition in an inflationary environment to see who can acquire the most money. NIRP is therefore perfectly compatible with capitalist and free-market ideas.
   7. NIRP would only persist as long as the desire for saving outweighs desire for borrowing. As soon as this ceases to be the case, market rates and then central bank rates should become positive again and credit expansion and later, inflation would return.
   8. The NIRP interest rate is determined by the credit markets, and the central bank simply reflects its estimate of that credit market rate in its own rates. Alternatively, the central bank may attempt to follow a deflation target, this works like an inflation target, but they try to prevent the actual level of deflation exceeding target, in order to stave off the possibility of a deflationary spiral.
   9. If the government takes the opportunity of negative rates to borrow excessively, then sooner or later government borrowing demand matches private sector saving demand and rates turn positive again. If the government has spent the borrowed money unwisely, it will still be in a hole.
   10. NIRP does not necessarily mean that retail borrowers can borrow at negative rates. It simply means that the return a bank expects on lending is negative in aggregate and that to make a reasonable profit it has to charge interest or fees to its depositors.


So, NIRP, combined with PIRP, and sensible deficit/public spending decisions, is a monetary framework that is symmetrical and can offer global society a means of dealing with contractionary circumstances like pandemics, climate change and demographics, as well as working during the good times. Cash and electronic bank reserves are a debt liability of the central bank/government (and thus by an extension a debt liability of all society), there is therefore no inherent moral reason why society must choose to promise any particular attributes of those liabilities.

Why should we be limited to having a monetary system that only works for growth and good times? How is that sensible?
 

1. Disagree. Savers are more likely to spend their money, borrowers more likely to borrow. Both of this increase consumption and demand for assets. 

2. Partially agree. Central Banks can introduce NIRP whenever they want,  ECB is an example. It is true that NIRP during high inflation periods is not a good idea as it increases prices.

3.  Disagree. even if the banks don't quite pass NIRP they will lower the rates they offer their customers.

4. Partially agree. It is true that negative rates paid by banks to CB disappear but that can be easily offset by increased money printing by CB. Additionally often new money issued by CB to banks is balanced by liability of banks to CB, this happens for an example in the case ECB LTOR ( banks own CB,  CB own banks). In this situation CB automatically creates new money. 

5. Partially agree. NIRP counters deflation so it works against the poorest assuming benefits are constant.

6. Disagree. NIRP is not a free-market, it is controlled by a CB. Of course there is a question how free CB are in making their decision. In theory they can do whater they want.

7. Disagree. I think you meant "should" not "would"

8. Partially agree. The question is how free CBs are. Even if they just purely react to the market situation they overdo creating positive feedback loop forcing rates lower in each iteration.

9. Disagree. The government can be directly funded by CB, no need for investors to buy bonds.    

10. Partially agree. In theory there is no need to charge negative rates on deposits. As long as banks make profit on the spread between  borrowing and lending greater than negative rates paid to CB they are fine. 

 

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20 minutes ago, Biggus said:

But would negative rates for retail banks might cause bank runs. When people start pulling their cash out of the bank to put cash under the matress the banks may not have enough reserves. Lack of reserves creates fear of losing savings in the bank leading to a bank run. How will such a thing be prevented?

 

Well it depends whether a commitment is given that all bank deposits are convertible to cash, or whether an upper limit is put on cash in circulation, such that the amount of electronic banks reserves is a good deal larger than the amount of paper cash. Also retail saving rates would probably have to go below 2% before taking all your money out as cash is even remotely attractive. How would you order stuff from Amazon for example?

I think such a threat - by the common man so to speak - is all bluster, since the benefits gained from dodging a small tax on savings has to be set against the enormous inconvenience of handling cash.

Also, presumably people would continue to be paid by bank transfer. So how could such an action work in practice for everyone?

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19 minutes ago, slawek said:

1. Disagree. Savers are more likely to spend their money, borrowers more likely to borrow. Both of this increase consumption and demand for assets. 

If the above is right, then demand for credit will immediately exceed demand for savings and the interest rate would instantly turn positive again, they money supply will expand and the threat of deflation and monetary contraction will be gone. Happy days.

Borrowers cannot in aggregate borrow more than savers are willing to lend them, so how does your statement make any accounting sense?

Also in reality, there are more factors going into spending and borrowing decisions than an interest rate. If a severe pandemic comes back do you think people will be borrowing to buy houses or using savings to buy holidays, just because their savings rate is -1%? Or what if we had a major climate disaster like a huge flood or something, or wildfires are burning property? 

Its easy to get obsessive about 'savings as an investment', which leads to drawing the wrong conclusions about monetary policy. 

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16 minutes ago, scepticus said:

Well it depends whether a commitment is given that all bank deposits are convertible to cash, or whether an upper limit is put on cash in circulation, such that the amount of electronic banks reserves is a good deal larger than the amount of paper cash. Also retail saving rates would probably have to go below 2% before taking all your money out as cash is even remotely attractive. How would you order stuff from Amazon for example?

I think such a threat - by the common man so to speak - is all bluster, since the benefits gained from dodging a small tax on savings has to be set against the enormous inconvenience of handling cash.

Also, presumably people would continue to be paid by bank transfer. So how could such an action work in practice for everyone?

I dont't think negative interest rates are just an abstract possibility. They look like a real possibility in the near future. So the real question is what does it mean for me? How I do to protect my savings?

Also, do you think negative rates will be applied to mortgages?

 

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It's already been shown that the more you lower interest rates, the more people save to make up for the lost interest (i.e. they feel they need to save even more to be safe or have the same amount as before).

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21 minutes ago, scepticus said:

Borrowers cannot in aggregate borrow more than savers are willing to lend them, so how does your statement make any accounting sense?

Huh?

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16 minutes ago, Errol said:

It's already been shown that the more you lower interest rates, the more people save to make up for the lost interest (i.e. they feel they need to save even more to be safe or have the same amount as before).

And they're forced into more riskier investments like the stock market.  This encourages a bubble .to form

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FFS how do I safely store value for a rainy day.  I don’t want to buy a load of crap I don’t need.  I don’t mind holidays and going out, experiences but no interest piling up possessions to make up for economic incompetence. 

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1 minute ago, morty said:

FFS how do I safely store value for a rainy day.  I don’t want to buy a load of crap I don’t need.  I don’t mind holidays and going out, experiences but no interest piling up possessions to make up for economic incompetence. 

Gold. Msg me and I can recommend you  a trusted dealer

 

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52 minutes ago, scepticus said:

Borrowers cannot in aggregate borrow more than savers are willing to lend them, so how does your statement make any accounting sense?

Surely that's only true in a world without fractional reserve banking? 

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1 hour ago, scepticus said:

If the above is right, then demand for credit will immediately exceed demand for savings and the interest rate would instantly turn positive again, they money supply will expand and the threat of deflation and monetary contraction will be gone. Happy days.

Borrowers cannot in aggregate borrow more than savers are willing to lend them, so how does your statement make any accounting sense?

Also in reality, there are more factors going into spending and borrowing decisions than an interest rate. If a severe pandemic comes back do you think people will be borrowing to buy houses or using savings to buy holidays, just because their savings rate is -1%? Or what if we had a major climate disaster like a huge flood or something, or wildfires are burning property? 

Its easy to get obsessive about 'savings as an investment', which leads to drawing the wrong conclusions about monetary policy. 

This is not a free market between savers and borrowers.  A response to lower rates is not a lower demand for bank deposits. 

As aggregate savers don't reduce the demand for deposits. Total bank deposits don't change unless someone pays off a loan or withdraw money as cash. When a saver buys something the deposit ownership is transferred to another saver. The velocity of the money increases which causes consumption and investment to go up. It is like a hot potato game.

Lower IRs make borrowers more likely to borrow relatively to a scenario IRs are not changed. Borrowing when pandemic and lower IRs > borrowing when pandemic and IRs are not changed.  

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Here's a good article on NIRP:

Where Negative Interest Rates Will Lead Us

Quote

 

Despite zero-interest-rate-policy (ZIRP) and multiple quantitative easing programs — whereby the central bank buys large quantities of assets while leaving interest rates at practically zero — the world’s economies are stuck in the doldrums. The central banks’ only accomplishment seems to be an increase in public and private debt. Therefore, the next step for the Keynesian economists who rule central banks everywhere is to make interest rates negative (i.e., adopt negative-interest-rate-policy or “NIRP.”) The process can be as simple as the central bank charging its member banks for holding excess reserves, although the same thing can be accomplished by more roundabout methods such as manipulating the reverse repo market.

Remember, it was the central bank itself that created these excess reserves when it purchased assets with money created out of thin air. The reserves landed in bank reserve accounts at the central bank when the recipients of the central bank’s asset purchases deposited their checks in their local banks. Now the banks have liabilities that are backed by depreciating assets (i.e., the banks still owe their customers the full amount in their checking accounts), but the central bank charges the banks for holding the reserves that back the deposits. In effect, the banks are being extorted by the central banks to increase lending or lose money. The banks have no choice. If they can’t find worthy borrowers, they must charge their customers for the privilege of having money in their checking accounts. Or, as is happening in some European banks, the banks try to increase loan rates to current borrowers in order to cover the added cost.

In European countries where NIRP reigns, so far, the banks are charging only large account holders for their deposits. So, these large account customers are scrambling to move their money out of banks and into assets that do not depreciate. The scramble for high grade securities has resulted in some securities being sold at a premium (i.e., the customers will get back less than they invested).

How can this be? Well, the premium amount is less than the charge by the banks, so the large account customer is slightly less worse off. He loses somewhat less money. But this really does not solve the problem; it just means that the excess reserves are moved somewhere else, simply creating the same problem for a new set of banks that ended up with the money after the first group of investors ditched their cash for securities.

But that is not what the central banks want. The central banks want to force the commercial banks to lend money in order to avoid the excess reserve charge. They appear poised to increase the so-far-nominal cost of a half percent or less. If the central banks can charge a half percent, they can charge anything they wish and, given the Keynesian mindset that led to the insanity of negative rates in the first place, probably will do so.

What Interest Rates Are For

Negative rates violate numerous tenets of sound economics. For example, the basis of interest rates is consumer time preference, described by David Howden in an article written almost three years ago about the loss of Canadian manufacturing.

"Time is a factor necessary for production, and unique in the sense that we cannot economically allocate it like other inputs. The choice of time is always “sooner or later” and never “more or less” (as is the case with other input factors). Interest rates help us determine how soon we should consume a good, or how long a production process should be. Low interest rates imply that the future is not heavily discounted. At a low rate you will be willing to wait a longer period of time to realise the enjoyment of consumption or the profits of an investment. High interest rates invoke the corollary — you will want to consume earlier, or employ production processes that pay off in as short a time as possible."

Dr. Howden goes even further to show how central bank production of money out of thin air in order to drive down the interest rate causes disequilibrium between borrowers, investors and savers. The very purpose of the interest rate in an unhampered economy, however, is to create equilibrium between these two groups.

Disequilibrium in the time structure of production (primarily an overinvestment in longer term projects), and an inevitable boom-bust business cycle that follows, results from the fact that real savings had not increased to provide the real goods necessary for the increased investments. First, businesses go bankrupt, then the banks, and then the population as a whole.

The Inevitable Bust

But can’t the central bank just print more helicopter money to save everyone? Unfortunately, no. More money cannot cure what too much money created.

Of course, an economy that has been thrown into disequilibrium by negative interest rates may display many weird anomalies before succumbing to the “crack up boom,” as described by Ludwig von Mises.

One early indication of loss of confidence in money is a commodity boom in precious metals. Prices rise faster and faster and production collapses. The public understands that the monetary authorities have no intention of reversing their negative interest rate policies and restoring sound money and banking. In a mad rush to save their wealth from total destruction, the public will start to buy what it hopes to be assets that will not depreciate. This sets off a huge boom in some asset categories; thus the “boom” portion of Mises’s “crackup boom” scenario. But the crackup follows on the boom’s heels.

The real pity is that the busts and crackups could all have been avoided if central bankers recognized that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesians believe. In a functioning market, the public’s demand to hold money will be satisfied when their reserves of money balances are sufficient in relation to the price level, when they are once again confident of the future, and when they are willing to invest for the long term.

Thus, the suppression of interest rates has been unnecessary and harmful. Nevertheless, expect more central banks to follow the early leaders — Switzerland, Sweden, Denmark, and even the European Central Bank itself — into negative interest rate territory. The crying shame is that it will not work and will cause great harm to hundreds of millions of people.

 

https://mises.org/library/where-negative-interest-rates-will-lead-us

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2 hours ago, regprentice said:

Surely that's only true in a world without fractional reserve banking? 

The normal entity lending to a borrower is a bank, and the bank is borrowing from savers. Credit creation does not require matching savings in the short term, but in the longer term it does. In an economy a long way from peak debt and zirp, that can be quite a long time, but in the current circumstances a bank has to watch its leverage in the short run also. 

Also if the profits from bank lending are low or uncertain, a bank will avoid taking the additional leverage required to allow unbridled credit creation. Bear in mind that under NIRP, the banks reserves are trickling away to the central bank. To make a new loan the bank must transfer reserves to the borrowers bank.

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2 hours ago, slawek said:

This is not a free market between savers and borrowers.  A response to lower rates is not a lower demand for bank deposits. 

Sorry - I didn't understand what you mean here.

2 hours ago, slawek said:

As aggregate savers don't reduce the demand for deposits. Total bank deposits don't change unless someone pays off a loan or withdraw money as cash. When a saver buys something the deposit ownership is transferred to another saver. The velocity of the money increases which causes consumption and investment to go up. It is like a hot potato game.

Lower IRs make borrowers more likely to borrow relatively to a scenario IRs are not changed. Borrowing when pandemic and lower IRs > borrowing when pandemic and IRs are not changed.  

The whole point of having a NIRP scenario is because people are not borrowing and spending. That is why NIRP happens. Clearly, if they start borrowing and spending again, there would be no more NIRP. Your assertion seems to be as soon as retail deposits attract a teeny negative interest rate, velocity will rise sharply, and so will the price level. In which case fine, we are back to normal, the CB can set the rate again above 0 and no more NIRP, economic crisis averted.

So where's the problem exactly? 

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4 hours ago, Biggus said:

I dont't think negative interest rates are just an abstract possibility. They look like a real possibility in the near future. So the real question is what does it mean for me? How I do to protect my savings?

Well, you don't. That is rather the point. You have to remember everyone is in the same boat so the question you ask is how best to arrange your personal affairs so that you do better than the average person. As long as you do that you will have won the nirp game. So its not really that different from normal times.

And you need to judge your savings value in real terms not nominal terms.

4 hours ago, Biggus said:

Also, do you think negative rates will be applied to mortgages?

 

In a few cases yes, but for the masses, no.

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30 minutes ago, scepticus said:

Sorry - I didn't understand what you mean here.

The whole point of having a NIRP scenario is because people are not borrowing and spending. That is why NIRP happens. Clearly, if they start borrowing and spending again, there would be no more NIRP. Your assertion seems to be as soon as retail deposits attract a teeny negative interest rate, velocity will rise sharply, and so will the price level. In which case fine, we are back to normal, the CB can set the rate again above 0 and no more NIRP, economic crisis averted.

So where's the problem exactly? 

You said before, which I disagreed with

" 1. It (NIRP) is not a stimulus, it is a mechanism to accommodate deflation without preventing it.  "

NIRP is a stimulus as lower rates encourage savers to spend more (money velocity up), borrowers to borrow more (money stock up) which causes consumption and investment to go up relatively to a scenario IRs stay unchanged.  Lower rates (including negative) are mechanism CBs use to fight deflation.  Without them deflation shocks would be much bigger and it would last longer.   

To be clear I didn't say  " as soon as retail deposits a teeny negative interest rate, velocity will rise sharply". It is a tug war between fear and greed. The speed of recovery depends on how aggressive CBs are and how quickly savers adapt to the new situation overcoming their fear. 

 

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45 minutes ago, slawek said:

You said before, which I disagreed with

" 1. It (NIRP) is not a stimulus, it is a mechanism to accommodate deflation without preventing it.  "

NIRP is a stimulus as lower rates encourage savers to spend more (money velocity up), borrowers to borrow more (money stock up) which causes consumption and investment to go up relatively to a scenario IRs stay unchanged.  Lower rates (including negative) are mechanism CBs use to fight deflation.  Without them deflation shocks would be much bigger and it would last longer.   

To be clear I didn't say  " as soon as retail deposits a teeny negative interest rate, velocity will rise sharply". It is a tug war between fear and greed. The speed of recovery depends on how aggressive CBs are and how quickly savers adapt to the new situation overcoming their fear. 

 

I see your point. I will clarify.

If the CB sets its rate consistent with market rates for credit, then this is neither a stimulus or tightening, regardless of whether that rate is +ve, 0 or -ve.

If the CB sets its rate above the market rate then this is an intervention which is deliberately contractionary. If the CB sets its rate below the market rate then this is an intervention which is deliberately expansionary/stimulative.

My point was that NIRP is not stimulus if the CB merely sets its rates in reaction to credit market rates. My following point is that if market rates become persistently negative, then the CB should be able to set its rate accordingly so that its actions are neutral and not deliberately contractionary.

Sometimes CBs try to get clever and look ahead. In general I don't think they should do this, and they should react to market conditions not try to anticipate them. NIRP in itself is thus not stimulus, as long as such rules are followed. The same applies to tightening actions in the face of rising interest rates. They should spend their time making sure they get an accurate read on credit market rates across all markets at any given point in time.

I find it hard to see how any genuine free market advocate could take issue with any of the above.

 

 

 

 

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11 minutes ago, scepticus said:

I see your point. I will clarify.

If the CB sets its rate consistent with market rates for credit, then this is neither a stimulus or tightening, regardless of whether that rate is +ve, 0 or -ve.

If the CB sets its rate above the market rate then this is an intervention which is deliberately contractionary. If the CB sets its rate below the market rate then this is an intervention which is deliberately expansionary/stimulative.

My point was that NIRP is not stimulus if the CB merely sets its rates in reaction to credit market rates. My following point is that if market rates become persistently negative, then the CB should be able to set its rate accordingly so that its actions are neutral and not deliberately contractionary.

Sometimes CBs try to get clever and look ahead. In general I don't think they should do this, and they should react to market conditions not try to anticipate them. NIRP in itself is thus not stimulus, as long as such rules are followed. The same applies to tightening actions in the face of rising interest rates. They should spend their time making sure they get an accurate read on credit market rates across all markets at any given point in time.

I find it hard to see how any genuine free market advocate could take issue with any of the above.

 

The problem with your argument is that "market rate for credit" doesn't exist. We savers as a collective don't have an alternative. We are forced to accept what the banking system offers. We can't really take money out. There is no supply-demand dynamic to discover the price of credit, demand is equal credit whatever the IRs.

The only option is withdrawing cash but it has zero interest so it doesn't matter when rates are positive. That is why negative IRs are so dangerous to the banking system. If they push IRs too low, the whole system will collapse.   

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10 hours ago, Aidan Ap Word said:

Locke's view of a government-less world as a better world hasn;t been properly tested.

Locke's view of a government-less world is one where people co-exist entirely peacefully, never have disputes over property rights, never have disputes over which other group of people should build their roads, never have disputes over how best to provide sewerage facilities. All of these things magically work themselves out because everyone is entirely rational and understands exactly which group of other people is best to do each task and there is no disagreement. And everyone has infinite time to worry about all of these aspects of life so there is no need to appoint people to worry about them on their behalf. Oh and most importantly, these perfect libertarians already own all he best resources and don't have to rely on anyone but themselves or some privately hired (and therefore open to higher bidders) enforcers (thugs in the language of libertarians) to protect their "right" to continue to own that resource in perpetuity, for no other reason than they owned it already.

In short: libertarians are idiots, but they are very opinionated and hypocritical idiots.

 

EDIT: Apologies @scepticus off topic. 

Edited by dugsbody
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12 minutes ago, slawek said:

The problem with your argument is that "market rate for credit" doesn't exist. We savers as a collective don't have an alternative. We are forced to accept what the banking system offers.

We are not. We can use P2P lending for one thing.

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  • 433 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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