Saturday, September 19, 2015

Libby economics go mainstream

Negative interest rates 'necessary to protect UK economy'

I told you so, and don't hate to say it. Carney has literally defrauded the vast majority of homeowners who have rushed into fixed term rates that will look expensive once deflation has set in and rates have to be cut. This comes hot of the heels of Yellen disappointing with no change on dollar rates, warning about negative rates to come. A wave of new technology and globalisation of labour markets is collapsing the price of doing business, leading to soaring house prices, plummeting mortgage costs and actual increase in disposable income for the first time. National debts for A rated countries will become assets as they start to yield interest, whilst these countries are forced to slash taxes to spurn demand whilst debt piles begin to reduce and increasing resources go to infrastructure.

Posted by libertas @ 08:02 AM (6288 views)
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37 thoughts on “Libby economics go mainstream

  • Brightonrentfodder says:

    Dream on Libby, what do you think the reaction of people would be to -ve interest rates. A lot of people will simply close their accounts and move their money abroad. The Banks can’t afford this to happen. this won’t help the economy. Haldane’s a fool, and it’s the sort of reaction a desperate govt and BofE would take. They don’t know how to improve the economy anymore. they’ve run out of ammunition. increasing debt and taking other people’s money won’t solve this.

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  • I note Andy Haldane says that abolishing cash will be necessary before lowering rates below zero and then goes to mention bitcoin which cannot have negative interest rates.
    Perhaps they’re in the process of creatimg their own digital currency that only they can print at will?

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  • Bearing in mind the above, where would that leave pension funds, compelled to buy negative bonds and leaving larger shortfalls requiring higher levels of funding and employee contributions. Plus why would any sane institution see ‘National debts for A rated countries’ as assets, surely the beginning of the end of the world as we used to know it.

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  • enuii, folk who have Mexican Peso’s that are devaluing 10% a year against the US Dollar will gladly pay -2% for US Government Bonds.

    This is why folk in the Eurozone are doing this very thing with Swiss Francs, because they expect the Franc to be stronger than the Euro now it has broken its peg. Likewise, pegged currencies are trading at a premium because if the Euro breaks, these provide safe haven. Risk of sovereign default also comes to play. For example, those holding Ukranian bonds at 10% yield would now wish they were paying -50% interest on Swiss government bonds, because many got a 100% haircut, and I expect the shift towards deflation to cause significant sovereign debt risk, particularly to countries reliant on taxing commodities. Scotland, are you listening?!

    So, ignore the nominal value, in economics all things are relative, since it is differences between different options, here and now, that sway decision making.

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  • Well Libertas you were right.
    My mortgage fix seemed like a good idea last year if only I had paid attention to your sage words.

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  • Captain Tightwad says:

    “whilst debt piles begin to reduce”

    Yes, negative interest rates would definitely lead everyone to pay off old debt and take out less new debt. That is totally how people work.

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  • libby, I reckon that you’ve joined all the dots – but failed to make the final leap. The odd negative rates will work here and there, for the reasons you cite, but once faith is lost in the whole system commodities will be where the smart money goes. People will want to swap their cash for something tangible.

    When that happens, it will happen very quickly.

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  • I wouldn’t normally post anything by Allister Heath, but he flags some of the obvious issues with this nonsense here and I can’t be bothered to say any more.

    http://www.telegraph.co.uk/finance/economics/11875529/We-musnt-ban-cash-or-inflate-the-pound.html

    I note that Haldane at least appreciates that in order for negative rates to work they will need to ban cash and possibly coin their own digital currency.

    I hear contactless has seen so little take-up, they’ve done product placement in Coronation st to try to increase awareness. 85% of people with contactless cards don’t know they have them. TSB is also offering 5% cashback on all contactless transactions. The future is… next year some time, possibly later.

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  • @4 Sorry, I should have also said that he’s saying what you’re saying and that is obviously true.

    There isn’t enough cash (or mattresses) to go around, so the money will have to go somewhere: commodities, shares, property; i.e. lots more asset bubbles and some inflation.

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  • A couple of thoughts on this:

    The proposal to eliminate cash might drive people to try to switch their electronic cash to foreign currency to escape the currency tax – that’s what Haldane’s idea is in my view. So how would we stop this foreign currency speculation? Currency controls! That is one sure-fire way to generate inflation. Reintroduce currency controls. I don’t think even Corbyn has gone this far yet.

    — / —

    One of the blogs I occasionally keep an eye on is Daneric’s Elliott Waves. Daneric has suggested that the yield on three month yield on US Treasuries is an indicator of when the Fed will raise rates.

    http://danericselliottwaves.blogspot.co.uk/2015/09/elliott-wave-update-15-september-2015.html

    “I have been making a case that the Fed follows the market (as Alan Greenspan has admitted). I base The Fed’s rate decision mostly on the 3 month yield rate at the time of the decision. If the 3 month yield is below .25, no rate change would likely occur. Today it still stands at .07%. So my guess is no, the Fed will not raise this week.”

    Another data source:

    http://www.investing.com/rates-bonds/u.s.-3-month-bond-yield-streaming-chart (press the “10y” link at the left just underneath the chart to switch to the long view)

    Note that Daneric’s graph is logarithmic whereas http://www.investing.com isn’t.

    Here’s the link to the UK gilts 3 month yield on http://www.investing.com. Again, you need to switch to the “10y” view.

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  • The banning of cash is simply about eliminating the black market, but the black market will always exist, since there are other transferrable sources of cash, i.e. Euros, Dollars, bitcoins, whatever. Bitcoins function as well because they also can be used in black markets.

    Obviously, eliminating cash would destroy certain grass roots operations, so this tyrannical things should be avoided, and is pretty much in line with the mark of the beast, where a global power controls the mark required to buy and sell. Fortunately money is not the only means of exchange and there will always be barter, even if that is merely the exchange of good will.

    Negative rates here are however more about the trend. Rates have been falling since about 1992, and 0% is a rather arbitrary place to stop. Furthermore, Switzerland has not collapsed over the past year of negative rates, indeed, negative rates helped stop the CKY rise enough to destroy the economy, so negative rates were necessary for sustaining the economy there.

    I truly believe that the mortgage market review front run the torrent of liquidity about to hit housing and infrastructure projects, with the BOE trying to coax house buyers into long term fixed rates so that banks would make royal once market rates go negative.

    I do not expect any apologies for all those who took the piss out of me for consistently predicting this, though it would be lovely if some of you maybe were more circumspect when attempting to hurl abuse randomly across cyberspace.

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  • Oops, CHF is the Swiss currency (Swiss Franc).

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  • I think people have missed the point…when you get to this stage it’s because things are really really terrible

    The consequences are unknown but likely to be the end of this mammoth bubble not the beginning of more rises

    Once the public get an inkling they have been hoodwinked then ala Japan the bubble illusion will burst

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  • its a daft idea but one ‘advantage’ is that it help the powers-that-be to collect taxes, which is ultimately what motivates all governments everywhere

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  • “ts a daft idea”
    NO, it is NOT AN IDEA. They are panicking here and are not in control. They are simply observing, noting that the market is driving rates negative. These people are like reeds in the wind.

    “The consequences are unknown but likely to be the end of this mammoth bubble not the beginning of more rises”
    NO, this is not a bubble, with London being the odd one out due to the population rising inexorably to 10million plus, whereas throughout much of the rest of the country, and indeed many parts of the commuter belt including places like Northamptonshire and parts of Essex, properties remain affordable. If rates are to stay this low for a long period, this can be sustained for a long time and through it the vast majority of people will take it as opportunity to pay down mortgages early. If this period of deflation results in increased disposable incomes with less taxes being needed to service the national debt, higher productivity from greater infrastructure investment and wages going further, in the long run, these higher house prices will become justified.

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  • I still expect a major correction around 2026, probably just after the 2025 general election, where the Tories will probably peak out their popularity, with maybe a hung parliament 2030 that could lead the general public to finally accept coalition politics, being absorbed into the European borg where it is the norm, possibly accepting electoral reform.

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  • libertas – Quite a few of us here have also been saying that IRs would not rise because of the need to fight the consequencies of debt with more debt. There’s the fear that when asset bubbles start bursting there’s no telling what will happen to the house of cards. CBs can always weasel their way into keeping rates down by telling us that “although the recovery is still on track it is not yet firmly entrenched, so we need to encourage firms to invest and create jobs (cont. p94)” or “although the ship of state is fundamentally sound it is sailing into ‘headwinds’ and ‘choppy waters’ outside our control” and other such rubbish.

    What you fail to realise is that the real economy – including in the UK and US – is stagnant or worse and that this is a convenient excuse for continuing with QE/ZIRP for the main purpose of supporting asset prices in the interests of the puppet masters e.g. pump up share prices to reward execs and shareholders while cutting back on net investment (ever wondered why, controlling for industry and company size, private companies invest significantly more than stock-exchange listed ones?). Low rates are not some continuation of a decades-long trend, they are partly the result of policy makers painting themselves into a ‘fight debt with debt’ corner and partly the result of the super-rich looking after their interests.

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  • @
    Exactly

    The idea that huge national debt will lead to lower taxes, higher wages, and massive investment in infrastructure is piffle, and anyone with even the slightest knowledge of economic history knows it. What it represents for the UK is national decline, especially when we consider the huge amount of mass immigration which is slowly turning it into a low-wage, low-productivity, low-value service economy.

    Before the General Election the Marxists, er I mean “Unconservatives”, promised lower taxes and infrastructure investment. After the election they dropped the plans for infrastructure investment and raised taxes.

    I agree with Libertas when he says the people in power don’t know how to handle the situation for the best. But anyone who thinks that the “unseen hand of the free market” is going to work some kind of magic and everything will come up smelling of roses is in for a painful epiphany.

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  • Whoops… post @16 should have started with…

    @ 11 Taffee

    People have missed the point…:-)

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  • Indeed…I was always a sort of believer in the idea that a hidden hand of very rich people sort of run the world..but that
    Thought is fading(sorry david icke)

    Think really that the world economies really worked on the basis that you borrow to invest…make sure population grows
    And aim for inflation to make the debt fall away enabling more borrowing etc etc…

    Bearing in mind they spent sleepless nights making sure we didn’t get into the present end game scenario..they seemed
    To throw the rulebook out the window around late 90s…started with dotcom boom fuelled by carry trade of cheap
    japanese yen(after their credit bubble) and ended up in a monstrous worldwide credit bubble…add the disastrous Arab spring aftermath and either
    This has been planned or its just plain reckless…if it’s the latter then God help us all!

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  • Cornishman @ 4, they buy houses, what else? At least you can live in it and it can`t be manipulated by paper ETFs like gold.

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  • I told you so, and don’t hate to say it.

    But rates aren’t zero or negative – you simply cannot claim to be right. Nor have rates risen – in fact *NOTHING* has happened aside from more talk.

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  • “I was always a sort of believer in the idea that a hidden hand of very rich people sort of run the world”
    – Well yes, and no, think of them as market participants rather than market leaders. Each cog in the wheel, even central banks, are small parts of the global economy, and so all the actors are reacting more than the act. As such, there really is an invisible hand, which is the result of the synergy of all human interactions. It is hard to explain because its properties are greater than the sum of its parts and the economy creates things that are not present where people do not interact, in the same way that a molecule has completely different dimensions and parameters to sub-atomic particles, so too, the economy is something completely different to the individuals who create it.

    – The main actors do act on self interest, but mainly by reacting to the actions of others.

    – In short, there are 8bn conspiracies (one for every human), and some are big and powerful conspirators, i.e. the central banks and established money but, they are not all powerful. Far from it. In-fact, most of their propaganda is a confidence game, to make people believe their power. Particularly the central banks.

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  • hpwatcher, rates ARE negative in multiple European countries, and are heading that way here looking at the long term chart.

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  • clockslinger, what you say makes sense for the individual – at the moment – but isn’t really an option for a large fund.

    In any case, given that the price/value of property is set at the margins by those properties that change hands, and given that the price is set by the cost of credit, and given that the 30-odd year bond market has to change direction at some point soon (bond prices collapse and interest rates therefore start to go up) – maybe property isn’t such a safe place to go?

    libertas said: “and so all the actors are reacting more than the act. As such, there really is an invisible hand, which is the result of the synergy of all human interactions”.
    Quite. Why would all those people be happy to pay negative interest rates on government’s and private debtor’s debts for the next 10 years until 2026? It’s inconceivable. It happens now in the odd cases where people think that there will soon be a breakdown in the system and that they will come out on top afterwards. It won’t happen as a matter of routine, everywhere, for the next 10 years. People with money will find other places to put it.

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  • @ 21 – If markets are influenced by everyone why is it that, with fairly constant supply, high demand for physical gold is not reflected in its price?

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  • @ 21 – The majority of demand for gold comes from industrial processors, central banks and institutional investors. Minor retail demand from conspiracy theorists will barely shift the price a few cents a year. However, gold is selling at a premium in Syria, Lybia, etc. but the fact of the matter is, that the West, following a relative secular decline since the 1970’s is, with the exception of the Eurozone (due to a politically calamitous settlement) is recovering, with London passing its 1939 population peak earlier this year being a serious bellwether of this, and so the risk premium for gold will diminish probably until about 2025.

    I too was a gold promoter, and I do believe it is in a major secular bull market, but the gold market is more glacial than human life in its slow grind up. Its secular bear market between around 1983 and 1996 was a mere correction and blip in its multi-century trajectory, but humans will grow up, be schooled, have children in that period and cannot simply sit on a pile of gold, ensuring that buy and hold can be the worst strategy at the wrong time, which is why I exited all my positions, end of August 2013 at a price of around £910 an ounce and put it all into a house deposit. Bear in mind I accumulated most of my position between 2007 and 2008 when gold was between £350 and £450 an ounce.

    It did help me get onto the ladder, but I have since discovered that the economics of house buying are such that had I purchased a small studio flat in London at that time, I would have paid off potentially 30% of a mortgage on a property that would now be circa 30% dearer than when I bought it, so I still made a big mistake, and investments such as this ONLY work out for those who own their own property already, spending spare cash they can afford to lose.

    Do not laugh at this please, do a poll of professional investors. THEY ALL OWN THEIR OWN HOME OUTRIGHT, and when they talk about the housing market providing poor returns, they are not comparing renting with buying, they are comparing putting cash into stocks, bonds, gold or buy to let.

    The first rule of investing is, that EVERYBODY’S first investment is the roof over their own head. As said, most pundits and writers of the subject are un the luxurious position of already owning their own house, and probably a few others, so they have no idea the economics of rentiers because they live in a completely artificial bubble.

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  • @ 21 – The majority of demand for gold comes from industrial processors, central banks and institutional investors. Minor retail demand from conspiracy theorists will barely shift the price a few cents a year. However, gold is selling at a premium in Syria, Lybia, etc. but the fact of the matter is, that the West, following a relative secular decline since the 1970’s is, with the exception of the Eurozone (due to a politically calamitous settlement) is recovering, with London passing its 1939 population peak earlier this year being a serious bellwether of this, and so the risk premium for gold will diminish probably until about 2025.

    I too was a gold promoter, and I do believe it is in a major secular bull market, but the gold market is more glacial than human life in its slow grind up. Its secular bear market between around 1983 and 1996 was a mere correction and blip in its multi-century trajectory, but humans will grow up, be schooled, have children in that period and cannot simply sit on a pile of gold, ensuring that buy and hold can be the worst strategy at the wrong time, which is why I exited all my positions, end of August 2013 at a price of around £910 an ounce and put it all into a house deposit. Bear in mind I accumulated most of my position between 2007 and 2008 when gold was between £350 and £450 an ounce.

    It did help me get onto the ladder, but I have since discovered that the economics of house buying are such that had I purchased a small studio flat in London at that time, I would have paid off potentially 30% of a mortgage on a property that would now be circa 30% dearer than when I bought it, so I still made a big mistake, and investments such as this ONLY work out for those who own their own property already, spending spare cash they can afford to lose.

    Do not laugh at this please, do a poll of professional investors. THEY ALL OWN THEIR OWN HOME OUTRIGHT, and when they talk about the housing market providing poor returns, they are not comparing renting with buying, they are comparing putting cash into stocks, bonds, gold or buy to let.

    The first rule of investing is, that EVERYBODY’S first investment is the roof over their own head. As said, most pundits and writers of the subject are un the luxurious position of already owning their own house, and probably a few others, so they have no idea the economics of rentiers because they live in a completely artificial bubble.

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  • “the 30-odd year bond market has to change direction at some point soon”
    With 0% being an arbitrary swing point, given that Switzerland has thrived with negative rates for a year. BOE statements have confirmed that the next move is just as likely down as it is up, as I have stated infinitum here, to constant nay saying.

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  • hpwatcher, rates ARE negative in multiple European countries, and are heading that way here looking at the long term chart.

    NO, NO, NO!

    UK Interest rates have **NOT** [yet] either risen or gone into the negative – you simply cannot claim to be correct. So, some official has just talked about it, it’s just talk. Carney is still saying interest rates will rise in 2016 – more talk.

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  • @ 25 – The supply of bullion in the futures markets is increased by printing uncovered contracts representing claims to gold. This artificial, fraudulent, increase in the supply of paper bullion contracts drives down the price in the futures market despite a fairly constant supply and high demand for bullion in the physical market. For four years the price of bullion has been falling in the futures market despite rising demand for possession of physical gold.

    Bullion prices are driven down by the sudden appearance and sale during thinly traded times of day and night of these uncovered future contracts. In the space of a few minutes or less massive amounts of gold and silver shorts are dumped into the Comex (Commodities Exchange) market, dramatically increasing the supply of paper claims to bullion. If purchasers of these shorts stood for delivery, the Exchange would fail. This is obviously not normal trading – nobody who wanted to unwind a big gold position would dump it on the market all at once.

    The bullion banks are the primary market-makers in bullion futures. they are also clearing members of the Comex, which gives them access to data such as the positions of hedge funds and the prices at which stop-loss orders are triggered. They time their sales of uncovered shorts to trigger stop-loss sales and then cover their short sales by purchasing contracts at the price that they have forced down, pocketing the profits from the manipulation.

    The question is why the authorities tolerate this. A rising $/gold price takes the gloss off the dollar?

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  • @taffee 11

    I agree but, although I can’t speak for anyone else, I imagine many of us are not so much missing the point as being sick of having to point it out.

    Whether or not you believe the policy approach of fighting a debt crisis with more debt is simply building up some cataclysmic financial armageddon that will dwarf 2008, any sensible person must surely conclude that even talk of NIRP from the BoE is a harbinger of doom.

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  • hpwatcher. You obviously missed the clear choreography that occurred. This BOE statement coincided with a similar statement from Yellen in the USA. These central bankers indeed, think rates should rise, but are increasingly capitulating to new territory beyond their control and experience.

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  • @Libertas

    Hpwatcher said UK interest rates haven’t changed for years which is correct.

    It might be argued that national bond yields have dropped below zero in some special cases for Germany and Switzerland but your opinions about whether our central bank is trapped is just … your opinion. I happen to think that the BoE wants to influence expectations by threatening rate rises but I’m pretty open minded about wht happens next.

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  • 26. libertas said…
    …With 0% being an arbitrary swing point, given that Switzerland has thrived with negative rates for a year….
    Monday, September 21, 2015 08:19AM

    0% isn’t an arbitrary swing point. It’s the point where depositors have to start paying to deposit their money. It’s the point where they will start to think about putting their money elsewhere. It’s the point where they will change their behaviour.

    Switzerland may have thrived with negative rates for a year, but that is probably because people expect that the Swiss currency will best survive the coming turmoil and that their small loss now will be more than compensated for by the increase in value afterwards.

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  • Taffee @ 11, exactly! It makes one wonder wtf. It is certainly not “normal”!
    @ 18, bait and switch is what’s voing down…electronic digits for real stuff. They’ve got form for this…gla
    ss beads for land etc…

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