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Sticky prices, negative interest rates, and a pyramid of fools

February 2, 2016

Sticky prices, negative interest rates, and a pyramid of fools

by Lushfun

Strange how the most leveraged borrowers, banks that have leverage 10-30+ times are pushing for negative interest rates from which they could loan money at positive rates to non-leveraged borrowers the public and productive businesses.

Fascinating that destruction of savings for the sake of providing funding to banks in the form of permanent transfer of purchasing power at an ever-increasing rate is actually being promoted globally. The logical conclusion of negative rates is dissolution of monetary system completely. Stimulating demand by having people buy things they don’t need to escape destruction of their savings may work but the dis-intermediation it would cause would be one of the effects nobody may have considered.

All these struggles to prevent assets that are worthless from clearing at their natural prices that are lower than today. Curious if the public is forced to fund the financial system via negative rates what kind of shift would constitute wealth in the future? Everyone is ignoring the overarching costs of having overpriced assets with those whom have lower utility for their use.

The most dire consequences will be the most unforeseen. Why save if it is punished? Why keep deposits in a jurisdiction that taxes them by negative rates? What medium of exchange would become more desirable if the war on cash goes on? What sort of battles would we see in the war on cash? If people begin to choose inventory say boxes of wine they like that they could hypothetically barter exiting the financial system completely what would happen to money? If financing is predicated on deposits when those run at what point would those countries and banks start confiscating them to convert into equity? Precious metals and jewelry seem useful but utility of something is very subjective and perhaps the most obvious answer is usually wrong.

If we in the U.S. raise rates to 1% while, Europe and Japan go to -1% wouldn’t their marginal capital flow here and their financial systems implode? What is also completely ignored is the amount of inefficiency in having negative rates and the amount of systemic trash both in assets and how the money flows through the system clogs up how things are rationalized in the real economy. If everything is predicated on financing those things that can be financed are not just artificially bid up by having a ready currency bid for it but are set up to have the trend to do so via the underlying systemic preference in their favor. All that overhead to re-distribute capital into assets that are pushing into negative present value creates negative marginal returns in having underlying system when the velocity of its’ use drops. Returns on things that you can’t finance or can’t finance anymore becomes much harder and structural shifts in the economy become extremely painful.

Banks want to be both the credit and capital of the new system yet if history is any guide all that capital will be destroyed just like credit that was poured into things that went bust. Having the infinite ability to finance something does not imply you stopping when future returns are negative because all of these actors are guided by the present instead of the total return decades outward. Nobody pushing the negative interest rate mantra is thinking that once cash is pushed out, black and grey markets cease to exist. Demand for those markets will make certain to create an exchange medium one that is thoroughly outside the system. The problem will occur when the system is so weakened by restrictions and regulation it sets upon itself that there would be a partial switch into those exchange mediums by the real economy due to not being able to operate efficiently in the cashless society promoted.


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