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.
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.
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.
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
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!
ME not ‘be’!
“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.
“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.
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.
BE too
” to keep their excess funds”
I find that term comical. I have never seen excess funds.
It means your employer is going to be bought by a German, French or Dutch company and you’ll have SAP thrust upon you.
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.
Were that real “negative interest” the bank would pay me to take the loan.
Words used to have meaning.
I’ve never dealt with full featured SAP but I can tell you that SAP Business One is a piece of crap. Hate it.
This has happened before in Germany under Hitler. The money tried to leave but there were laws against that...........
Negative interest rates, eh? So their banks will pay me to take a loan?
Didn’t think so...
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.
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.
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