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

I always thought Roubini had a Rasputin quality about him. 

That need for negative interest rates to provide economic stimulus is the only significant reason for a cashless society, to keep you from hiding your money under the mattress and not spending it. All other reasons are just secondary.

But Roubini talks about the mattress as well. He talks about robberies increasing once thieves know society is putting money under mattresses and in walls, and also he speaks about the destruction of said money by rodents. I kid you not.

Roubini and Larry Summers are not madmen,but certainly there is a sense of desperation and risk of negative consequences coming out in their thinking. One could think that their thinking puts us on the edge of the abyss of economic thought. But it is Roubini who wants you to just accept negative rates voluntarily. I bet he can afford a rodent-proof safe.

As I said, I don't believe these economists want Main Street to participate in more bubbles until the negative interest rate regime is in place. After all, they can't control the behavior of the masses in a bubble-then-crash setting. They can't control the masses if interest rates rise and the masses gobble up all their precious treasury bonds, the new gold of the derivatives clearing houses.

They don't want people walking away from their loans again, because they fear the government will be adverse to future bailouts. Truth is, it will be easier to accomplish bail-ins if money is held captive in the cashless society.

Better to have negative interest rates, so that people will want to spend their money, say the economists. But Roubini's idea has a fatal flaw: many will still hide their money and not spend it. That is, after all, the prudent way to live, or at least always has been until this derivatives monster was created.

Summers, alas, has the plan that will work, force you to spend or lose money in your forced savings account. But the St. Louis Fed disagrees, saying that negative interest rates are not a tool that should be used by central banks:

The above examples of negative central bank policy rates are newsworthy because they are unusual. Some analysts have argued that such examples suggest that central banks should consider setting negative policy rates, including negative rates on deposits held at the central bank. Such proposals are foolish for a number of reasons. First, a policy rate likely would be set to a negative value only when economic conditions are so weak that the central bank has previously reduced its policy rate to zero. Identifying creditworthy borrowers during such periods is unusually challenging. How strongly should banks during such a period be encouraged to expand lending? Second, negative central bank interest rates may be interpreted as a tax on banks—a tax that is highest during periods of quantitative easing (QE)Central banks typically implement QE policies via large-scale asset purchases. Sellers of these assets are paid in newly created central bank deposits, which, in due course, arrive in the accounts of commercial banks at the central bank. It is an axiom of central banking that the banking system itself cannot reduce the aggregate amount of its central bank deposits no matter how many loans are made because the funds loaned by one bank eventually are redeposited at another. Is it reasonable for the central bank to impose a tax on deposits held at the central bank when the central bank itself determines the amount of such deposits held by banks and the banking system? Perhaps these and other considerations caused European Central Bank President Mario Draghi in a recent press conference to label negative deposit rates "uncharted waters" and dismiss any possibility that the ECB would consider it.

In summary, in normal economic times, both nominal and real interest rates are positive. But in unusual times, negative nominal and real yields are not unusual. Both often reflect investors' flight to safety. The existence of negative yields, however, provides no support for the argument that central banks should consider negative policy rates as a monetary policy tool.

 

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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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