Posted Mar 10, 2015 by Martin Armstrong
The entire problem we have with this proposal of negative interest rates first put forth by Larry Summers, is that this is another means for bankers to make a fortune through theoretical stimulus that will never reach the public. This crazy idea will have a DEFLATIONARY drag on the entire economy and threaten to tear the entire system apart for it is presented on behalf of a single group – the money center banks..
The entire view of interest rates is one-sided and part of the propaganda sold to us by the press since the New Deal. The general proposition is a claim raising interest rates will be bearish for the stock market on this one-dimensional idea that if it costs more then people will buy less. However, we put that theory to the test and it has proven to be a total fallacy. The stock market has NEVER peaked with the same level of interest rates even twice. The bubble in 1929 took place with the lowest level of interest rates because of capital inflows into the USA whereas in 1899 rates went to nearly 200% because of capital outflows. The key is simply the spread between interest rates and expectations. If you expect to double your money in 1 year, you will pay 25%. But if you do not think you will make 1% in a year, you will not borrow at 0.5%.
Our problem is caused by academics with no trading experience, just ideas, and lawyers who think they can FORCE the people to do as they command with the threat of punishment. If they will not borrow at 0.5%, then Larry Summers pitched for the bankers as he always does. Let the bankers charge money to have an account so they will make money. They justify this by claiming making rates NEGATIVE will simply FORCE people to invest and spend. They wipe out savings and punish people who have saved. This is looking at the world ONLY from the banker’s perspective.
This entire focus is way too narrow in its scope. What about the elderly who were told to save for their retirement? They cannot make even interest at the nominal levels. Then we have pension funds that keep 40% to 80% of their investment in “safe” government bonds that pay nothing. Most pension funds average requirement to fulfill their objective is 8%. This whole idea of negative interest rates is creating a huge pension crisis coming on the other-side of 2015.75. Mr Summers and the bankers only look at themselves and to hell with society.
Car loans, fully secured, are going for 2.29%-4% depending where you are. Considering their cost of funds is effectively ZERO, this is actually a historical high spread in profit margins for bankers. Taking rates to NEGATIVE will only result in smart money moving to equities, and dumb and dumber will just do as they are told and pay the banks to hold their money until these is none left.
Now we look at government. The deficits have not stopped. They all borrow more every year. The crisis hits because they are now addicted to low rates. What happens when rates rise? Central Banks can try to manipulate short-term rates, but they cannot manipulate long-term. That is why the Fed was buying back 30 year bonds trying to create a shortage of long-term so in theory others would lend long-term. That totally failed as everything the Fed has done. Why? Because they act ONLY indirectly and assume the banks will act as they intend. The banks have not lowered car loans or credit card fees and rates in proportion to the decline in rates at the Fed. They have pocketed the difference.
Central Banks act ONLY indirectly, and not directly. They count on banks lending. In the USA, the banks did not lend and instead they went to the Fed and demanded they be paid interest on excess reserves. The Fed complied and pays them 0.25% for excess reserves. The banks can pay ZERO and make money without risk and use the balance for trading.
This entire exercise is brain-dead and it will not end very nicely. All they are doing is wiping out pension funds and the elderly. All those years of advice save for retirement are proven to be total bullshit when banks can convince governments that people should be paying them for the privilege to trade wildly with their money. What a deal. Thank you Larry.