Posted on 02/02/2016 10:24:49 PM PST by Zhang Fei
In early 2015, Switzerland's interest rates turned negative. Not for one year. Not for five years. But all the way out to 10 years, meaning that virtually everyone desiring to park their cash in safe-haven Swiss francs had to pay for the privilege.
And Swiss bonds weren't unique. Yields on French and German sovereign debt went negative out to five and seven years, respectively, while the overnight Euro Interbank Offered Rate (Euribor), which had averaged about 2% for the previous couple of years, fell below zero and stayed there. By the end of 2015's first quarter, paper accounting for 31% of the Bloomberg Eurozone Sovereign Bond Index was trading with negative yields.
Even more startling than the numbers was the timing. This plunge in rates occurred in the sixth year of a recovery during which most of the developed world had run record fiscal deficits, cut interest rates aggressively, and created vast amounts of new currency.
Traditional economic theory says that a combination of massive deficit spending and historically low (not to mention negative) interest rates should produce a rip-roaring boom in which workers get generous raises, prices spike, and interest rates follow. Theory also says that, even in the rare case of nominal interest rates turning negative, the rates can't stay there because beyond this "zero bound," savers and investors will withdraw their cash and store it themselves, emptying banks and crashing the financial system.
Recent events have challenged both of these assumptions while sparking a debate over the nature and the import of this collapse in yields. Specifically, is it a brief aberration or the beginning of an unfamiliar and potentially treacherous new normal?
(Excerpt) Read more at blogs.cfainstitute.org ...
The ZIRP & NIRP has reduced velocity of money.
Savers and seniors are no interest income. Seniors be spending less or spending their principle.
But even bigger problem is increased burden on small businesses and startups. Obamacare and regulations are un-affordable.
Back in high school (early 70’s) a ‘savings account” earned maybe 4-5 percent interst, and loans were higher ... 8-12% interest. not too too many credit cards, households might have two cards plus some company cards like Sears or texaco or the like. general cards like Mastercard and Visa were not around yet - nor named yet even! And ATM’s were just getting started with Wachovia around Atlanta and one western bank in the late 70’s.
Had one year when we had to declare 70.00 dollars interest income, and THAT passed us up to a higher income tax level and THAT caused us to need another 275.00 in more taxes.
I’ve been skeptical ever since.
So, last year, on $6000.00 average daily balance after 40 years of inflation .... we earned ...... 3.50 in interest. All year.
Low interest rates should increase the velocity of money as businesses and consumers can borrow money cheaply and have no reason to save at zero interest. Instead people are paying down debt and reducing purchases because, as bad as things are now, they expect them to get worse. Also banks don't trust lending money out so they would rather sit on it than lend it to any but the absolute safest borrowers. The pessimism (or clear thinking wisdom after a decade of monetary excess) was before the low interest and is what is driving down the velocity of money.
So let me get this straight.
We have political and economic and financial leaders who have done everything they can to screw up our economy and financial system with their insane and counter productive economic, fiscal and monetary policy.
As a result, people are rightly concerned about the economic future and a are cutting back on their spending in anticipation of harder times in the near future.
This holding back on spending , combined with the destructive effects of the insane and counter productive economic, fiscal and monetary policy has the unintended (intended?) consequence of causing deflationary pressure on the economy. Not even near zero interest rates are able to reduce this dynamic as consumers rightly become more focused on the return of their assets as opposed to annual return on their assets.
This is very, very bad because our brilliant political leaders have embarked on massive Keynesian borrowing binge to “stimulate” the economy and generate inflationary pressure to in an attempt to inflate our way out of the deficits by devaluing the borrowed debt and paying it off with inflated dollars in the future. If they can't hit their inflationary target numbers they (or should I say we) are screwed.
The planners have so screwed up the economy with their irrational and unsound economic theories combined with punitive polices that produce serious economic disincentives that we are seeing deflation where, in any normal economy, we should be seeing significant inflation.
So now our brilliant social planners and commissars are desperately planning to smoke those currently squirreled away dollars out of the safe havens of the bank accounts they are hiding out in by using negative interest rates to force consumers to spend using extortionate fiscal policy.
This ill advised measure is going to backfire even worse than their previous policies have because it will not stimulate spending but will only cause consumers to pull their dollars out of the banks and cause a banking run that will devastate the liquidity of the bank and out entire financial system.
Our current economic problems were kicked off by an act of economic warfare on the United States by which foreign interests tried to pull 5 Trillion dollars out of the US to crash our economy by draining all capitol and liquidity out of banking and financial system.
The almost succeeded in their attack.
Now our leaders wish to repeat this by forcing all Americans to collectively withdraw their savings from our already hard pressed banking system and hide them under the mattress in the hopes that they will spend them to generate inflation instead of squirrel them away in bank accounts. This will not work because consumers will not spend and those dollars will stay hidden between the mattress because deflation does not induce people to go out and spend, it encourages them to hoard their money.
What we will see is a combination of deflation exacerbated by liquidity crisis in our banking system as people pull their hard currency out of savings to avoid negative interest penalties.
In effect, our political leadership is going to incentivize the American people to carry out a self inflicted macro economic act of economic warfare on themselves that is far more devastating than the external act of economic warfare that got the ball rolling in Sept 2008.
Your assets are always going to be worth less when they are about to be taken by a hoard of muslims.
Now our leaders wish to repeat this by forcing all Americans to collectively withdraw their savings from our already hard pressed banking system
If I understand correctly from my reading - most banks keep approx. 500.00 per depositor on hand- would be difficult to get cash if there was bank run these days. I would be willing to bet that in full blown bank run there is not enough cash to pay out all depositors in the USA
fire up the presses if people start demanding cash- but that would only increase the problems
Interesting how the crooks at the Fed and the banks coin the term “negative interest rates” to try to hide the fact that they want to charge you for having accounts of any kind at their banks. This idiocy must stop.
Good information, thanks!
I actually make out checks to pay my monthly bills, don't much care for the automatic computerized approach. It's cheaper for me to prepay a few months on bills and save stamps than it is to keep the money in an account with no interest. But that account still has to have a pretty hefty balance to avoid fees. Besides that, if there were a banking collapse, that prepaid money would be safe on deposit with the utility or credit card! Crazy situation.
We're on our way to a cashless society. That would be the end of freedom. JMHO
I agree with cashless society coming our way- had that discussion with another fr person last week.
I remarked last week that I know people who have never used cash- debit/credit of ETF for everything.
I still use cash for everyday expenses- although I do get strange looks on on some larger ticket item purchases
One reason is, and I hate to say it, I live real close to an area where there's a high concentration of dishonest people. Yes, I'm overcautious, but don't know that all the employees right down the line are honest enough to want them to have access to my credit card number.
I'm paranoid. But you know what? Paying cash locally and making out checks forces one to think about how money is being spent. It's a useful aspect of controlling ones spending habits.
Thinking about purchase- if one uses cash- it is no longer abstract,
I have been doing for years.
I have a cussedness streak when comes to some activities- the more retailers try to get me to use credit cards the more likely I am to use cash. Like I said I am contrary at times. LOL
This will out-contrary you, any day:
A local gym had an unbelieveable deal: $10 permanent membership, $18 a month, no contracts! Real good equipment and staff. The catch? They keep your credit info on record, and only accept an automatic charge to it each month for payment.
Will not do.
...as people pull their money out of negative return accounts...
One of the touted benefits of a cashless society is no bank runs. It is interesting we’ve been hearing more about a push to go to a cashless society.
A lot of this is starting to make a lot more sense now.
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