You know how sometimes you are aware of something, but it isn't until someone says it in a certain way that you fully grasp the gravity? Well that happened last night on Doomberg.
They were talking about negative interest rates and this guy was like - this is the most terrifying thing I've ever seen.
Usually they have people on who are wishy washy. They say it could be bad or it could be good. But this guy flat out said - banks will stop lending. Banks will not pay people to borrow money. They will simply stop lending.
And while the talk of negative interest rates has filtered down to the average person, I'm betting none of them understand the danger. They all think this is an opportunity. Who doesn't want to get paid to take out a loan? But knowing banks as I do - that guy is right. They will stop lending.
Even India last night decided to give people tax breaks over monetary policy.
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This hasn't happened before in the US, but it has in Germany, and the several periods of non-inter-war negative coupon rates are interesting ...
ReplyDeleteCredit isn't going to dry up, but there may be a separate system where costs to borrow money are arranged.
The Islamic banking system works like this: you don't pay interest, but it is regular and customary to pay for the arrangements for a loan, and those arrangements can become part of the loan payment itself instead of being paid ahead.
If you have a mortgage, you've already been through this if you've had to deal with "origination fees", which essentially amount to the costs of paperwork plus the costs of acquiring the proceeds for the loan and whatever graft your mortgage broker can shake you down for.
Because consumer lending in the US is never going to be done at a zero or negative coupon rate at any reasonable volume, people are not going to be paid to borrow money. Instead, they'll pay lower interest rates plus perhaps some sort of other fee.
Most people watching the news or even presenting it do not actually understand that at no time have they ever been offered an inter-bank lending rate or anything that even remotely resembles one.
But this will affect bond yields, and so there will be forces that work against the negative interest rate so the things that bonds are funding will continue to attract investors.
Essentially it comes to this: the ECB, the FRB/Treasury, the BOJ, etc. are powerful, but they are not all-powerful, and so they can declare an interest rate that is only binding for people who work within those systems.
These central bankers can stamp on the interest rate brakes all they like, but even they are discovering that this doesn't tend to produce the effects that they are looking for.
Outside those systems, the lending rate approaches a semblance of anarchy in a lot of ways: people will continue to pay to borrow whatever they feel is an acceptable rate for the money, regardless of the accounting and rate tricks employed by central bankers.
In other words, the "current lending rate" is essentially a managed central banking fiction, and that the reality involves many layers and many types of lending as well as differing lending rates.
If anything, this might encourage a flight into "non-centrally managed currencies" precisely because sentiments may hold that the people managing them have royally fucked everything up.
What you're watching is a circus spectacle where people are now starting to realize that the "central banking system" isn't all-powerful and isn't really all that central ...
Of course, this freaks the shit out of Doomberg presenters because they're essentially media pimps for central banking's brothel. :-)
Hmmm. I'm thinking about that. I have no comment one way or the other. This is sort of new territory.
ReplyDeleteI think the negative interest rate would be for money the banks borrow.
ReplyDeleteBanks borrow cheap and lend at a markup. Hence mortgages being some fiddly bit above the prime rate... and the interest on credit-card balances being a whole bunch above the prime rate.
It matters little to the bank whether it's borrowing at 3% and lending at 5% or borrowing at -1% and lending at +1%.
It does, however, matter a great deal to people with saving accounts whether the bank is paying them 0.75% or charging them 1%.
"I think the negative interest rate would be for money the banks borrow."
ReplyDeleteYes, that's what the inter-bank rate is, and then there are central bank rates, but generally in the US (so far) the two have proceeded lock-step.
That very likely won't continue when interest rates head into negative territory.
The central banking idea with negative interest rates is that they can stamp on the brakes of monetary volume growth and inflation, which is to say that they think they can smack deflation with carnival mallets and it'll go back into its box full of holes for a while.
Of course this is all happening because of spending slowing down.
As I'd mentioned before, there are actually several rates in parallel, and this one is also called the "overnight repo rate" in forex trading. It's the central bank lending rate for overnight deposits, and it was initially used as a way to expedite clearance of funds with central bank money.
Then it became a way where the borrower banks could play the markets at generally little risk with money from central banks. In the US banks were prohibited from doing that, but then "the fix" was in and the regulations were loosened, leading to the investment kite flying festivals of 2007 and 2008.
This pushes into new territory where the central banks are actually encouraging other banks to keep their money and to stop playing the Stock Market Casino that "professional investors" try telling everyone isn't a casino.
The idea behind the actions of these central bankers is that these banks should be lending more money out and playing with less of the central bank's money on the investment markets.
What the central bankers want is for everyone to spend money the way they did back in 2005 because if they don't get a spending uptick, they'll eventually have to settle for some sort of managed valuation slump and a money supply contraction that they really can't afford.
So this negative interest isn't actually the most troubling thing ...
Snarkie's right to worry: if this doesn't work, the valuation slump along with what follows it, such as a run on the banks, would definitely be something to worry about.
Holding physical currency isn't going to help: there's an excess of physical US currency that's historically rare already. But people in hard-to-understand situations tend to do things that don't make much sense on a larger scale, and this would definitely be one of those situations.
Once again, the biggest risk is that everyone panics and causes the actual valuation collapse that the central bankers are trying to avoid ...
... which is why I really, really like the idea of non-central banking managed currencies and assets that hold at least some of their value in the face of a valuation shit storm.
So, yeah, buy a few $hitcoin$, and some gold fractionals, and maybe some hefty one kilo Aussie silver ingot "coins" if you need some hefty door stops in your office, you might as well right now.
"This is sort of new territory."
This is actually a good answer: understanding that this is unprecedented activity for the US and for Europe is key to trying to make best-guesses for where everything's going to wind up.