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What Does Europe’s Adoption of Negative Interest Rates Mean for America?
Townhall.com ^ | June 17, 2014 | Paul Dykewicz

Posted on 06/17/2014 12:39:37 PM PDT by Kaslin

The European Central Bank’s (ECB) recent move to adopt what is described as “negative interest rates” to guard against deflation should lift stock prices, spur businesses to invest and help to aid lagging economic growth on the continent.

With the U.S. Federal Reserve scaling back on its easy-money policies as the American economy recovers, the ECB seems focused on adopting some of the same methods that helped the United States. However, such policies are artificial ways to fuel the economy and encourage businesses to take on additional debt that may need to be paid off at much higher interest rates in the years ahead.

Mario Draghi, president of the ECB, orchestrated the adoption of a new set of easy-money policies, including one that will charge member banks a small amount, 0.1 percent, to keep their excess funds at Europe’s central bank. Other steps the ECB is taking to spur economic activity in Europe include cutting its benchmark interest rate to just 0.15 percent, offering banks modestly priced four-year loans with a requirement that the money be used for business lending and buying packages of loans to encourage lending to companies in struggling countries.

London-based investment adviser Nicholas Vardy described the ECB’s measures as a “.”

Without question, Europe’s economy has been weak, particularly in places such as Portugal, Italy, Greece and Spain (the so-called PIGS). Whether the new policies will adequately stimulate the economy is open to debate but they should start to trim the value of the euro and make goods produced there less expensive for foreigners to import.

Central banks from Japan to the United States have used monetary policies during the past few years to weaken their currencies to spur exports and now the ECB is pursuing the same path. However, the strategy only works if other central banks avoid following suit. If all central banks adopt the same policies, the short-term effectiveness of the moves would counter each other.

The easy-money policies also carry long-term risks. Artificially low interest rates discourage people from saving money. Those savings are essential to spur economic growth in a sustainable way, since savings allow for capital accumulation and investments.

Another risk of negative interest rates is that governments can be induced into excess spending without maintaining proper fiscal discipline. Low interest rates encourage risk-taking activities that contribute to asset bubbles. When inflation returns, the asset bubbles can burst and cause economic upheaval.

Indeed, free-market economist Mark Skousen, PhD, warned that low interest rates adopted by the European Central Bank and the U.S. Federal Reserve may produce an artificial boom and lead to the dreaded consequence of asset bubbles.

For the short term, negative interest rates in Europe could help Americans and Europeans alike by encouraging spending and lending in Europe. Producers of goods in Europe should benefit, along with consumers of the goods and investors in those European companies. But watch out if inflation returns and causes asset bubbles, as well as the need to refinance debt at increased costs as interest rates rise.


TOPICS: Business/Economy; Editorial
KEYWORDS: banking; europe; finance

1 posted on 06/17/2014 12:39:37 PM PDT by Kaslin
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To: Kaslin

Flood the system with indigents to bring capitalism down, and then step in as dictators of a police state.

Works every time it’s tried.


2 posted on 06/17/2014 12:43:10 PM PDT by P.O.E. (Pray for America)
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To: Kaslin

Negative interest rates, meaning the bank takes a percentage of your deposits, are to force you to invest your money. But you’re literally better off just taking it out of the bank. I only have investment accounts with brokerages now. You can do anything with them that you can do with a checking account; credit cards, write checks, etc. Only the poor will be affected. A friend who has rental units told me that half her renters are paying in cash rather than checks. They can’t afford to keep enough cash in their accounts to avoid high fees. So, by all means, adopt negative interest rates. See the banks collapse overnight.

Oh, and the article says the economy is improving? Really?! Maybe if you’re a Clinton.


3 posted on 06/17/2014 12:47:33 PM PDT by Gen.Blather
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To: Kaslin; P.O.E.; Gen.Blather

it means that european hot money floods out of Europe to US equity markets in search of higher returns—which means the US stock market goes higher


4 posted on 06/17/2014 12:50:37 PM PDT by ckilmer (q)
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To: Kaslin
What Does Europe’s Adoption of Negative Interest Rates Mean for America?

Well; for ME; it means I'll be taking out a BIG loan from there, and they'll then be paying BE to do so!

5 posted on 06/17/2014 12:51:24 PM PDT by Elsie (Heck is where people, who don't believe in Gosh, think they are not going...)
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To: Elsie

ME not ‘be’!


6 posted on 06/17/2014 12:51:52 PM PDT by Elsie (Heck is where people, who don't believe in Gosh, think they are not going...)
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To: ckilmer

“it means that european hot money floods out of Europe to US equity markets in search of higher returns—which means the US stock market goes higher”

You’re right. Their thinking is not only provincial, but does not take unintended consequences into consideration.


7 posted on 06/17/2014 12:58:52 PM PDT by Gen.Blather
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To: ckilmer

“it means that european hot money floods out of Europe to US equity markets in search of higher returns—which means the US stock market goes higher”

Agree.


8 posted on 06/17/2014 1:05:51 PM PDT by Attention Surplus Disorder (At no time was the Obama administration aware of what the Obama administration was doing)
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To: Kaslin

This is a cosmetic PR issue, not an investment issue.

We’ve already had negative real interest rates in the US for many years. Real interest rate = nominal interest rate less inflation and taxes.

But, it’s an important PR issue—paying the bank directly for safekeeping your funds is insulting, even if it’s only a charge in terms of nominal interest rates. You’re already losing way more than that through inflation.


9 posted on 06/17/2014 1:08:54 PM PDT by Pearls Before Swine
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To: Elsie

BE too


10 posted on 06/17/2014 1:10:46 PM PDT by teeman8r (Armageddon won't be pretty, but it's not like it's the end of the world.)
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To: Kaslin

” to keep their excess funds”

I find that term comical. I have never seen excess funds.


11 posted on 06/17/2014 1:14:46 PM PDT by Resolute Conservative
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To: ckilmer

It means your employer is going to be bought by a German, French or Dutch company and you’ll have SAP thrust upon you.


12 posted on 06/17/2014 1:17:10 PM PDT by Buckeye McFrog
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To: Attention Surplus Disorder

Capital let at interest for risk, with a rate of return for the owner of the capital. It is called capitalism.

Well, that has not happened for a long time. The banksters continue to play one step ahead of the so-called equity and commodity markets as well as the financial markets.

Joe Schmo gets slaughtered in both directions, long and short.

It is well past time to eradicate these parasites. But, they already own not only us but the government(s), such as it(they) is(are), and no one will end it.

No one.

When the game of musical chairs ends and economiess and banking collapse, it will just be another crisis that “they” can’t afford to waste.

Wretches.


13 posted on 06/17/2014 1:17:15 PM PDT by the anti-mahdi
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To: Kaslin

Were that real “negative interest” the bank would pay me to take the loan.

Words used to have meaning.


14 posted on 06/17/2014 1:18:45 PM PDT by GladesGuru
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To: Buckeye McFrog

I’ve never dealt with full featured SAP but I can tell you that SAP Business One is a piece of crap. Hate it.


15 posted on 06/17/2014 1:20:12 PM PDT by RegulatorCountry
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To: Kaslin

This has happened before in Germany under Hitler. The money tried to leave but there were laws against that...........


16 posted on 06/17/2014 1:23:24 PM PDT by PeterPrinciple (Where is your thinking cap? The one you were issued in elementary school.)
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To: PeterPrinciple
There is already talk of an "exit gate". If you leave your money to be stolen with negative interest rates, you lose. If you try to take it out before it can be slowly stolen, you'll get hit with a big penalty for daring to remove your funds. See Exit gates for bonds
17 posted on 06/17/2014 1:34:42 PM PDT by Myrddin
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To: Kaslin

Negative interest rates, eh? So their banks will pay me to take a loan?

Didn’t think so...


18 posted on 06/17/2014 1:38:36 PM PDT by Boogieman
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To: the anti-mahdi

Well, I share your basic sentiment, but you have to admit one thing:

The Fed has obliterated any and all known rules of economics, at least for now.


19 posted on 06/17/2014 1:40:25 PM PDT by Attention Surplus Disorder (At no time was the Obama administration aware of what the Obama administration was doing)
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To: Myrddin

Well, I guess I’m going to have to steal a lot of pens from the bank to make up for the cost of that penalty.


20 posted on 06/17/2014 1:41:50 PM PDT by Boogieman
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To: ckilmer

As others have said, it will hurt the poor schmuck the most. The fat cats will be fine.

Already banks here are nickel-and-diming the small guy with fees and whatnot.


21 posted on 06/17/2014 1:58:06 PM PDT by P.O.E. (Pray for America)
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To: Kaslin
"What Does Europe’s Adoption of Negative Interest Rates Mean for America?"

A unilateral currency war against us with the blessings of our worldly superiors--a higher dollar with decreases in American exports, manufacturing and jobs. It's for the children...er, the one-world investors.


22 posted on 06/17/2014 2:11:54 PM PDT by familyop (We Baby Boomers are croaking in an avalanche of corruption smelled around the planet.)
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