E Negative Interest Rates Are Insane

Buy Low Sell High

Sales at stores on Main Street attract many eager and delighted buyers. The same should hold true on Wall Street when equities are priced at deep discounts form their dividend-discount values. Instead of shivering in their boots when shares are on sale, investors should be filling their boots with bargains.

Unfortunately for some perverse reason too many stock-market participants want to buy high in euphoria and sell low in despair. The old 90% rule continues to hold true that 90% of the people will miss 90% of the move 90% of the time.

Negative interest rates.

Anyone who is terrified by the current financial conditions and wishes to let me hold his or her money for any period of time and expect to receive their money back less a fee paid to me for the privilege of holding their money under my mattress is more than welcome to contact me.

Negative interest rates are insane. Except as a measure whereby governments force bankers to move off their nice safe assets of excess reserves. In the USA the Fed is paying bankers O.5% pa. interest on US$ 2.28 trillion of excess reserves. This is US$11.4 billion pa. to keep senior bank executives in the bonuses and lifestyles to which it seems they feel entitled. One wonders if bonuses would have to be repaid if interest rates turn negative!

This situation is the result of changing regulations, increased risk oversight, low long-term yields and an all pervasive and continuing fear of replaying 2008. The fear is despite the regulations that have been enacted to ensure that such a nightmare is never repeated. This almost guarantees that the cause of the next collapse, if and whenever it might happen, will be due to something entirely different!

The Fed need not move to negative rates to push excess reserves into the real economy. All that is required is to curb the largess of paying any interest whatsoever on excess reserves.

Quantitative Contraction by Fed Evident in January being reversed.

On January 6, it looked as though the Fed was tightening much more than implied by a 25 basis point rise in the Funds rate. Excess reserves fell significantly and it appeared as though the U.S. dollar would strengthen in consequence. Over the last month the total monetary base moved back up again by 7% form just over US$3.6 trillion on January 6 to just under US$3.9 trillion. Excess reserves also rebounded by 11%. However, the most encouraging change has been the jump in the amount of money that is at work in the economy to a record US$1.6 trillion. 

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