Negative Interest Rates---Wassup?

  Amongst my most loyal readers are a handful who know of my extraordinary insights into the workings of the modern economy. Ignoring members of the younger generation who have asked:

                   ”if you're so smart why aren't we rich?"

I have bowed to intense pressure to write this blog on the latest monetary wheeze---

                   NEGATIVE INTEREST RATES

    
     On hearing of this a close relative got quite excited at the prospect of being paid 50 grand a year to borrow a couple of million quid--preferably without collateral. Regretably the bank manager assured us that Barclays had no plans to implement such a scheme. But what does she know; she did not even know how to fix Libor.

    Over the last 18 months negative interest rates have been introduced in Denmark, Sweden, Japan, and Switzerland and by the European Central Bank. That’s over half the world's monetary system. Lord[oops that's next year after he creates the next sterling crisis] Carney has hinted that sterling may be next and even that nice lady Janet Yellin has said that negative rates were "on the table”. Didn’t read about that on page 3 of the Sun or New York Daily News, eh.

    In 2015 about a third of Eurozone government debt issues had negative rates. That means if you bought government bonds you would be GUARANTEED to get back less than you paid. Now we all knew that something like this was inherent in George Osborne's tax policy but at least he had the decency to keep quiet about it. Perhaps we can expect the combined genius of Jeremy Corbin and John McDonnell will be brought to bear to explain how this policy will usher in the Socialist Utopia. So what gives here? And why has it not been at the centre of public discussion?

The chief methods central banks use to implement monetary policy is the buying /selling of bonds to/from the Banking System and by legally requiring banks to deposit cash at the central bank as reserves against future crises of liquidity. I know, I know ,70% of you went to get a cup of tea after "chief methods'' the rest after "legally requiring”. It’s much easier to explain if you studied Euclidean Algebra at Chicago--- a few ∑µ   ≤   zero would no doubt convince; perhaps followed by a J--just kidding.

         A few inscrutable graphs with some lines sloping down and others going straight up would add further enlightenment.

   Suffice to say, the idea is that if banks have to pay to keep their cash at the central bank then they would choose to lend it to business to invest instead. This of course is what banks were invented to do in the first place. So why are they not doing it [enough] now anyway? Well, partly because most corporations are awash with money and are averse to investing when they are anxious about final demand .         Apple,Microsoft, Amazon ,TELCO et al cannot get rid of their cash flow and even the car manufacturers are self financing.

  There is NO disagreement that worldwide demand is anemic and should be increased. The issue is how.

     Central banks cannot determine Fiscal Policy--taxing and spending---so they keep stretching monetary policy beyond the bounds of efficacy. Hence negative interest rates to "incentivise” banks to remove their money from the safe central bank and lend to "productive' enterprise and households.

      Unfortuneately you cannot lend to a corporation--or individual--which will not borrow. There are currently very few large corporate investment programs and those in the minerals and oil sectors---typically major borrowers---have been slashed as a result of the commodities bust.Anyone looking to buy a steel mill? And if you show me a banker looking to lend to a copper mine, oil development, aluminum or some such projects, I will show you an early retiree. Of course companies could -and will-borrow to buy each other, at ever higher prices. But how does that help the economy? ---Oh please!

  Negative interest rates work very well in mathematical models but they are not an incentive for banks to lend to uncreditworthy borrowers, nor for cash rich entities to borrow if they have no plan to invest beyond the resources they already have.

      

If this sounds to you that "it’s as effective as pushing on a piece of string"-- then you have got the point.

   

If this sounds like central banks have run out of ideas and this a policy of desperation---then you have got the point.

If you believe that monetary policy has run its course ---hallelujah ---then you have got the point.

If you also understand that negative interest rates will lead to withdrawal of cash from your banking system seeking a return elsewhere, resulting in a competitive currency depreciation; then you are an economist and very cynical---you have got the point.

    So what to do?

   Abandon austerity---let Greece[Portugal,Spain ]live! Let Greeks work!

 Expand Public Investment in infrastructure, housing and[God help me]even the military to destroy ISIS.It will never be cheaper to build power plants,social housing,bridges or battleships.

 Suspend regressive taxes ---social security, national insurance and sales taxes---for 4 years.

Give each EU citizen  a 5000 euro debit card expiring in 6 months--then give them another one.

Ignore German finance ministers.Then ignore all other German ministers.British ones too.

  In short: Just remember the lessons we already learned from the depressions of the 19th and mid 20th Centuries.

"The biggest problem is not to let people accept new ideas, but to let them forget the old ones.”

John Maynard Keynes