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Welcome to Bank Underground, the official (and slightly subversive sounding?) Bank of England staff blog.
It’s gone live this Friday, with not one but two inaugural posts touching on topics as far ranging as the impact of driverless cars on the insurance industry to the somewhat wonkish debate over how the ELB (effective lower bound) might one day constrain monetary policy and inflation.
While the BoE isn’t the first central bank to publish staff analysis in blog form– the New York Fed’s staff have been blogging on Liberty Street Economics since 2012 — it is the first that intends to use the medium as a mechanism for self-scrutiny and internal challenge.
As Andy Haldane, the Bank’s chief economist and executive director of monetary analysis and statistics told FT Alphaville this fits with the Bank’s push to make itself more open and transparent. Read more
We had a hunch back in July 2012 that negative rates, as and when they would surely manifest, would create all sorts of perverse incentives for banks and capital owners.
Notably, our point was, that banks would prefer to lend money to monopoly-minded corporates focused on artificially constraining supply — rather than those focused on improving competition rather or pursuing capex policies. Failing that, a negative rate environment would otherwise create a plethora of zombie corporates propped up with cheap financing, producing output that isn’t necessarily valued much by anyone in the wider world. Read more
The exciting thing about negative rates in the current context is that they make the fundamental ETF, MMF and repo-type structure that lies at the core of central banking much more obvious.
In a negative rate regime the “central bank ETF” essentially clips your rights to the underlying collateral that it holds on your behalf, often, beyond the arbitrage spread a primary dealer can secure. It’s easy for a regular ETF to enforce such a management fee because all its units are electronically registered. All costs, as a result, are distributed equally. If the managing fee is too great, meanwhile, customers would just go elsewhere. Read more
Yes, yes, we should just look away, Bill Gross wants your clicks. But…
It would be pretentious to say that I resembled Honey in any way, but nonetheless she was the puppy I chose. Honey turned out to be a little bit of a tramp, so maybe there’s the connection. Back in the freewheeling ‘80s when society had not even contemplated poop scooping and blue pick-up bags, Honey would roam the neighborhood, depositing wherever she pleased, but bringing things back home in return.
A question worth asking considering the rather large amount of them knocking about at the moment. According to JPM, the total universe of government bonds traded with a negative yield was $3.6tr last week or 16 per cent of the JPM Global Government Bond Index. It’s an answer in itself, really.
Anyway, here’s a list of those willing/ forced to buy those negative yielding government bonds from JPM’s Niko Panigirtzoglou: Read more
It’s a brave new world, even if the idea behind the ever more deeply negative rates being tried out in Switzerland and Denmark isn’t that new at all. Silvio Gesell — Keynes‘ strange, unduly neglected prophet — got there quite a while ago via his eponymous tax. It’s an idea that gets dredged back up every now and then and we’re tempted to do so again here as it neatly frames any conversation about any constraint on how negative these negative rates can get. Read more
What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.
So, at least, says George Saravelos at Deutsche Bank.
His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets. Read more
Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund, who now heads his own consulting company, is — as ever — on a mission to explain central bank actions for what they really are.
His latest focus area: the real story behind negative interest rates at the ECB.
Critical to understanding the purpose of these, he suggests, is the following chart:
Gary Jenkins at LNG Capital brings us news on Wednesday that… yes, peripheral eurozone bond yields are or in some cases are just about to trade through US Treasuries.
But why should we be shocked about this?
Or as he puts it:
There has been a few headlines recently which suggested that we should be shocked that Spanish 10 year government bond yields now trade through treasuries and that the Italian equivalent is just a few basis points away. I think that these Eurozone countries should trade through treasuries. I think Portuguese bonds should do the same. Greece? Not so much… The fact is that since Mario Draghi started acting like a modern day central banker and the leading politicians looked into the abyss of what the default of a major European country like Spain might look like the yields on the so called ‘periphery’ European bonds have been converging with those of the core at a rapid rate.
There’s a good note from Goldman Sachs this week on the implications of negative rates at the ECB.
But given that many of the points echo much of the discussion already featured on FT Alphaville for years, we’ll cut straight to the interesting bits.
Goldman agree there isn’t anything conceptually special about negative rates because bond math works with negative numbers (as it’s focused on real returns). However, they add, there is a specific reason why negative rates might have qualitatively different macroeconomic implications, unless controls on cash were put in place with them: Read more
Ken Rogoff wades into the negative rate debate this month, in a paper that discusses the costs and benefits of phasing out paper currency — a topic previously explored by Willem Buiter and Miles Kimball (and of course Satoshi Nakamoto).
Among his observations is the somewhat provocative point (at least judging by the replies on Twitter) that…
Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.
Meaning that a good bout of inflation could be just as good as a negative rate regime. Read more