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Posts Tagged ‘Negative rates’

The Eurozone Is Going down the Same Stagnating Road as Japan | Mises Wire

Posted by M. C. on September 20, 2021

Countries like Italy, Spain, Portugal, or Greece cannot survive stagnation due to elevated levels of unemployment and the small size of the business fabric. Therefore, the ECB seems to ignore the risks of perpetuating the perverse incentives to bloat government spending and debt.

https://mises.org/wire/eurozone-going-down-same-stagnating-road-japan

Daniel Lacalle

The European Central Bank announced a tapering of the repurchase program on September 9. One would imagine that this is a sensible idea given the recent rise in inflation in the eurozone to the highest level in a decade and the allegedly strong recovery of the economy. However, there is a big problem. The announcement is not really tapering, but simply adjusting to a lower net supply of bonds from sovereign issuers. In fact, considering the pace announced by the central bank, the ECB will continue to purchase 100 percent of all net issuance from sovereigns. https://www.youtube.com/embed/bXBFrWXPMjQ?feature=oembed

There are several problems in this strategy. The first one is that the ECB is unwillingly acknowledging that there is no real secondary market demand for eurozone countries’ sovereign debt at these yields. One would have to think of twice or three times the current yield for investors to accept many eurozone bonds if the ECB does not repurchase them. This is obviously a dangerous bubble.

The second problem is that the ECB acknowledges that monetary policy has gone from being a tool to help implement structural reforms to a tool to avoid them. Even with the strong GDP bounce that the ECB predicts, few governments are willing to reduce spending and curb deficits in a meaningful way. The ECB estimates show that after the massive deficit spending of 2020, eurozone government spending will rise again by 3.4 percent in 2021 only to fall modestly by 1.2 percent in 2022. This means that eurozone government spending will consolidate the covid pandemic increase with little improvement in the fiscal position of most countries. Indeed, countries like Spain and Italy have increased the structural deficit.

The third problem is that negative rates and high liquidity injections combined with elevated government spending have generated no real multiplier effect in the eurozone. We must remember that the main economies were in stagnation already in the fourth quarter of 2019, before the pandemic and despite large stimulus plans like the Juncker Plan, which mobilized hundreds of billions of euros in investments.

The fourth challenge for the ECB is that it acknowledges being trapped by its own policy, it cannot stop it and normalize because governments and markets would suffer, and it cannot keep the current pace because inflation is putting even more pressure on growth.

The final challenge for the eurozone and the ECB is that they continue to implement policies that ignore demographics and structural burdens to growth. The eurozone has an aging population and monetary and fiscal policies seem to ignore the evidence of changing consumption patterns when citizens reach a certain age or retire. If we add to demographics a taxation system that increasingly hurts middle classes, businesses, and investment, we face an economy that seems to be following all the wrong policies that Japan implemented at the beginning of the ’90s.

As Japan did, the eurozone is betting all on government spending, chains of stimulus packages driven by political directions, and massive debt monetization. However, the eurozone does not have the disciplined labor force that Japan has nor the elevated levels of corporate and household savings that allow the country to continue in stagnation for decades.

Countries like Italy, Spain, Portugal, or Greece cannot survive stagnation due to elevated levels of unemployment and the small size of the business fabric. Therefore, the ECB seems to ignore the risks of perpetuating the perverse incentives to bloat government spending and debt. All messages concerning structural reforms and real growth initiatives have disappeared in favor of directed stimulus plans that never deliver. Our duty as economists is to warn of the more than likely scenario of poor recovery, low productivity, and high debt that the eurozone faces. Fiscal multipliers have been negative for too long for us to ignore the negative crowding-out effect of high government spending and the erosion of competitiveness that the economy faces. Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

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Four Unreported Signs Paper Money is Dying

Posted by M. C. on September 7, 2021

By Matthew Piepenburg

Reason 1: The Taper Debate May Not be a Debate at All

Here, we look past the taper headlines and ask a simple question: Would a Fed “tapering” of QE really matter?

As we’ve written elsewhere, the Great Taper Debate is less of a debate than it is a pundit circus, forever fueling now classic yet complimentary debates on inflation vs. deflation, gold vs. the dollar and Fed-speak vs. honesty.

Of course, such topics, including the great “taper,” are all critical issues worthy of opposing views and somber discussions.

The world needs open, transparent and respectful (as opposed to tyrannical) debate, now more than ever.

If the Fed, for example, were to taper money printing, it’s logical to assume (and argue) that this would mean falling bonds, rising rates, deflationary forces, a stronger dollar and massive headwinds for risk assets like stocks and real estate.

But for many who are not otherwise deeply ensconced into the weeds of Wall Street (i.e., normal, smart and conscientious investors), what they may not know is this: The Fed has other tricks up its liquidity sleeve than just “QE.”

Stated otherwise, the taper fears as well as taper debate may not be as central to the central bank debate as one might think.

Why?

Hidden Liquidity Tricks and More Central Bank Fire Hoses

Because hidden within the backwash of the deliberately murky and mysterious (i.e., toxic) love affair between Wall Street and the Fed, lies unmarked little islands of hidden liquidity powers known as the Standard Repo Facility (SRF).

Specifically, we’re referring to the Reverse Repo Program (RRP) for domestic use and the FIMA swap lines (for foreign creditors) which allows the Fed to keep dumping liquidity into the system even during a QE “taper.”

The RRP program, for example, allows the Fed to help commercial banks avoid (i.e., cheat on) those otherwise laudable Basel 3 rules, thereby giving our seemingly immortal banks the hidden power to circumvent Basel 3’s reserve requirements.

Without diving too deep into this intentionally complex arena, RRP programs technically reduce liquidity, but the program’s fine print effectively allows increasingly less “liquid” commercial banks to sidestep Basel 3, which means they are not forced to become “less liquid” in actual practice—just more dangerous.

As we warned months ago, as debt conditions worsen, so too does transparency and truth; far more importantly, centralized control over (and support for) an otherwise grossly distorted banking system (and risk asset bubble) continues to rise behind the headlines.

In short, if investors are wondering why or how markets can and could climb despite “taper” headlines, the answer is hidden in plain yet deliberately complex sight. After all, distortion loves to hide behind complexity.

Like inflation, the real truth behind Basel 3 and the taper-debate is hidden behind deliberate obfuscation and mis-reporting—what normal folks call, well…lies.

This means, taper or no taper, the dollar liquidity will keep pumping within the fantasy islands of the RRP archipelago and hence the liquidity needed to help “inflate away” otherwise unconscionable and mathematically growth-killing sovereign debt will and can continue.

Such liquidity trends, of course, just mean the further debasement of fiat/paper money.

Reason 2: The IMF Signals More Liquidity

But if you think the Fed is the only monetary body growing more desperate and hence liquidity-clever by the day, let’s not forget those Wunderkinder at the IMF nor Forest Gump’s reminder that when it comes to dumping more paper money onto an already unsustainable debt pile, “stupid is as stupid does.”

Just one month ago, the IMF’s board of governors approved an allocation (its first since 2009) of Special Drawing Rights (SDR) to the tune of $650B (456B in SDR) in order to stimulate, you guessed it, more global liquidity.

See the rest here

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Subzero Rates Are Coming to the US and the UK | Mises Wire

Posted by M. C. on February 19, 2021

Negative rates are a huge transfer of wealth from savers and real wages to the government and the indebted. A tax on caution. The destruction of the perception of risk that always benefits the most reckless. It is a bailout of the inefficient.

https://mises.org/wire/subzero-rates-are-coming-us-and-uk

Daniel Lacalle

Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists, who all start from a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.

Inflation and growth are not low due to excess savings, but because of excess debt, which perpetuates overcapacity with low rates and high liquidity and zombifies the economy by subsidizing the low-productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.

Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it. They do not strengthen the credit capacity of families: the prices of nonreplicable assets (real estate, etc.) skyrocket because of monetary excess and because the lower cost of debt does not compensate for the greater risk.

Investment and credit growth are not subdued because economic agents are ignorant or saving too much, but because they don’t have amnesia. Families and businesses are more cautious in their investment and spending decisions, because they perceive, correctly, that the reality of the economy they see each day does not correspond to the cost and the quantity of money.

It is completely incorrect to think that families and businesses are not investing or spending. They are only spending less than what central planners would want. However, that is not a mistake from the private sector side, but a typical case of central planners’ misguided estimates, which come from using 2001–07 as “base case” of investment and credit demand instead of what those years really were: a bubble.

The argument of the central planners is based on an inconsistency: that rates are negative because markets demand them, not because they are imposed by the central bank. If that is the case and the result would be the same, why don’t they let rates float freely? Because it is false.

Think for a moment what type of investment, company, or financial decision is profitable with rates at –0.5 percent but unviable with rates at 1 percent. A time bomb. It is no surprise that investment in bubble-prone sectors is rising with negative rates and that nonreplicable and financial assets are skyrocketing.

Instead of strengthening economies, negative rates make governments more dependent on cheap debt. Public debt trades at artificially low yields, and politicians abandon any reformist impulse, preferring to accumulate more debt.

The financial repression of central banks begins with a misdiagnosis assuming that low growth and below-target inflation is a problem of demand, not of the previous excess, and ends up perpetuating the bubbles that it sought to solve.

The policy of negative types can only be defended by people who have never invested or created a job, because no one who has worked in the real economy can believe that financial repression will lead economic agents to take much more credit and strengthen the economy.

Negative rates are a huge transfer of wealth from savers and real wages to the government and the indebted. A tax on caution. The destruction of the perception of risk that always benefits the most reckless. It is a bailout of the inefficient.

Central banks ignore the effects of demography, technology, and competition on inflation and growth of consumption, credit, and investment, and with the wrong policies generate new bubbles that become more dangerous than the previous ones. The next bubble will again increase countries’ fiscal imbalances. Even worse, when central banks present themselves as the agents that will reverse the effect of technology and demographics, they create a greater risk and bubble.

When this happens, it becomes necessary for to protect one’s savings with gold, silver, inflation-linked instruments, and stocks in sectors that do not suffer from negative rates. Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

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A New World Monetary Order Is Coming – Activist Post

Posted by M. C. on October 28, 2020

Making your life an open book.

Shutting you and access to your assets off with the flick of a switch.

https://www.activistpost.com/2020/10/a-new-world-monetary-order-is-coming.html

By Stefan Gleason

The global coronavirus pandemic has accelerated several troubling trends already in force. Among them are exponential debt growth, rising dependency on government, and scaled-up central bank interventions into markets and the economy.

Central bankers now appear poised to embark on their biggest power play ever.

Federal Reserve Chairman Jerome Powell, in coordination with the European Central Bank and International Monetary Fund (IMF), is preparing to roll out central bank digital currencies.

The globalist IMF recently called for a new “Bretton Woods Moment” to address the loss of trillions of dollars in global economic output due to the coronavirus….

Under a central bank digital currency, direct credits and debits could replace stimulus checks and taxes. It would be the vehicle through which modern monetary theory could be fully implemented – with the central bank becoming tax collector and funder of all government operations.

If depreciating the value of the currency through the inflation tax wasn’t enough, the Fed could also stick dollar-holders with a direct tax in the form of negative interest rates. Once paper notes are phased out, holding cash itself would no longer be a way for individuals to escape negative rates.

The only escape hatches would be volatile alternative digital currencies (such as Bitcoin) or hard money (gold and silver).

Under a monetary order where electronic digits representing currency can be created out of thin air in unlimited quantities, the best hedge is the opposite – tangible, scarce, untraceable wealth held off the financial grid.

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Central Bankers Have Declared War on Your Savings | Mises Wire

Posted by M. C. on December 2, 2019

Recently, European Central Bank (ECB) President Christine Lagarde bemoaned their surpluses, complaining that they would be better off spending the money on infrastructure and education. Desperate for a modicum of growth, Lagarde is of the philosophy that the only way to grow an economy is through government intervention.

https://mises.org/wire/central-bankers-have-declared-war-your-savings?utm_source=Mises+Institute+Subscriptions&utm_campaign=adfd4f6c6d-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-adfd4f6c6d-228343965

…Lagarde is a proponent of the NIRPs , championing the unconventional mechanism to achieve growth. Since the eurozone has barely cracked 2% GDP, many are anticipating that Lagarde will deepen negative rates during her term as president. Anytime she has mused on the subject, Lagarde has usually dismissed concerns about the saver, noting that they are also consumers, borrowers, and workers.

Unfortunately, this contempt for savers is commonplace because it is antithetical to the Keynesian approach of spending. Disciples of John Maynard Keynes will contend that consumption over saving should only happen during the bust phase of the business cycle, but if you peruse any opinion pieces by individuals subscribing to this ideology, you will only come across spending prescriptions for every type of economy – boom or bust. They dismiss the fact that capital accumulation, not consumption, creates wealth.

This myth originates from Keynes’ The General Theory and Treatise on Money, in which he posits that a saver is reducing the income of another person because he or she is not consuming the goods or services extended by somebody else. Put simply, he considered saving a self-defeating act.

“Saving is the act of the individual consumer and consists in the negative act of refraining from spending the whole of his current income on consumption,” he wrote.

The crusade against savers has been prevalent in the Democratic primary. The likes of Sen. Elizabeth Warren (D-MA) and Sen. Bernie Sanders (I-VT) have grieved about hoarders , particularly those who are the top 0.1% (no longer just the 1% anymore; likely because these two people are the 1%, too). The presidential candidates are perturbed that the supposed capital hoarders are not putting their fortunes into the economy. This is nonsense talk to justify their wealth confiscation policies, since the affluent are saving and investing, not just stuffing their money under mattresses.

Negative rates, higher taxes, and inflation – the statists are employing every measure to gain access to the fruits of your labor…

If you don’t like it, then you are out of luck. You have nowhere to go. The globalists have declared war on mom and pop savers, pillaging bank accounts and conquering our lives. Is there a chance for victory? As long as the omnipotent and iniquitous institutions remain in charge, optimism over sound economics can only fade to black.

Originally published by Liberty Nation.

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Younger Generation Will Probably End Up Poorer Than Their ...

 

 

 

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Silicon Valley Joins War on Cash – LewRockwell

Posted by M. C. on February 28, 2018

  • Savers could no longer have the individual freedom to store wealth “outside” of the system.
  • Eliminating cash makes negative interest rates (NIRP) a feasible option for policymakers.
  • A cashless society also means all savers would be “on the hook” for bank bail-in scenarios.

https://www.lewrockwell.com/2018/02/tyler-durden/silicon-valley-joins-war-on-cash-tim-cook-seeks-elimination-of-money

Apple CEO Tim Cook has one big hope for the future – that he lives to see the end of money.

Speaking at a meeting for Apple shareholders in Cupertino, California earlier this month, Cook made it clear that he is firmly on the side of the war-on-cash establishment.

“Because why would you have this stuff! Why go through all the expense of printing this stuff and then some people steal it, and you’ve got to worry about counterfeits and all these things,” he continued.

As Apple’s CEO talked about the downsides of cash, BI reported that he became more animated, revealing his real passion about the topic… Read the rest of this entry »

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