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Mr Practical: Negative Interest Rates are Playing with Fire


Savings in a bull market is thoughtful and constructive. Savings in a bear market is hoarding.

Watching central bankers increase negative rates (yes that is the right term) is like watching a zookeeper try to control a Bengal tiger with an electric prod.  He can do it for a while but you know at some point he is going to get mauled.
Do these people not know better?  If you described the situation to a twelve year old, he or she would say "How can that work?"
If central banks are successful in their myopic goal of driving savings into consumption, it will eventually destroy the economy: we will consume all of our liquid capital and the government will be the only entity left to make investments.  
If they are not successful, as has been the case so far, they will drive consumption lower and savings higher as fear increases.  If this happens, the assault on cash will continue: cash is the last defense people have against governments that are gaining more and more control over the financial markets.

Cumulative Still
Greenspan began his career with the 1987 crash and he dealt with it by flooding the markets with liquidity: he guaranteed the debt of all derivative clearing houses, he lowered margin requirements at banks, and he lowered interest rates the Fed charged banks to borrow money.
He lowered them so much they became negative on a real basis: the rate charged on loans was lower than the rate of inflation.  Of course the market would never allow this but Mr. Greenspan realized he could fool everyone into believing the Federal Reserve was bigger than the market.
We've had thirty years of loose monetary policy that had the effect of creating more debt than there should be.  Bernanke picked up where Greenspan left off, as did other central banks; countries like China, where the government and other bureaucrats think they can control everything from growth to rates of employment, to what, where, and how things should be built, creating bank debt to levels hard to believe.
This makes things seem great as people and businesses can borrow money (created out of nowhere by central banks) and spend it.  

But soon the debt became so big that it could no longer be supported: the amount of income generated by the investments made with the borrowed money was not enough to pay the interest and principal back on the loans.

Many of those loans were packaged in complicated forms like derivatives but they were just loans; sliced and diced, but loans nonetheless.
So we had 2008, when the debt bubble crafted by Greenspan and Bernanke popped.  And what did they do about it?  They doubled down and created $60 trillion more in global debt (a 40% increase) since then to re-bubble the bubble.
We are now in worse shape than we were before, but do we know it?  Earnings estimates have already started to come down, as is to be expected with so much unproductive debt.  When loans can't be repaid, companies, consumers, and governments weighed down by that debt will suffer.  You can see that beginning to happen.  Everywhere.
So what are central banks doing?  Driving interest rates deeper into negative territory!  Some central banks like Sweden, Switzerland, the ECB, and Japan are now charging banks for deposits, which in turn lead to banks charging depositors to hold their cash. This is supposed to drive money from bank savings accounts into consumption and drive economic growth.
But this is a tax pure and simple, and so far depositors are treating it like one: instead of taking savings and using it for consumption, people are actually saving more out of fear.  They are hoarding.
I can't be critical enough about negative interest rates.  Economics is about allocating resources to improve people's standard of living.

Central banks seem to think it is about getting stock prices up to make the rich richer.  Once again, the markets will prove them wrong.
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