Monday, September 5, 2016

Tim Sablik: Subzero Interest

Rather than increase government spending to get the economy going central bankers are considering negative interest rates to force banks, corporations, and individuals to spend their money rather than save it. The neoliberals have run  out of viable ideas since near zero interest rates haven't worked to stimulate the economy.
In late January, Japan's central bank, the Bank of Japan, surprised markets by announcing an unusual policy. Rather than paying banks a positive rate of return on excess reserves, it would begin charging 0.1 percent. The central bank hopes that this negative interest rate will encourage banks to increase lending and thereby spur greater economic activity in a country that has suffered from weak growth for almost two decades.
While highly unorthodox, negative interest rates are not unheard of. Switzerland adopted negative rates on foreign deposits in the 1970s to counter outside pressure on its currency. And the Bank of Japan is actually the fifth central bank to dip its toes into negative territory in more recent times.
Negative rate policy has even been discussed in the United States, despite the fact that the Fed raised rates in December and has said it is likely to raise rates further. In February testimony, Federal Reserve Chair Janet Yellen said that negative rates weren't "off the table," though she has since told legislators in June that negative rates were not something the Fed was "actively looking at."
Doing Away With Cash:
For the casual observer, the idea of banks charging savers for the privilege of keeping their money and paying borrowers to take on more credit seems backward. In fact, economists long assumed that it would be impossible to make nominal rates significantly negative because depositors would simply withdraw their funds into cash, an asset that always pays a nominal interest rate of zero. Given this challenge, how and why have monetary policymakers in Europe and Japan pushed rates negative?
Goodfriend also notes that while holders of digital cur­rency may lose money in times of negative rates, they could actually earn a positive return when rates are above zero, something paper money currently lacks. "If we expect that interest rates are going to be positive most of the time, then for most of the imaginable future, people are going to bene­fit from earning interest on currency."


Andrew Anderson said...

The most risk-free deposits should pay is 0% otherwise we have welfare proportional to account balance.

Xaiver Buchs IV said...

Myopic article (at best) that ignores the much larger picture (economics as an enslavement device) to perpetuate the idea that manipulation of a single aspect (interest rates) via a single and notably insecure medium (digital currency) will somehow be a solution to an utterly failed system that puts financial profit above everything else.

Andrew Anderson said...

Also, since positive yielding sovereign debt is also a form of welfare for the wealthy then it should yield no more than 0% either but naturally more than interest on "reserves"* which should be even more negative given their immediate maturity..

*Fiat account balances at the central bank are know as "reserves" since only depository institutions in the private sector may currently have accounts at the central bank - a most unjust situation.

Matthew Franko said...

AA you are talking about abstract regulatory accounting constructs as if they are real things.... fyi...

Jure Jordan said...

Maximum stupidity by CB keeps trying the same method and expect different results.

Simple fact; monetary policy works by transmiting interest rate change acros banks to economy. (it is the change that affects economy, not static levels)

If banks do not offer official interest rate to economy, to borrowers, then there is no effect from monetary policy.
Interest rates to economy is unchanged since before GFC started.
In 2007 APR was 3.75% (even lower was advertised but that was only add bait)
In 2009 APR was about 4.5%
Today again around 3.75% while official rate fell from 2% to 0.25%.
It made no difference to any borrower in an economy.

Stupidity of monetary policy at ZLB or negative rate is that it is not offered to economy.

EVen bigger stupidity is talking about having deposits with negative interest rates for people and businesses (economy) while they can not borrow at that rate and ignoring such importance of monetary policy.

Why is there such bias?
Why i can not find anyone talking about this, only I do it?

Offer to the econoy such funds with negative interest rate and let's see how long it takes to start working. But such idea is not even registering in the whole world, let alone to implement it.

Monetary policy works by transmitting information (interest rate) from CB through banks to economy. SIMPLE Make loans to economy at such rates.
If banks wont do it then make Fredie Mac and Fannie Mae do it directly, or open a new state owned bank that will do it on yuuuge scale.

Matthew Franko said...


Good points about the rates the borrowers pay vs. the policy rate.... check out US auto loan rates too...

Fannie and Freddie have to make munnie so they cannot operate where they are making loans at a negative rate... they have no appropriation...

btw neither does the Fed... so for the Fed to pay the ior they have to buy govt securities and use the USD balances paid by the govt issuer of those securities to pay the ior...

Fed needs a positive yield curve or they (to them) would be bankrupted....

The Rombach Report said...

Negative interest rates are deflationary by nature.