Have central banks gone too far in with rate cuts? I think so, and a BIS study No 804 (Un)conventional Policy and the Effective Lower Bound concludes the same thing.
The 47-page study is for geeks and it is mostly unintelligible gibberish that I will mock. A few small sections of the report are mostly understandable. Here are a couple such snips.
In response to the Financial and economic crisis of 2008-09, central banks have aggressively cut monetary policy rates, in many cases all the way to the effective lower bound (henceforth ELB), namely the rate below which it becomes profitable for Financial institutions to exchange central bank reserves for cash.
Our main result is that in reaction to a Financial shock which reduces banks’ monitoring efficiency, credit policy may be a more efficient tool than policy interest rates.
Cutting policy rates to zero may be unnecessary after non-standard measures have been implemented.
The report was mostly 47 pages of nonsense that looked like the following:
BIS Study 804 Snip 1
BIS Study 804 Snip 2
BIS Study 804 Snip 3
The study had 20 references to the word “assume”.
Note the preceding snip to “simply” the solution via a simple “approximation”.
The study is rife with gibberish about things like “output gaps” that cannot be accurately calculated even if they exist at all.
In the first snip above, the study mentions “entrepreneurs would postpone consumption until the time of death.”
This is another way of saying time preference cannot logically be negative.
Conclusion
Despite all the gibberish and mathematical nonsense, the final conclusion is at least somewhat understandable “Cutting policy rates to zero may be unnecessary after non-standard measures have been implemented“.
I would revise and expand the sentence as follows.
Cutting rates to zero can never be correct. It is against laws of finance and time preference, which can never be negative. But there should not be a Fed in the first place either to cut rates or to implement “non-standard” measures.
Brick Wall
Central banks are the problem, not the solution.
They have hit a brick wall and cannot cram any more debt into the system.
There is no tolerance for paying interest.
The evidence is overwhelming.
- More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
- Inverted Negative Yields in Germany and Negative Rate Mortgages.
- Fed Trapped in a Rate-Cutting Box: It’s the Debt Stupid
Mike “Mish” Shedlock
Negative interest rates are created by the Fed expanding Reserve Bank credit, as opposed to driving the commercial banks out of the savings business. That is all, it began in January 1957. It accelerated in 1966. It’s offset, the demand for the residual transaction deposits, ended in 1981. It was accelerated by Greenspan dropping legal reserves by 40%. It was exacerbated by Bankrupt-u-Bernanke remunerating IBDDs. Unless savings are activated, a dampening economic impact is exerted and matastesizes (it’s called Secular Strangulation).
“Central banks are the problem, not the solution.”
The problem is that every cycle has an up phase and a down phase. There is no solution that prevents cycles. Inflation and deflation complete a cycle. Rise and fall of an empire complete a cycle. There is no preventing the fall of an empire.
The American middle class bloomed when the U.S. became producer to the world.
That condition no longer exists, as world economies recovered from the WW2 era.
Thus the U.S. middle class has been in decline since the post war peak.
Why is there no gold standard today? Cycles. The down phase of a cycle will break a currency peg to gold. Central banks are not a solution and neither is a gold standard. All solutions are temporary and simply work until the inverted phase of the next cycle dismantles them.
Thank you for setting the record straight. Govt intervention only increases/decreases the amplitude of the cycle.
The Fed could disappear tomorrow, but as long as the career politician exists, the corruption will continue. Solutions are only possible with short term-limits.
BTW, if the Fed went back to their original charter of buying corporate debt to stimulate, instead of federal debt, the money might get were it’s needed most.
The problem is politicians can’t get re-elected on the down phase, so they need the cb to keep the up phase rising indefinitely.
it is not a question of ‘maybe’ ; cutting rates IS unnecessary,, UNHEALTHY even ! CB’s should know by know…..But they don t know, or don t want to kow rather , that much is obvious … Criminal, secretive , bunch of counterfeiters disrupting the financial system for the benefit of the 0,0001 % !
And people wonder why Socialism is gaining traction. There is no such thing as Capitalism now. How can there be if the powers that be penalise savers? There is no Capitalism without savers. Pay $100 now to receive $89 back in 10 years. In what world is this sensible? “Socialism is evil” cries the Corporatist. ” Well we’ve read your book ” says the Socialist ” and what you have produced is putrid, Forward brothers and sisters to the promised land! ” I have done very well out of Capitalism. I am comfortable not rich, but a damned site better off than my forbears. For most of my life a Capitalist came along and said ” Lend me some money I’ve got a great idea it will make us all richer.” Sometimes the investment failed, but more often than not the idea made money. Now what have we got? Hey saver buy this and lose $11 over 10 years. Something wicked this way comes and I’m not sure that the Corporatists don’t deserve all that is coming to them. Pity the rest of us have to suffer with them.
ZH headline: “After Mark Carney Admits That Low Rates Lead To War, San Fran Fed Suddenly Changes Its Mind On NIRP”
I somehow missed this line in snip3 “where we also assumed”
Only one formula needed.
Assumptions + Approximation(s) = BS
Nobody is perfect Mike. Reading all that reminded me of college, when I first started to doubt my choice of majors.
I can’t get enough of those formulas that make economists look like scientists, something like eh…chemistry, which I studied. It made me feel good that, e.g. molecules behave predictably, and according some formulas. Thus, my conclusion is that the financial disaster in which we live can be attributed to lack of economic formulas. Make more complex formulas fellas, and raise those rates now.
You think that is cool just wait till you see what “Climate Science” uses to instill confidence.
It’s the ” May Not Be” that suggests even BIS (the authority) really has no clue too.
Does anyone expect CBs to back off now?
Once through zero what event in the real world puts a hard limit on how negative they can go?
What will stop them?
Meanwhile Lagarde heads to ECB just as one of her darling children, Argentina, teeters on default again. She left some wreckage with poor interventions in Greece, siding with the Eurozone, and Argentina. She thinks neg rates are ok, along with Greenspan.
Beyond me to understand what on earth they think they are accomplishing outside of building upto an even bigger negative consequence.
Michael Hudson theorized that rates could head as far down as a whopping -25%, but it seems everything would blow up before we plumb anywhere near those depths.
So yeah, once we wander into NIRP there is nothing to curb this bizarre race to the bottom. As long as the central banks continue their collusion with each other, only popular uprising or total economic implosion can stop them.
There is no economic rationale for anyone (with a brain) to invest in a negative yielding asset which is why it won’t last. This is not a new paradigm (the usual retort when unusual market situations present themselves) but a bonafide bubble. Plain and simple.
Negative rates would destroy economies and the various agents that fund them ie banks, pension funds, insurance companies. Companies won’t invest when so much capital is being consumed.
What this signifies is that we are actually very close to a wholesale overhaul of the monetary system.
Carney recently come out saying no reason for $ to be future reserve and Osbourne pitching to be head of the IMF. Carney was Osbourne’s man.
Only a matter of time before some large change arrives, we might be getting hints.
Hints that cant be given by big players. Carney about to leave office.
30 July; from the Guardian
European countries will face a choice from a list that includes Jeroen Dijsselbloem, the former Dutch finance minister; Bulgaria’s Kristalina Georgieva, number two at the World Bank; Olli Rehn, the head of Finland’s central bank; Portugal’s Mario Cénteno, chair of the Eurogroup of finance ministers; and Spain’s finance minister, Nadia Calviño. The French finance ministry on Monday denied reports that Cénteno and Calviño had been cut from the shortlist.
It says Carney was cut and did not make the short list and Osbourne was never a candidate. Also, Carney is Canadian with UK and Irish passports, his cred as an actual European are questioned. Dijsselbloem has baggage especially in southern Europe, and Georgieva is technically not qualified unless they change their rule that the head of the IMF be appointed before their 65th birthday. This only leaves Olli Rehn.
They might as well put you or me in there for all the good it would do, I believe that with Brexit and the collapse of the Italian government the EU is in very serious danger of collapse, especially with Trump smashing his way through the world economy, we may see both the euro and globalism generally finally come crashing down. I know we all want to see that, but I also get the feeling that we are about to throw the baby out with the bathwater. I certainly believe that the EU was an error, I like the common market and Schengen agreements, as a citizen of the EU (Ireland) it made travel so much easier, but the euro was a step too far, and the EU parliament is an exercise in bureaucratic clusterfuckery. I do not know a single American that can even name the EU President, nor a European that can give one example of why they should be president of the EU.
Lately I hear three words ringing in my head over and over. Shelter in place.