We’ve spilt a fair few pixels on the potential limits of negative rates and proposals to get around the pesky zero lower bound. Citi’s Buiter has weighed in on this for some time and has done so again on Thursday.
We present three practical ways to eliminate the ELB: i) abolish currency, ii) tax currency or iii) remove the fixed exchange rate between zero-interest cash currency and central bank reserves/deposits denominated in a virtual currency.
There’s more in the usual place for those who want it but, for now we thought we might just pull out his list of disadvantages to getting rid of cash Read more
Regarding how low negative interest rates can go, Paul Krugman wrote a couple of weeks ago that:
When central banks push interest rates on government debt below zero, the effective lower bound is the return on cash held by people who would otherwise be holding that government debt — not people looking to expand their checking accounts. So the liquidity advantages of bank deposits over cash in a vault are pretty much irrelevant. It’s all about the cost of storage.
On the potential death of that long awaited negative deposit rate, interesting thoughts from HSBC’s Steven Major below if sovereign quantitative easing does eventually raise its head in Europe.
But first, a necessary nod to QE skepticism from Peter Stella:
Rather amazingly, a crude quantitative measure of ECB stimulus—the sum of refinancing operations and securities held for monetary policy purposes—peaked the very month of Dr. Draghi’s [whatever it takes] speech. Those who are now seeking QE apparently believe that, despite the inverse correlation between quantitative stimulus and actual results, an increase in the size of the ECB balance sheet will lead to an outcome superior to that associated with the increase in policy “size” evident above during the 14 months prior to the Draghi speech. During that time, the sum of ECB monetary operations instruments expanded by 168 percent without any discernible palliative impact on markets. So if the definition of insanity is repeatedly trying the same behavior and expecting different results, the market would appear slightly insane. Or perhaps it is simply guilty of failing to fully comprehend the complexity of monetary operations, and more specifically, which monetary medicines work and which do not.
Just in case Draghi actually, finally, opts for negative rates later today and puts us all out of our misery, Deutsche Bank’s George Saravelos has taken a stab at how big a hit the euro would take (with our emphasis in the last paragraph): Read more
Or, why it’s nuts out there
In this series we have thus far presented the economic argument for the introduction of “free money”, whether it be via the rise of private market virtual units or central-bank dropped bundles of helicopter money.
The question which arises, however, is what does it mean when anyone in an economy can self-create money and have it respected without the need for national guarantees? The answer, presumably, is that there is such a shortage of money relative to output that the system flourishes with every virtual unit that’s created by the system — i.e. there is more risk in hoarding output than in distributing it.
And more specifically, that there’s a greater benefit in creating money “no strings attached” than with conditionality attached to it in the form of bank credit money. Read more
We promised at the end of our previous post that we would qualify the economic case for the introduction of “free money” with some direct references to Willem Buiter, Citi chief economist and former BoE MPC member.
So here follow some of his observations on all things “money” during a liquidity trap, as plucked from his papers on seigniorage, the nature of irredeemable fiat money, numerairology and the use of virtual currencies to break through the ZLB from the last decade or so. Read more
In a previous post we presented research by Willem Buiter, Citi chief economist and former BoE MPC member, which he conducted in the mid 2000s, into whether virtual currencies could be a useful mechanism for breaking through the zero-lower bound.
The idea in many ways represents an evolved form of QE, in which differentiable units from dollars are pumped into the economy, inducing an effective negative interest rate on dollars due to the fact that there is less of the new currency in circulation than the established one. Seen from this light, the recent rise of private virtual currencies could can be seen as amounting to the market’s own endogenous version of QE. Read more
Here’s a crazy thought to start the New Year year with. What if virtual currencies were born less of an organic anti-government peoples’ movement and more of extreme unconventional monetary policy by the state? The ultimate central bank Jedi mind trick if you will, which takes easing to levels that conventional policy just cannot go.
But even if it’s not a plan hatched directly by monetary bodies to serve the interests of the state, there’s still a strong argument to be made that virtual currencies could be doing the Fed, the BoE and even the ECB a big favour. Read more
Yup, we’re back here again. Here’s how Credit Suisse ranks the ECB’s options if, or when, the increasingly dovish governing council decides that more easing is necessary:
The first option comprises exhausting the ECB’s standard policy lever by cutting rates further. We expect this to be the first response if more needs to be done and could be prompted by inflation falling to 0.5% y/y or lower. A further cut in the key policy rate would also entail taking the deposit rate into negative territory.
The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem:
The ECB meets this week and expectations about what Draghi and team may or may not do seem to be erring towards the non-event side of things.
But, as Beat Siegenthaler at UBS observed in a note on Monday, there still seems to be a lot of confusion about the likelihood and usefulness of negative rates being introduced. A rise in eurozone rates over the past two weeks has only added to the confusion: Read more
Everyone has an open mind about negative rates these days… Swiss National Bank chief Thomas Jordan has said he certainly does following this piece of repeat advice from the International Monetary Fund’s annual report on Switzerland (our emphasis):
The conjuncture of Switzerland may render some of the potential drawbacks [of negative interest rate] less relevant than in other countries. Activity in the interbank market is already very low, as all banks have excess liquidity. Switzerland is experiencing strong credit growth, particularly in the mortgage market. The impact of negative interest rates on mortgage rates depends on the pass-through.
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark?
Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair. Read more
Gary Jenkins writing in Credit Matters this week gets to the heart of the matter when it comes to what investors should do with their money (our emphasis):
Is nowhere safe? The natural reaction to this is that fi nancing for banks should become more expensive. We are already seeing this reaction in the market to some degree. But what does this mean for a product like Cocos? How does an investor monitor the risk of conversion if the ECB could, on any given day, decide to withdraw liquidity unless the bank were to improve its capital position?
Okay. Negative interest rates have now gone fully mainstream in the UK thanks to this week’s testimony by Bank of England deputy governor Paul Tucker.
Even the Daily Mail is writing about it.
But a number of major misunderstandings are popping up as a result. So let us try to clear some of them up. Read more
Throwing around the negative interest rates idea has become very trendy all of a sudden with Draghi, Praet and Constancio weighing in and, we’d argue, using the threat to substitute for policy impotence.
So, was Bank of England deputy governor Paul Tucker doing the same thing on Tuesday morning in front of a Parliamentary committee? Using a jedi-trick to talk down sterling perchance? It’s not a phrase you use lightly and it seems unlikely he would have whacked it out completely unintended. But it has to be said, if he was going Jedi here, the effect didn’t last all that long. Read more
The big story on Friday concerns the terms and structure of Qatar’s life-saving support for Barclays at the peak of the financial crisis in 2008. As Daniel Schäfer, Caroline Binham and Simeon Kerr report, the key issue is whether Barclays lent Qatar the money to buy shares in the bank. Read more
From the Danish central bank:
Effective from 25 January 2013, Danmarks Nationalbank’s interest rate on certificates of deposit and the lending rate are increased by 0.10 percentage point. The discount rate and the current account rate are unchanged.
Remember the whipsawing days of 2008? The days when commodity prices couldn’t get crazier?
Dear central bank of Santa,
We, the banks, think we have been really good this year. We didn’t pick on retail customers. We didn’t tell on our Libor manipulating friends. We respected our regulator parents. And most importantly we didn’t have a hissy fit that nearly brought down the global monetary system. Read more
Some Praet-prattle in the WSJ last week has put a bit of a dampener on the idea that the ECB is gonna go for a negative deposit rate in the near term. Read more
Are you a Swiss bank? Do you have haven appeal? Want to make some quick, easy money? Then keep reading…
Credit Suisse has decided it will start charging negative rates on Swiss franc cash balances above a certain threshold. From CS: Read more
The abstract from the latest paper by Peter T. Leeson entitled “Human Sacrifice” (H/T Tyler Cowen at Marginal Revolution): Read more
Remember when Denmark’s central bank went negative, back in July?
After the ECB’s deposit rate went to zero, the Nationalbanken cut its own deposit rate, largely in order to stem capital inflows. Read more
To all those still defending negative interest rates — arguing that the stimulative effects will outweigh the costs to banks — we bring you the following from Tina Mortensen at Citi on Wednesday:
Denmark — FSA urges banks to charge customers more and to cut costs deeper to stay competitive. Following the introduction of negative interest rates, Danish banks are struggling to maintain their interest rate margins. At the same time, the economy has still not recovered from last year’s funding crisis and the fallout of a burst housing bubble in 2007. Read more
Here’s an interesting factoid by way of Bartosz Pawlowski from BNP Paribas’ CEEMEA team — Eurozone yields aren’t the only ones being haunted by negativity.
As it turns out, euro-denominated non-eurozone debt is also treading perilously close to the zero mark. Read more
Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry.
Though, for a long time we’ve felt very much alone with this obsession. Weirdly enough, nobody else has seemed too bothered about it. (Note, we even had to go to the ECB directly to ask Draghi what he thought about it.) Read more
A while ago we observed that negative gold leasing rates were potentially signalling something awry with the Libor rate.
That judging by gold forwards, the Libor component of the gold lease rate calculation (Libor-GOFO = Lending rate) was coming in much lower than what might otherwise be expected. Read more
Maybe not truly natural, as this is a matter of currency intervention, but close.
After the ECB lowered its interest and deposit rates on Thursday, the Danish central bank, Nationalbanken, followed a few hours later. Read more
This is a follow-up to our post on “base money confusion“, which incorporates some of the ideas we’ve raised in our “beyond scarcity” series.
Let’s assume a few truths (we’re sure they’ll be up for debate, but here goes anyway): Read more