Negative interest rates and what it means

February 29th, 2016 at 2:53:31 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 850
Posts: 10144
Quote: petroglyph
They already accomplished the same thing with the printing press.


Forbes wrote on JUN 2, 2011 "Is There A Difference Between QE And Printing Money?"
Here is a brief reminder of the Mexican situation in 1994, which, surprisingly perhaps, has parallels with both what led to the crisis and what is now plaguing the U.S.
A massive printing of pesos preceded the steady outflow of capital and the devaluation at that time. Why did the Mexican government allow this to happen? And once financial markets unearthed the policy, why did the central bank not sell bonds and absorb the unwanted peso liquidity? ...

http://www.forbes.com/sites/leapfrogging/2011/06/02/is-there-a-difference-between-qe-and-printing-money/#5955c2f1355c
February 29th, 2016 at 10:23:05 AM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 18
Posts: 3193
Quote: Pacomartin
In July 2009, Sweden's central bank, the Riksbank, set its policy repo rate, the interest rate on its one-week deposit facility, at 0.25%, at the same time as setting its overnight deposit rate at -0.25%. As I said earlier, they set the repo rate at zero about 490 days ago, and started in negative numbers . So the overnight deposit rate keeps going lower and lower into negative territory.


The Riksbank hasn't a choice, they are in survival mode, dancing at the end of the strings pulled at the ECB. They are acting like a needle valve on a giant gate in Hoover dam. I have heard this called a "beggar thy neighbor" policy of competitive devaluation. Sweden's economy isn't large enough to handle the inflow of hot money from Europe should their bank offer even a .005% better term than the ECB.

http://www.zerohedge.com/news/2016-02-29/all-eyes-again-draghi-what-remains-ecbs-toolbox#comments

"Here, according to SocGen, is what is next on the ECB's agenda:

A 20bp cut in the deposit rate in March, to -0.5%, mainly in order to steepen the yield curve, likely with an announcement of an immediate or forthcoming introduction of a two-tier charge on excess reserves allowing the ECB to soften the impact on banks by exempting parts of excess reserves from the lowest rate. Our best “guesstimate” of the effective lower bound, based on the experience in smaller currency jurisdictions, is around -0.75%, but there is no technical limit per se;"

I bet those bankers at the Riksbank are dancing on a pin. A central banker game of "hot potato", China is playing also. The only reason the US$ hasn't collapsed is, it's the best dirty shirt. It is only a hologram of real money.
Everyone gets thrown from the plane to maintain altitude
February 29th, 2016 at 11:28:49 AM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 18
Posts: 3193
Quote: AZDuffman
What does Citizens United have to do with it?

See, this is the danger. It is at a macro central banking level yet people seem to want to blame one party or the other.


Citizens United just makes overt what had been in the shadows. Dark money and lobbyists have always controlled our government.

I don't support any political party, other than independent. My candidates never win, but I am not so insecure that I have to vote for a winner. My political values are closely in line with Ron Pauls voting record.

How can we have freedom or capitalism, with a fiat currency? A representative republic? BAH

John McAfee, Libertarian candidate for Potus ;http://www.newsweek.com/john-mcafee-running-president-speaks-newsweek-410536 "To McAfee, nobody—including himself—in the 2016 presidential race was ready for the White House, but McAfee says he is the best America’s got."
Everyone gets thrown from the plane to maintain altitude
February 29th, 2016 at 1:06:23 PM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 18
Posts: 3193
http://www.zerohedge.com/news/2016-02-27/global-run-physical-cash-has-begun-why-it-pays-panic-first#comments

"Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote "Be Careful What You Wish For"
Everyone gets thrown from the plane to maintain altitude
February 29th, 2016 at 3:13:10 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 850
Posts: 10144
Quote: petroglyph
The Riksbank hasn't a choice, they are in survival mode, dancing at the end of the strings pulled at the ECB. They are acting like a needle valve on a giant gate in Hoover dam. I have heard this called a "beggar thy neighbor" policy of competitive devaluation. Sweden's economy isn't large enough to handle the inflow of hot money from Europe should their bank offer even a .005% better term than the ECB.


In July 2009, Sweden's central bank, the Riksbank, set its policy repo rate, the interest rate on its one-week deposit facility, at 0.25%, at the same time as setting its overnight deposit rate at -0.25%. Subsequently the repo rate has moved into zero and negative numbers.

Date ........ Repo-rate Days
10/28/2014 0.00% 491
02/12/2015 -0.10% 384
03/18/2015 -0.25% 350
07/02/2015 -0.35% 244
02/11/2016 -0.50% 20

In 2009, the exchange rate was above 10 kroner to the euro. Now the euro is about is 6.656% weaker @ 9.3342 SEK/EUR. I don't see why the Riksbank just doesn't give up and peg the SEK at 10 to the EUR. Sure they lose monetary policy freedom, but right now they have to spend hundreds of billions of crowns just trying to keep the currency from getting stronger.

I figure they can print a token couple of million 500SEK banknotes, and then just let 50EUR banknotes creep into the country as unofficial currency. The 50EUR banknotes would just serve as a physical reminder that Sweden has (at least temporarily) given up monetary policy.


2008 Week 42: 9.8149
2008 Week 43: 10.0045
2008 Week 44: 9.9122
2008 Week 45: 9.9347
2008 Week 46: 10.0503
2009 all weeks > 10.0
2010 Week 6: 10.0477
2010 Week 7: 9.8524
March 3rd, 2016 at 11:39:06 AM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 18
Posts: 3193
https://confoundedinterest23.wordpress.com/2016/03/03/bizarro-world-15-european-countries-now-have-negative-2y-sovereign-yields-and-japan/

“ECB Studies Stimulus Options That Won’t End Up Hurting Banks.”, then who do they want it to hurt?
Everyone gets thrown from the plane to maintain altitude
March 3rd, 2016 at 4:12:15 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 850
Posts: 10144
Quote: petroglyph
“ECB Studies Stimulus Options That Won’t End Up Hurting Banks.”, then who do they want it to hurt?


I sent the following inquiry to the Riksbank to ask them where the production quantities are published (fairly routine information from most central banks). They basically said that is a state secret.

As Sweden's central bank goes deeper and deeper into negative interest rates, the private banks may start to pass along negative interest rates to consumers (probably in the form of fees). Swedish citizens who have prided themselves on not handling dirty banknotes when buying their pizza and paying for most items, will suddenly remember that cash also functions as a "store of value".

But if the banks do what I think they are going to do, and eliminate all but a token number of banknotes over 200SEK=$23.50 from circulation, people may suddenly be very interested in how many 500SEK and 1000SEK banknotes are being held at the central bank.

Property prices rocket despite crash warning 14 Oct 2015
Sweden's housing market is continuing to heat up, despite warnings from top economists that the situation is a bubble waiting to burst.
http://www.thelocal.se/20151014/property-prices-rocket-despite-crash-warning

Quote: My e-mail to Swedish Riksbank
Dear sir/madam,
I am doing research into production of banknotes, and while most central bank websites give production quantities of banknotes (as well as circulation quantities), I am unable to locate such information on your website. For instance, the new 1,000-kronor banknotes introduced in March 2006 with the Crane’s Motion, (an optically variable feature incorporating a micro-lens array for security threads) were introduced. How many banknotes were purchased?
How many of the new banknotes were produced?
Thank you for your time
Quote: Jessica/Riksbank
Dear Mr Martin,
Thank you for your inquiry. However, information on the production of Swedish banknotes is not public.
Kind regards,
Quote: My e-mail to Swedish Riksbank
Thank you Jessica
That's interesting. Is there a publicly available reason for keeping the production statistics private?
Most central banks display the information in their annual reports or on their websites.
http://www.norges-bank.no/pages/68197/notes_coins_statistics_2015.htm
Quote: Jessica/Riksbank
Hi again,
The reason is that we don’t wish to reveal how much we have in stock; something which would be easy to calculate if you knew how much we produce.
Kind regards,
Jessica
March 3rd, 2016 at 4:43:57 PM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 18
Posts: 3193
Quote: Pacomartin
I sent the following inquiry to the Riksbank to ask them where the production quantities are published (fairly routine information from most central banks). They basically said that is a state secret.
Kudos to you for inquiring. At least they gave you an answer : )

Quote:
Property prices rocket despite crash warning 14 Oct 2015
Sweden's housing market is continuing to heat up, despite warnings from top economists that the situation is a bubble waiting to burst.
http://www.thelocal.se/20151014/property-prices-rocket-despite-crash-warning


I had heard 100 year mortgages were popular, so I looked after you posted. It appears that home mortgages can go on much longer. http://qz.com/123411/swedish-regulators-want-borrowers-to-pay-off-their-mortgages-faster-like-in-less-than-140-years/

I had seen in the past that some were suggesting hundred year mortgages in the US.
Everyone gets thrown from the plane to maintain altitude
March 3rd, 2016 at 11:23:11 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 850
Posts: 10144
Quote: petroglyph

I had seen in the past that some were suggesting hundred year mortgages in the US.


In Japan in the real estate boom in the late 80's and early 90's people were taking out 100 and 120 year mortgages in Tokyo. I think many people are still making payments on these loans today nearly 30 year later. People are still "upside down" on their mortgages today.

The preferred way to finance a massively expensive home today in the USA is "interest only" for a fixed number of years, and then the principal is due. Actually that was the way homes were financed in the 19th century. It doesn't make too much sense for a $100K loan.

Years Principal & interest Principal Yearly Rate Per Year
30 -$599.55 $100,000 6.00% 12
60 -$514.18 $100,000 6.00% 12
100 -$501.26 $100,000 6.00% 12
120 -$500.38 $100,000 6.00% 12
interest only -$500.00 $100,000 6.00% 12


Home interest is tax deductible for up to a million dollars in principal. So at low interest rates, ultra long loans make some sense, and they don't come with the fear associated with the balloon payment of the interest only loan.

Years Principal & interest Principal Yearly Rate Per Year
30 -$3,696.19 $1,000,000 2.00% 12
60 -$2,386.05 $1,000,000 2.00% 12
100 -$1,928.03 $1,000,000 2.00% 12
120 -$1,833.31 $1,000,000 2.00% 12
140 -$1,774.85 $1,000,000 2.00% 12
interest only -$1,666.67 $1,000,000 2.00% 12


Quote: petroglyph
Kudos to you for inquiring. At least they gave you an answer : )


Her answer seemed so innocent. We don't tell you because we don't want you to know. Well government does not want to tell us a lot of things.
March 4th, 2016 at 2:58:35 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 110
Posts: 8631
Quote: Pacomartin
In Japan in the real estate boom in the late 80's and early 90's people were taking out 100 and 120 year mortgages in Tokyo. I think many people are still making payments on these loans today nearly 30 year later. People are still "upside down" on their mortgages today.

The preferred way to finance a massively expensive home today in the USA is "interest only" for a fixed number of years, and then the principal is due. Actually that was the way homes were financed in the 19th century. It doesn't make too much sense for a $100K loan.


Back in the boom there were some weird terms. I saw one 100 year and several for 40 instead of 30. The issue as you point out is after a certain period the principal falls by so little that more term does not matter much. At 100 years all you are really doing is sort of locking in your rent payment with the bonus that you get any increase in value for yourself and not a landlord.

If it goes up your heirs get a nice little bonus. If inflation is really bad they could even eventually be able to pay it in full. If deflation his you own not a house but a coffin, you are there forever.

It is hard to imagine deflation with all the cheap money we have sloshing around, but we seem to be near that being the case. Same as in the 1970s it was previously thought you could not have stagnant growth and inflation at the same time. My advice is get your personal debt as low as possible for leveraged people and corporations will get slaughtered if we get a deflation trap.
The man who damns money has obtained it dishonorably; the man who respects it has earned it