-2% Interest Rates?

Discussion in 'Currencies' started by JulieW, Sep 11, 2016.

  1. JulieW

    JulieW Well-Known Member Silver Stacker

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    I like Mish's Blog:

     
  2. Dogmatix

    Dogmatix Active Member

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    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.
     
  3. Ipv6Ready

    Ipv6Ready Well-Known Member Silver Stacker

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    Isn't the US economy recovering well?
     
  4. bubblebobble2

    bubblebobble2 Well-Known Member Silver Stacker

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    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/
     
  5. Killface

    Killface Well-Known Member Silver Stacker

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

    <Sarc Smiley>
     
  6. willrocks

    willrocks Well-Known Member Silver Stacker

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    Release the helicopters!
     
  7. SpacePete

    SpacePete Well-Known Member Silver Stacker

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    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%.
     
  8. Dogmatix

    Dogmatix Active Member

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    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?
     
  9. Big A.D.

    Big A.D. Well-Known Member Silver Stacker

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    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.
     
  10. Pirocco

    Pirocco Well-Known Member

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

    silverbait Active Member Silver Stacker

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    Good try :) They will never do that even if they run as non for profit
     
  12. Pirocco

    Pirocco Well-Known Member

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

    Phil_Stacker New Member

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    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.
     
  14. SilverDJ

    SilverDJ Well-Known Member

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    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.
     
  15. Phil_Stacker

    Phil_Stacker New Member

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    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.
     
  16. SilverDJ

    SilverDJ Well-Known Member

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    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?
     
  17. Phil_Stacker

    Phil_Stacker New Member

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

    Pirocco Well-Known Member

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    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.

    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 109351OCT. 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
     
  19. Phil_Stacker

    Phil_Stacker New Member

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    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.
     
  20. SilverDJ

    SilverDJ Well-Known Member

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

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