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#1 2016-09-11 08:34:05

JulieW
Silver Stacker
From: Australia
Registered: 2010-10-14
Posts: 11,132

-2% Interest Rates?

I like Mish's Blog:

Today's spotlight is on Marvin Goodfriend, a former economist and policy advisor at the Federal Reserve's Bank of Richmond, and Ken Rogoff, a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund.

Case for Minus 2% Rates

Goodfriend says the Fed Might Need to Cut Rates to Minus 2 Percent.

    The U.S. Federal Reserve might need to cut interest rates to as low as negative 2 percent, far lower than levels other global central banks have tested, a former Fed economist said.

    That's what would likely be needed to engineer a recovery if the U.S. economy were to fall into a recession in the next couple of years, Marvin Goodfriend, who was an economist and policy advisor at the Federal Reserve's Bank of Richmond from 1993-2005, told CNBC's "Squawk Box" on Thursday.

    Goodfriend, who is currently a professor of economics at Carnegie Mellon University, pointed to data on the eight recessions in the U.S. since 1960.

    "In eight of those recessions, the Fed had to push the short rate 2.5 percentage points below the long term rate. Today, the 10-year rate in the U.S. is 1.5 percent," he noted, saying that would indicate that during the next recession, the Fed would need to cut rates as low as minus 1 percent at a minimum.

    "In five of those recessions, the Fed had to push the federal funds rate 3.5 percentage points below the 10-year bond rate," he said. "So if that happens this time around, we would have to push the federal funds rate to minus 2 percent."

......



    "Negative Interest Rate Theory: Supposedly, getting people to buy things they do not need or want will create prosperity!

    — Mike Shedlock (@MishGEA) September 10, 2016

A currency crisis awaits.

https://mishtalk.com/2016/09/10/case-fo … more-40670

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#2 2016-09-11 09:17:43

Dogmatix
Member
From: Gaul (Australia)
Registered: 2011-06-22
Posts: 1,839
Trades :   54 

Re: -2% Interest Rates?

That seems like pretty awful reasoning IMO.

Part of the problem was keeping rates too low over the long-term, so given the logic above, each recession will see lower and lower negative rates.

Yet they don't appear to take into account that the USD is the world reserve currency and -2% rates will mess with world trade. Any currency-related action the US takes must take into account the effect on the rest of the world. If they don't, they might lose their privilege.

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#3 2016-09-11 10:17:53

Ipv6Ready
Silver Stacker
From: North Sydney
Registered: 2016-01-08
Posts: 2,261
Trades :   39 

Re: -2% Interest Rates?

Isn't the US economy recovering well?


WTB 4 to 6 grams of pure gold. Don't care if it is coin, bar or granules. Near spot, suits anyone who has been tempted to open a certicard or just have some granules to make a ring

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#4 2016-09-11 17:18:01

bubblebobble2
Member
From: Seedeneey
Registered: 2012-02-06
Posts: 1,046
Trades :   64 

Re: -2% Interest Rates?

Ipv6Ready wrote:

Isn't the US economy recovering well?

Nah... it's all about ppl's perception... Yennet has her poker face every month to make sure no panic in US market...national debt is almost $20Trillion, probably hit this mileestone this week.
http://www.brillig.com/debt_clock/

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#5 2016-09-11 17:30:01

Killface
Silver Stacker
From: Nunya
Registered: 2016-01-06
Posts: 978
Trades :   15 

Re: -2% Interest Rates?

So my mortgage lender will have to start paying me? Bring it on!

<Sarc Smiley>


All that glitters is not gold...
...but all that is gold glitters!

Stacker formerly known as HoldMeTender

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#6 2016-09-11 17:45:27

willrocks
Silver Stacker
From: Yesterday
Registered: 2012-05-10
Posts: 7,635
Trades :   29 

Re: -2% Interest Rates?

Release the helicopters!


"You can ignore reality, but you cannot ignore the consequences of ignoring reality." - Ayn Rand

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#7 2016-09-11 19:27:17

SpacePete
Silver Stacker
Registered: 2014-03-01
Posts: 13,437
Trades :   122 
Website

Re: -2% Interest Rates?

Dogmatix wrote:

Yet they don't appear to take into account that the USD is the world reserve currency and -2% rates will mess with world trade. Any currency-related action the US takes must take into account the effect on the rest of the world. If they don't, they might lose their privilege.

There is a way around those issues.

The USD becomes one of a basket of currencies floating against a global unit of exchange managed by a central authority. The public would never appreciate the significance of the change, and inflation could be reignited.

Actually, this is happenning now and on October 1st the Chinese Yuan will be added as the 5th currency in the basket.

Basket percentages: USD 41.73%, Euro 30.93%, Chinese yuan 10.92%, Japanese yen 8.33%, British pound 8.09%.


Catus amat piscem, sed non vult tingere plantas

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#8 2016-09-12 03:58:13

Dogmatix
Member
From: Gaul (Australia)
Registered: 2011-06-22
Posts: 1,839
Trades :   54 

Re: -2% Interest Rates?

SpacePete wrote:
Dogmatix wrote:

Yet they don't appear to take into account that the USD is the world reserve currency and -2% rates will mess with world trade. Any currency-related action the US takes must take into account the effect on the rest of the world. If they don't, they might lose their privilege.

There is a way around those issues.

The USD becomes one of a basket of currencies floating against a global unit of exchange managed by a central authority. The public would never appreciate the significance of the change, and inflation could be reignited.

Actually, this is happenning now and on October 1st the Chinese Yuan will be added as the 5th currency in the basket.

Basket percentages: USD 41.73%, Euro 30.93%, Chinese yuan 10.92%, Japanese yen 8.33%, British pound 8.09%.

I think a switch to using SDRs is not so simple. Not saying it won't happen, but there's almost no way to make it a smooth transition.

There are just that many USDs out there, outside of the US. What's the timeframe to repatriate them?

What value would a USD have in the age of the SDR, when the US Fed is busy with -2% rates?

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#9 2016-09-12 04:39:10

Big A.D.
Silver Stacker
From: Sydney
Registered: 2009-10-29
Posts: 6,449
Trades :   52 

Re: -2% Interest Rates?

Dogmatix wrote:
SpacePete wrote:
Dogmatix wrote:

Yet they don't appear to take into account that the USD is the world reserve currency and -2% rates will mess with world trade. Any currency-related action the US takes must take into account the effect on the rest of the world. If they don't, they might lose their privilege.

There is a way around those issues.

The USD becomes one of a basket of currencies floating against a global unit of exchange managed by a central authority. The public would never appreciate the significance of the change, and inflation could be reignited.

Actually, this is happenning now and on October 1st the Chinese Yuan will be added as the 5th currency in the basket.

Basket percentages: USD 41.73%, Euro 30.93%, Chinese yuan 10.92%, Japanese yen 8.33%, British pound 8.09%.

I think a switch to using SDRs is not so simple. Not saying it won't happen, but there's almost no way to make it a smooth transition.

There are just that many USDs out there, outside of the US. What's the timeframe to repatriate them?

What value would a USD have in the age of the SDR, when the US Fed is busy with -2% rates?

USD's don't actually have to be repatriated. Commerce simply needs to start using SDR's as the reference point for trade, rather than USDs.

For example, right now, gold is worth XDR947.08 and XDR1 is worth AUD$1.86

You can't actually hand someone a 10 SDR note to pay for lunch or anything, but as a reference point it's a lot less volatile than any individual currency. Rises in one currency in the basket are cancelled out by (relative) falls in the other currencies.

In terms of a world operating purely on fiat currency, SDRs are meta-fiat.


I am the Leafy Sea Dragon.

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#10 2016-11-20 09:14:37

Pirocco
Member
From: EUSSR
Registered: 2011-05-24
Posts: 4,832
Trades :   
Website

Re: -2% Interest Rates?

Big A.D. wrote:

but as a reference point it's a lot less volatile than any individual currency.

Considering that savers that try to evade an individiual fiatcurrencies devaluation are the reason for volatility, that's a lot less good - competition eliminated.

Big A.D. wrote:

In terms of a world operating purely on fiat currency, SDRs are meta-fiat.

Sure it's the world that operates?
I'd say it's just a thievery part of the world that operates, with SDRs as their meta-thievery tool.


Silver won't save you if you act as clueless and careless as with your bank account.
Get in- not disinformed. Last is easiest, visit www.zerohedge.com & Co and hurry to their bullion shops.
Futures: http://forums.silverstackers.com/topic- … ilver.html #9
Central Banks inflict you less gold and fiat: http://forums.silverstackers.com/topic- … tners.html #19

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#11 2016-11-20 19:06:45

silverbait
Silver Stacker
From: Sydney, Kingsford
Registered: 2015-04-12
Posts: 615
Trades :   98 

Re: -2% Interest Rates?

HoldMeTender wrote:

So my mortgage lender will have to start paying me? Bring it on!

<Sarc Smiley>

Good try smile They will never do that even if they run as non for profit


"The real question is not whether life exists after death. The real question is whether you are alive before death."  OSHO

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#12 2016-11-21 00:23:04

Pirocco
Member
From: EUSSR
Registered: 2011-05-24
Posts: 4,832
Trades :   
Website

Re: -2% Interest Rates?

silverbait wrote:
HoldMeTender wrote:

So my mortgage lender will have to start paying me? Bring it on!

<Sarc Smiley>

Good try smile They will never do that even if they run as non for profit

"non for profit" can also make profit, only that law forces it to stay on the business account.


Silver won't save you if you act as clueless and careless as with your bank account.
Get in- not disinformed. Last is easiest, visit www.zerohedge.com & Co and hurry to their bullion shops.
Futures: http://forums.silverstackers.com/topic- … ilver.html #9
Central Banks inflict you less gold and fiat: http://forums.silverstackers.com/topic- … tners.html #19

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#13 2016-11-21 01:15:57

Phil_Stacker
Member
From: Brisbane, QLD, Australia
Registered: 2016-11-05
Posts: 266
Trades :   12 

Re: -2% Interest Rates?

Not for profit MUST make profit, they are not FOR profit.  That is - they must earn profit to keep the organisation going, but they cannot return excess money to anyone (such as share holders).

If an organisation doesn't make profit, it goes out of business (long-term).  If the organisation is "FOR profit", they are bound to return profits to the share-holders.

If they ran "For Loss", the intention to take money from share holders, and in this case the directors are criminally liable because that's against the corporations act.

As for negative interest rates, this is for money banks park at the central bank instead of putting it onto the open market.  The interest is not how much money costs the bank directly, and therefore not directly related to the money you borrow.  If you are to "take" money from any bank (reserve or otherwise) there is a cost to that debt (capital), and the weighted average cost of capital (the average of all the money required to supply your loan) dictates the loan rate.  The reserve bank monetary rate is only part (and decreasing) aspect that dictates the cost of the debt, and even with negative reserve bank rate, the debt will always be positive.  Otherwise, as you point out, they would be giving money away.

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#14 2016-11-21 03:16:46

SilverDJ
Member
From: Australia
Registered: 2014-11-01
Posts: 2,528

Re: -2% Interest Rates?

Phil_Stacker wrote:

As for negative interest rates, this is for money banks park at the central bank instead of putting it onto the open market.  The interest is not how much money costs the bank directly, and therefore not directly related to the money you borrow.  If you are to "take" money from any bank (reserve or otherwise) there is a cost to that debt (capital), and the weighted average cost of capital (the average of all the money required to supply your loan) dictates the loan rate.  The reserve bank monetary rate is only part (and decreasing) aspect that dictates the cost of the debt, and even with negative reserve bank rate, the debt will always be positive.  Otherwise, as you point out, they would be giving money away.

It will be interesting to see the relationship of actual home (and business) loan rates vs the official interest rate as it continues to drop. I bet the ratio won't remain the same, it will widen.

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#15 2016-11-21 03:53:55

Phil_Stacker
Member
From: Brisbane, QLD, Australia
Registered: 2016-11-05
Posts: 266
Trades :   12 

Re: -2% Interest Rates?

SilverDJ wrote:

It will be interesting to see the relationship of actual home (and business) loan rates vs the official interest rate as it continues to drop. I bet the ratio won't remain the same, it will widen.

Which is exactly the point the banks are making, as the reserve bank's rate drops the ratio of their weighted cost of capital widens compared to the reserve bank funding rate.  This makes it impossible for banks to match reductions in reserve bank interest rates - they are simply not as closely related to loan products as they used to be.

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#16 2016-11-21 04:09:35

SilverDJ
Member
From: Australia
Registered: 2014-11-01
Posts: 2,528

Re: -2% Interest Rates?

Phil_Stacker wrote:
SilverDJ wrote:

It will be interesting to see the relationship of actual home (and business) loan rates vs the official interest rate as it continues to drop. I bet the ratio won't remain the same, it will widen.

Which is exactly the point the banks are making, as the reserve bank's rate drops the ratio of their weighted cost of capital widens compared to the reserve bank funding rate.  This makes it impossible for banks to match reductions in reserve bank interest rates - they are simply not as closely related to loan products as they used to be.

I'm wondering if there is a point at which they will simply stop passing on any further rate cuts?
For those living in negative interest rate countries, what are your actual home loan rates?

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#17 2016-11-21 07:55:50

Phil_Stacker
Member
From: Brisbane, QLD, Australia
Registered: 2016-11-05
Posts: 266
Trades :   12 

Re: -2% Interest Rates?

Google speaks the truth and the truth is about 2.6% for Switzerland that has -0.75% central bank rate.

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#18 2016-11-21 14:19:46

Pirocco
Member
From: EUSSR
Registered: 2011-05-24
Posts: 4,832
Trades :   
Website

Re: -2% Interest Rates?

Phil_Stacker wrote:

Not for profit MUST make profit, they are not FOR profit.  That is - they must earn profit to keep the organisation going, but they cannot return excess money to anyone (such as share holders).

The thing is, that legal status "not for profit" delivers a variety of privileges / legal benefits, at expense of others.
So it's easier for them to make profit.
On the other hand, a substantial amount does make loss, and still continue business, because protected by State against those whoms bills weren't paid. Abit like State itself, the biggest loss maker of all.

Phil_Stacker wrote:

As for negative interest rates, this is for money banks park at the central bank instead of putting it onto the open market.  The interest is not how much money costs the bank directly, and therefore not directly related to the money you borrow.  If you are to "take" money from any bank (reserve or otherwise) there is a cost to that debt (capital), and the weighted average cost of capital (the average of all the money required to supply your loan) dictates the loan rate.  The reserve bank monetary rate is only part (and decreasing) aspect that dictates the cost of the debt, and even with negative reserve bank rate, the debt will always be positive.  Otherwise, as you point out, they would be giving money away.

There is a catch though, the Federal Reserve also has a rate on the excess reserves, before their monetary planning method changed from rate to balance, the excess reserves rate was a PAY by its member banks. After it, it was a PAY by the Fed. This needed a change of the legislation around the Fed. One may wonder why they did that, but it's easy to guess why: this way, the Fed could "donate" its member banks new / free dollars, without having a rate that goes negative, which tends to raise too much eyebrows.
Apparently, they foresaw the 2008 crisis / the need for the monetary planning method change.

www.csbs.org/legislative/leg-updates/Documents/FinServices-RegRel-PublicLaw109-351InterestonReserves.pdf
PUBLIC LAW 109–351—OCT. 13, 2006

SEC. 201. AUTHORIZATION FOR THE FEDERAL RESERVE TO PAY
INTEREST ON RESERVES.
(a) I N G ENERAL .—Section 19(b) of the Federal Reserve Act
(12 U.S.C. 461(b)) is amended by adding at the end the following:
''(12) E ARNINGS ON BALANCES .—
''(A) I N GENERAL .—Balances maintained at a Federal
Reserve bank by or on behalf of a depository institution
may receive earnings to be paid by the Federal Reserve
bank at least once each calendar quarter, at a rate or
rates not to exceed the general level of short-term interest
rates

Last edited by Pirocco (2016-11-21 14:29:22)


Silver won't save you if you act as clueless and careless as with your bank account.
Get in- not disinformed. Last is easiest, visit www.zerohedge.com & Co and hurry to their bullion shops.
Futures: http://forums.silverstackers.com/topic- … ilver.html #9
Central Banks inflict you less gold and fiat: http://forums.silverstackers.com/topic- … tners.html #19

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#19 2016-11-21 17:27:09

Phil_Stacker
Member
From: Brisbane, QLD, Australia
Registered: 2016-11-05
Posts: 266
Trades :   12 

Re: -2% Interest Rates?

Wow.  What you stated is not the case in Australia.  I headed a not for profit and we were a standard incorporated entity with no government backing.  Glad I love in the lucky country.  It's a little known fact that they drafted Australia's constitution on USA's and learnt from the mistakes.  LOL (our contrition is crud like we must take care of all citizens = mandatory welfare). But we don't have the situations you outlined.

Last edited by Phil_Stacker (2016-11-21 17:28:15)

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#20 2016-11-21 21:57:01

SilverDJ
Member
From: Australia
Registered: 2014-11-01
Posts: 2,528

Re: -2% Interest Rates?

Phil_Stacker wrote:

It's a little known fact that they drafted Australia's constitution on USA's and learnt from the mistakes.

Shame we don't have a Bill Of Rights. We are the only western country not to have one.

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#21 2016-11-21 23:10:59

Ag bullet
Member
From: SE QLD
Registered: 2013-12-26
Posts: 535
Trades :   10 

Re: -2% Interest Rates?

SilverDJ wrote:
Phil_Stacker wrote:

It's a little known fact that they drafted Australia's constitution on USA's and learnt from the mistakes.

Shame we don't have a Bill Of Rights. We are the only western country not to have one.

Or a right to bear arms


'let's get physical!'

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#22 2016-11-21 23:25:56

Sa_bogan
Silver Stacker
From: Adelaide
Registered: 2012-08-26
Posts: 1,346
Trades :   88 
Website

Re: -2% Interest Rates?

Ag bullet wrote:
SilverDJ wrote:
Phil_Stacker wrote:

It's a little known fact that they drafted Australia's constitution on USA's and learnt from the mistakes.

Shame we don't have a Bill Of Rights. We are the only western country not to have one.

Or a right to bear arms

8017_bear_arms.jpg

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#23 2016-11-21 23:45:14

fiatphoney
Member
Registered: 2010-06-12
Posts: 1,135

Re: -2% Interest Rates?

Go negative i/rates on foreign deposits.


And through his policy also he shall cause craft to prosper in his hand; and he shall magnify himself in his heart, and by peace shall destroy many: he shall also stand up against the Prince of princes; but he shall be broken without hand.   Daniel 8:25

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