Saturday, March 12, 2016

Negative rates as currently applied

Know that negative rates are only one of two different things at this time.  One, official negative rates that exist in Sweden, Switzerland, Denmark, Japan and the European Monetary Union.  Switzerland started with negative rates to slow down hot money coming into their country being that Switzerland was such a solid place.  Demark is using such rates to peg their currency to the Euro.

Sweden and the sorry sisters Japan and Europe are using negative rates in an attempt to spur economic growth.

The negative rates are quoted as an annual rate.  So the actual amount of interest is low. The rates are charge by the central bank only to commercial banks on their excess cash balances which are called reserves.  The central banks used to pay interest to commercial banks on their excess reserves which seemed only fair since the central banks forced all that newly created money down the throats of the commercial banks.  But now they punish commercial banks for having that cash.

So far, the commercial banks have not passed on their costs to depositors.  For one thing, the cost is small.  However, some large depositors at commercial banks are asked by their bank to spread their large deposits over several other banks to help minimize the cost at their main bank.

The ideal of charging commercial banks on their cash balances is to create hot potato money.  As you know, money created stays created in the banking system as a whole until it is uncreated the reverse way it was created.  So the idea is to get the banks to pass around the hot potato.  The central banks want the commercial banks to unload their money hopefully by making loans to consumers and businesses.  This is the official explanation.  But it is stupid.  Commercial banks do not and cannot lend out their customer’s deposits.  That is because commercial banks actually create the money they lend which makes the problem all that much worse for banks in the system because now there is more money in the system.

That brings us to the second type of negative interest rate.  The market created negative interest rate.  Since the commercial banks don’t want to make loans and make their problem worse what are they to do?  They can buy government bonds and that is what they can and do, do.  Because so many banks are trying to unload so much cash back to their governments so they won’t be charged interest they are bidding up the price of government bonds right into negative territory.

Bloomberg very recently reported that there is $7 trillion dollars of negative government bills, notes, and bonds right now.

I will say it for you.  Central banks are fucking stupid.  Unless they are liars and really smart.  Maybe they are lying that they want their economies to pick-up and just want to borrow money at negative interest rates to help their governments with their heavy debt loads.

Your welcome.

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