E Summers And Roubini Talk Negative Interest Rates, Sound Logic But Uncharted Waters

While that prospect is ridiculous, Larry Summers, on his own blog, spoke of permanent secular stagnation.  Summers says that there is too much saving in America. He says that this excess saving slows down the economy. Of course, his goal is a cashless society, where people will have to put their money in the bank, and in order to avoid losing it to negative interest, will be forced to spend the money to stimulate the economy.

That is his way of aborting secular stagnation, or deflation. Summers is far more worried about secular stagnation than he is worried about inflation.

Summers believes that in any crisis, Fed funds rates must be cut at least three to four percentage points. That means, if there was a crisis today, Fed funds would need to be lowered to minus 3 to minus 4 percent! Without a cashless society in place, those low rates would be difficult to do in the face of inevitable bank runs.

If you think that little notion of negative 4 percent is far-fetched, Nouriel Roubini and Paul Krugman have advocated negative interest rates and/or a cashless society as a means of stimulating the economy as well. While they make valid arguments logically, I have to tell you that there is an aspect of totalitarianism in their thinking. Economics as a dismal science rarely gets more dismal than this. I think this is a potentially chilling plan going forward, as the world spirals towards deflation.

But that is where we are as the Fed looks foolish in trying to raise interest rates by a pitiful 25 basis points month after month, without achieving the goal! The actions of the Fed make Larry Summers look more reasonable and logical all the time, and that is scary. Derivatives are the cause of this, you know.  Derivatives' demand for collateral forces treasury bond prices up and treasury bond yields down.

The need for collateral has made treasury bonds into rock stars. The shortage of those bonds is a huge reason why I believe Summers wants interest rates to stay low and go lower.  It has nothing to do with jobs. According to Summers, jobs are going to be lost anyway, to technology.

No, Summers wants low rates and it has to do with hedge funds, financial clearing houses and banks. If interest rates remain low,  the people who need to buy scarce bonds as collateral will not be interfered with by some old retired guy who wants to make a little interest on bonds.

God forbid that the average Joe would hold precious clearing house collateral and have it lying around doing nothing! No, the financial system, and I think this is the crux of Larry Summers' thinking, has to make treasury bonds look really ugly to the public. Low and negative interest rates make these bonds ugly to Main Street, but they are still very pretty to people who want to make deals on Wall Street.

This must be what people are talking about when they say the financial system is divorced from the real world. There isn't anything brave about this new world. It is dreadful in its design.

Truth is, Wall Street folks will pay banks for the privilege of owning treasury bonds for use as collateral. They don't care if there are negative interest rates. The more negative, the better, as that means they won't have to worry about not having enough bonds with which to do business. 

Roubini, as I said above, is in the negative interest rate camp. No big deal to him, since you accept zero interest at the bank and that is an effective negative rate as inflation runs higher. Roubini says you will also get used to accepting having money pulled out of your account for interest payments when real negative rates become a reality.

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I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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