Negative interest rates Wars?
Australia’s central bank cut interest rates to a fresh record low as it moves to counter disinflation and support a labour market hampered by high levels of part-time work and underemployment. Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.5 per cent Tuesday, as predicted by 20 of 25 economists and market bets. Headline consumer price-growth slowed to a 17-year low last quarter, reflecting stagnant wage gains and weak global price pressures. The cut reflects that “inflation is likely to stay low for an extended period, and the labour market has lost momentum this year,” Felicity Emmett, head of Australian economics at Australia & New Zealand Banking Group Ltd., said before the announcement. Full Story
Start getting used to the phrase Inflate to infinity, for that is where the central bankers are heading. The race to embrace negative rates is on, and central banks are adopting it with Gusto. This experiment will likely only end when one so-called too big to fail nation collapses triggering a severe market imbalance otherwise known as a crash. Ultimately that mega crash will also prove to be a buying opportunity, but such an event has to be played differently. No point discussing that as we are a long way from that stage.
Germany became on Wednesday the second G-7 nation after Japan to issue 10-year bonds with a negative yield, highlighting a willingness among investors to hold top-rated debt even as yields across the world collapse. Germany’s 10-year government bond yield turned negative for the first time at an auction, fetching the lowest average yield on record for such paper at -0.05 per cent. Full Story
The Majority of countries will have no option but to embrace Negative Rates
Nothing new here, we knew this would happen, and it is coming to pass as expected. Every G7 nation will embrace negative rates and so will the US. The talk about raising rates is nothing but good acting. The U.S wants to be the last to join the Pack as it will give the illusion that the USD is still the best currency; when in fact, the only appropriate term would be the least rotten out of the pack. The Crowd loves a story, and they will get a good one. The end game here is to fuel the best speculation bubble ever and then pop it.
Dangers of Negative Interest Rates
This means that the primary burden of recession fighting continues to fall on the shoulders of the Federal Reserve. The question is, How shall America’s central bank do the job when its primary policy tool in the face of an economic downturn, the lowering of interest rates through monetary expansion, has little room for manipulation because key interest rates are, nominally, so near to zero already?
In Rogoff’s view, this calls for new monetary policy strategies in the uncharted waters of negative interest rates. “Central bankers who are serious about preparing for future recessions,” he states, “should be looking hard at proposals for how to pay interest on money, both positive and negative, which is by far the most elegant solution.”
What shall a central bank do when price inflation rates remain low (say, 2 per cent or less) and nominal interest rates are at or near zero? Where is the policy room to lower interest rates in an attempt to stimulate borrowing for investment and other purposes during a recession in a setting in which nominal interest rates are already so low? Full Story
Why Negative Interest Rates Are Dangerous?
However, if production is characterized by fixed proportions of capital and labour, it is possible to have excess capacity and no economic need for additional investment.
Second, capital is long-lived and lumpy. The willingness to use low-interest rate loans to finance investment today depends on expectations of future interest rates. Even if today´s loan rates are negative, firms may be unwilling to borrow to finance relatively low yielding investment today if they think that those investment projects will be saddled with future high-interest costs.
Negative interest rates can disrupt the provision of bank credit and also raise the cost of credit. At this stage, it is necessary to discuss the two options for implementing negative rates. Option 1 has the central bank lowered its lending rate to commercial banks below zero. Option 2 has the central bank charge commercial banks with interest on their deposits with the central bank. In practice, central banks have favoured option 2 over option 1.
Option 1. If the central bank charges a negative lending rate, the wholesale cost of finance is negative. Banks will push their deposit rates below zero, penalizing depositors. Depositors will have an incentive to reduce money holdings and shift into other assets, and lower rates of return may then increase or decrease saving. Firms will not increase investment once the return on investment becomes zero. Instead, they will use negative interest rate credit to reduce equity (i.e. stock buybacks) and finance merger and acquisition activity. Full Story
Negative interest rates are here to stay
If you want freedom today, the 1st task is to attain financial freedom so that you can break free the clutches of the top players who seek to enslave you. They want you to run in a circle like a hamster that runs on a spinning wheel; the hamster thinks the faster it runs the further it will go, but sadly it is going nowhere.
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