Monday, November 25, 2013

Another negative interest rates story

Banks Warn Fed They May Have To Start Charging Depositors

The Fed's Catch 22 just got catchier. While most attention in the recently released FOMC minutes fell on the return of the taper as a possibility even as soon as December but they propose reducing interest rates to zero or negative to off-set the reduction in liquidity,,,,, After all, the Fed's policy book goes, if IOER is raised to tighten conditions, easing it to zero, or negative, should offset "tightening financial conditions", right? Wrong. As the FT reports leading US banks have warned the Fed that should it lower IOER, they would be forced to start charging depositors. (Charging depositors is the equivalent of negative interest rates)

Posted by libertas @ 02:30 AM (1797 views)
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5 thoughts on “Another negative interest rates story

  • The markets are being stretched and manipulated. Sooner or later the effect of pulling on the bungee cord will be a very rapid adjustment.

    I have no idea when this will happen or what the trigger might be. I just don’t want to be standing in the way when it goes TWANG!!

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  • …oh, by the way I’m owning up.

    I thought gold would be a good hedge when it was over $100 higher than today’s price $1235. It will be forced lower, I believe. See Zero hedge for the rationale & analysis of the “slam dunks”.

    I understand the UK is looking into the gold manipulation allegations…. however, all seconded staff are discussing the premier league in the canteen at the mo….

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  • Do they actually want to cause a generalised bank run on the entire banking system? Again?

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  • Paul Krugman and Larry Summers are currently pushing the line that only asset bubbles can keep the economy from stagnating (a turnaround from Krugman’s previous calls for more government spending and fiscal stimus). They now say there’s a ‘liquidity trap’ (high savings despite low interest rates, monetary policy unable to stimulate the economy) and that irresponsible lending, lax regulation and high leverage and asset bubbles are OK if that’s what it takes to keep the economy alive, and that “if the market wants a strongly negative real interest rate (they say it does) we’ll have persistent problems until we find a way to deliver such a rate” (Krugman in the NYT).

    That is the right answer if you’re batting for speculators and banks which want to roll over their massive debtpile at no cost to themselves.

    But another analysis might say that the problem lies in the falling ratio of wages to national income – stagnation in the 1970s leading to policies to raise profits by pushing down labour costs. So it’s not a ‘liquidity trap’ but an income trap. “High unemployment depresses wages, depressed wages depress private consumption and depressed consumption does not allow the economy to recover despite enormous profits in the company sector and desperate attempts of monetary policy” (quoted from the URL below)

    This latter view is expressed at:

    Which of the two views do you think policymakers will take?

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  • I thought the US and Western economies were stagnating because about 10 big companies control everything you buy and they steal new ideas from small businesses via NSA and GCHQ, which effectively stops the entreprenurial spirit. The West keep offshoring production to Asia and China and keep increasing public servants (except in local A&E departments). In the end the whole system falls apart unless supported by aggressive military & police action.

    As for “policymakers”……

    This morning, someone with no apparent fiduciary duty to their clients for best execution or any apparent trade allocation expertise decided it was time to dump 1500 contracts into an entirely illiquid gold futures market. The 150,000 ounce notional sell order ($184.5 million), sent the price down $10 instaneously, tripped the exchange’s circuit breakers and halted the market’s trading for 20 seconds (once again).

    It’s becoming more like a war ! Someone is out to smash down the price of gold and has powerful friends. Next stop is around $1150. The Chinese, Russians and Indians are buying physical gold like mad. More fun as the next round of “Tapering” discussions inevitably pushes gold down again.

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