Tag Archives: NIRP

Fed Hints During Next Recession It Will Release Targeted ‘Universal Income’ and NIRP

In a moment of rare insight, two weeks ago in response to a question “Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?”, we said that this was simply a “prelude to central bank funded universal income”, or in other words, Fed-funded and guaranteed cash for everyone.

On Thursday afternoon, in a stark warning of what’s to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of “solutions”, as simply cutting interest rates won’t well, cut it anymore, and in addition to more QE and forward guidance – both of which were used widely in the last recession – the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

This is a bold, tactical admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force that the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams’, Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams’ implicit admission that as a result of 9 years of Fed attempts to stimulate the economy – yet merely ending up with the biggest asset bubble in history – the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

Among Williams’ other suggestions include not only negative interest rates but also raising the inflation target – to 3%, 4% or more, in an attempt to crush debt by making life unbearable for the majority of the population – as it considers new monetary policy frameworks. Still, even the most dovish Fed lunatic has to admit that such strategies would have costs, including those that diverge greatly from the Fed’s current approach. Or maybe not: “price-level targeting, he said, is advantageous because it fits “relatively easily” into the current framework.”

Considering that for the better part of a decade the Fed prescribed lower rates and ZIRP as the cure to the moribund US economy, only to flip and then propose higher rates as the solution to all problems. It is not surprising that even the most insane proposals are currently being contemplated because they fit “relatively easily” into the current framework.

Additionally, confirming that the Fed has learned nothing at all, during a Q&A in San Francisco, Williams said that “negative interest rates need to be on the list” of potential tools the Fed could use in a severe recession. He also said that QE remains more effective in terms of cost-benefit, but “would not exclude that as an option if the circumstances warranted it.”

“If all of us get stuck at the lower bound” then “policy spillovers are far more negative,” Williams said of global economic interconnectedness. “I’m not pushing for” some “United Nations of policy.”

And, touching on our post from mid-September, in which we pointed out that the BOC was preparing to revising its mandate, Williams also said that “the Fed and all central banks should have Canada-like practice of revisiting inflation target every 5 years.”

Meanwhile, the idea of Fed targeting, or funding, “income” is hardly new: back in July, Deutsche Bank was the first institution to admit that the Fed has created “universal basic income for the rich”:

The accommodation and QE have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich. It is not difficult to see how disruptive unwind of stimulus could become. Clearly, in this context risk has become a binding constraint.

It is only “symmetric” that everyone else should also benefit from the Fed’s monetary generosity during the next recession. 

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Finally, for those curious what will really happen after the next “great liquidity crisis”, JPM’s Marko Kolanovic laid out a comprehensive checklist one month ago. It predicted not only price targeting (i.e., stocks), but also negative income taxes, progressive corporate taxes, new taxes on tech companies, and, of course, hyperinflation. Here is the excerpt.

What will governments and central banks do in the scenario of a great liquidity crisis? If the standard rate cutting and bond purchases don’t suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor. Other ‘out of the box’ solutions could include a negative income tax (one can call this ‘QE for labor’), progressive corporate tax, universal income and others. To address growing pressure on labor from AI, new taxes or settlements may be levied on Technology companies (for instance, they may be required to pick up the social tab for labor destruction brought by artificial intelligence, in an analogy to industrial companies addressing environmental impacts). While we think unlikely, a tail risk could be a backlash against central banks that prompts significant changes in the monetary system. In many possible outcomes, inflation is likely to pick up.

The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, Civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, united and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from alt-left to alt-right movements. In fact, many recent developments such as the US presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis. How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article ‘the death of equities’ in 1979.

Kolanovic’s warning may have sounded whimsical one month ago. Now, in light of Williams’ words, it appears that it may serve as a blueprint for what comes next.

Source: ZeroHedge

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NIRP Refugees Are Coming to America

Negative interest rate policies elsewhere hit US Treasury yields

The side effects of Negative Interest Rate Policies in Europe and Japan — what we’ve come to call the NIRP absurdity — are becoming numerous and legendary, and they’re fanning out across the globe, far beyond the NIRP countries.

No one knows what the consequences will be down the line. No one has ever gone through this before. It’s all a huge experiment in market manipulation. We have seen crazy experiments before, like creating a credit bubble and a housing bubble in order to stimulate the economy following the 2001 recession in the US, which culminated with spectacular fireworks.

Not too long ago, economists believed that nominal negative interest rates couldn’t actually exist beyond very brief periods. They figured that you’d have to increase inflation and keep interest rates low but positive to get negative “real” interest rates, which might have a similar effect, that of “financial repression”: perverting the behavior of creditors and borrowers alike, and triggering a massive wealth transfer.

But the NIRP absurdity has proven to be possible. It can exist. It does exist. That fact is so confidence-inspiring to central banks that more and more have inflicted it on their bailiwick. The Bank of Japan was the latest, and the one with the most debt to push into the negative yield absurdity — and therefore the most consequential.

But markets are globalized, money flows in all directions. The hot money, often borrowed money, washes ashore tsunami like, but then it can recede and dry up, leaving behind the debris. These money flows trigger chain reactions in markets around the globe.

NIRP is causing fixed income investors, and possibly even equity investors, to flee that bailiwick. They sell their bonds to the QE-obsessed central banks, which play the role of the incessant dumb bid in order to whip up bond prices and drive down yields, their stated policy. Investors take their money and run.

And then they invest it elsewhere — wherever yields are not negative, particularly in US Treasuries. This no-questions-asked demand from investors overseas has done a job on Treasury yields. That’s why the 10-year yield in the US has plunged even though the Fed got serious about flip-flopping on rate increases and then actually raised its policy rate, with threats of more to come.

So here are some of the numbers and dynamics — among the many consequences of the NIRP absurdity — by Christine Hughes, Chief Investment Strategist at OtterWood Capital:

Negative interest rate policies implemented by central banks in Europe and Japan have driven yields on many sovereign debt issues into negative territory.

If you look at the BAML Sovereign Bond index, just 6% of the bonds had negative yields at the beginning of 2015. Since then the share of negative yielding bonds has increased to almost 30% of the index, see below.

With negative yielding bonds becoming the norm, investors are instead reaching for the remaining assets with positive yields (i.e. US Treasuries). Private Japanese investors have purchased nearly $70 billion in foreign bonds this year with the sharpest increase coming after the BoJ adopted negative rates. Additionally, inflows into US Treasuries from European funds have increased since 2014:

“According to an analysis by Bank of America Merrill Lynch, for every $100 currently managed in global sovereign benchmarks, avoiding negative yields would result in roughly $20 being pushed into overweight US Treasuries assets,” wrote Christine Hughes of OtterWood Capital.

That’s a lot of money in markets where movements are measured in trillions of dollars. As long as NIRP rules in the Eurozone and Japan, US Treasury yields will become even more appealing every time they halfheartedly try to inch up just one tiny bit.

So China, Russia, and Saudi Arabia might be dumping their holdings of US Treasuries, for reasons of their own, but that won’t matter, and folks that expected this to turn into a disaster for the US will need some more patience: these Treasuries will be instantly mopped up by ever more desperate NIRP refugees.

by Wolf Richter | Wolf Street

Negative Interest Rates Are Destroying the World Economy

https://i0.wp.com/armstrongeconomics-wp.s3.amazonaws.com/2015/11/Negative-Rates.jpgQUESTION: Mr. Armstrong, I think I am starting to see the light you have been shining. Negative interest rates really are “completely insane”. I also now see that months after you wrote about central banks were trapped, others are now just starting to entertain the idea. Is this distinct difference in your views that eventually become adopted with time because you were a hedge fund manager?

ANSWER: I believe the answer is rather simple. How can anyone pretend to be analysts if they have never traded? It would be like a man writing a book explaining how it feels to give birth. You cannot analyze what you have never done. It is just impossible. Those who cannot teach and those who can just do. Negative interest rates are fueling deflation. People have less income to spend so how is this beneficial? The Fed always needed 2% inflation. The father of negative interest rates is Larry Summers. He teaches or has been in government. He is not a trader and is clueless about how markets function. I warned that this idea of negative interest rates was very dangerous.

Yes, I have warned that the central banks are trapped. Their QE policies have totally failed. There were numerous “analysts” without experience calling for hyperinflation, collapse of the dollar, yelling the Fed is increasing the money supply so buy gold. The inflation never appeared and gold declined. Their reasoning was so far off the mark exactly as people like Larry Summers. These people become trapped in their own logic it becomes irrational gibberish. They only see one side of the coin and ignore the rest.

Central banks have lost all ability to manage the economy even in theory thanks to this failed reasoning. They have bought-in the bonds and are unable to ever resell them again. If they reverse their policy of QE and negative interest rates, government debt explodes with insufficient buyers. If the central banks refuse to reverse this crazy policy of QE and negative interest rates they will see a massive capital flight from government to the private sector once the MAJORITY realize the central banks are incapable of any control.

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The central banks have played a very dangerous game and lost. It appears we are facing the collapse of Social Security which began August 14th, 1935 (1935.619) because they stuffed with government debt and robbed the money for other things. Anyone else would go to prison for what politicians have done and prosecutors would never defend the people because they want to become famous politicians. We will probably see the end of this Social Security program by 2021.772 (October 9th, 2021), or about 89 weeks into the next business cycle. These people are completely incompetent to manage the economy and we are delusional to think people with no experience as a trader can run things. If you have never traded, you have no busy trying to “manipulate” society with you half-baked theories. So yes. The central banks are trapped. They have lost ALL power. It becomes just a matter of time as the clock ticks and everyone wakes up and say: OMG!

https://www.armstrongeconomics.com/wp-content/uploads/2016/04/Roman-Army-768x496.jpg

We have government addicted to borrowing and if rates rise, then everything will explode in their face. Western Civilization is finished as we know it just as Communism collapsed because we too subscribe to the theory of Marx that government is capable of managing the economy. Just listen to the candidates running for President. They are all preaching Marx. Vote for me and I will force the economy to do this. IMPOSSIBLE! We have debt which is unsustainable the further you move away from the United States which is the core economy such as emerging markets. Unfunded pensions destroyed the Roman Empire. We are collapsing in the very same manner and for the very same reason. We are finishing a very very very important report on the whole pension crisis issue worldwide.

Source: Armstrong Economics

It’s Time For Negative Rates, Fed’s Kocherlakota Hints

Fed chief Narayana Kocherlakota

If you’re a fan of dovish policymakers who are committed to Keynesian insanity, you can always count on Minneapolis Fed chief Narayana Kocherlakota who, as we’ve detailed extensively, is keen on the idea that if the US wants to help itself out, it will simply issue more monetizable debt, because that way, the Fed will have more room to ease in the event its current easing efforts continue to prove entirely ineffective (and yes, the irony inherent in that assessment is completely intentional).

On Thursday, Kocherlakota is out with some fresh nonsense he’d like you to blindly consider and what you’ll no doubt notice from the following Bloomberg bullet summary is that, as the latest dot plot made abundantly clear, NIRP is in now definitively in the playbook. 

  • KOCHERLAKOTA SAYS FED SHOULD CONSIDER NEGATIVE RATES
  • KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS
  • KOCHERLAKOTA SAYS JOBS SLOWDOWN ‘NOT SURPRISING’ GIVEN POLICY
  • KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS

So not only should the Fed take rates into the Keynesian NIRP twilight zone, but in fact, the subpar September NFP print was the direct result of not printing enough money which is particularly amusing because Citi just got done telling the market that the Fed should hike (i.e. tighten policy) because jobs data at this time of the year is prone to being biased to the downside. 

Read the rest by Tyler Durden on Zero Hedge

“Can’t Princeton turn out a half decent person these days instead of the constant stream of “pinky and the brain” economists they have created lately?!”