Here is a quick summary of how negative interest rates came about. Many articles that you will have read in the media about negative rates don't fully explain how we have got here, so this could be the first such article.
Meanwhile, the first-order and tangible effect of Negative Interest Rates Policy on financial stability has been that it has enhanced it by improving the sustainability of outstanding debt.
There is nothing sustainable about the mountains of debt piled up, it is not possible to improve the sustainability of colossal amounts of debt except by eradicating it and preventing it from happening again by implementing high interest rates . Negative interest rates are actually doing the opposite - they help create new debt by making it so cheap.
So, the main reason why negative interest rates are here is because spending is out of control in the EU and in Ireland and we are more reliant on debt than ever before.
The other main reason is because of Quantitative Easing (QE), or money printing. As you can see in the figure below, after QE, the commercial bank such as Bank of Ireland or AIB, holds more reserves with the central bank. The central bank has been charging negative interest rates for holding these reserves, so the commercial bank has no choice but to pass this on to consumers.
So as economies in Europe become increasingly dependent on QE, the central bank will come under pressure to charge for holding these higher reserves, and the commercial banks will have no choice but to pass on these costs to consumers.
This process of never ending debt and continuous QE is a feedback cycle, whereby more QE allows governments to borrow even more by offloading longer term bonds into the market. As you can see from the above, the pension fund sells their government bonds to the central bank to get the QE process going.
Negative interest rates are the direct consequence of this continuous cycle of QE and debt that has been the central policy of the ECB since 2014. Only recently are customers feeling the pinch from negative rates so we are in uncharted territory as to what will happen. But my prediction is that they are the harbinger of a very bad recession and widespread poverty. As it becomes clear that no real production is taking place and the high consumption levels are a mirage.
There is also a calamity coming when people retire, as savings are no longer being encouraged and the alternative of investing in pensions are now being hit. The days of high interest rates are over but that also means prudence is over and that can only end one way.
There appears to be a craven urge to spend no matter what the source of revenue. All the great and the good are extremely well educated in the tricks of accounting and exploit any way to continue until they run out of options. It appears too that there is only one home for money of investors such as pension funds viz: the state. The EU and the state have domination of the printing of money and are the only home for money once printed. Real wealth creation is dwindling, they are robbing savers, pension funds and eventually will rob deposits.
ReplyDeleteWhile driving one early morning last week I heard some expert being interviewed about the Irish economic prospects on an Irish radio station. . He said all pension funds are gone into NAMA and that the next generation of pensioners would have to work into their 80s to survive. This article does a better job at explaining what is happening than that interviewee, but the writing is on the wall as we all realize the grim reality. Warnings were ignored, the people will have to learn the hard way.
ReplyDeleteWelcome to the magic money tree - that mythical entity that keeps on giving, until it stops. Negative interest rates are indeed the direct consequence of this continuous cycle of QE and debt that has been the central policy of the ECB and elsewhere since 2014. As we believe that we can project our profligate consumption based lifestyles out into the far forever. Until the confluence of the second wave, hard Brexit, the American civil war, the collapse of the magic money tree and sudden job displacement by massive expansion of artificial intelligence (AI) stops the music.
All of the rush to live online, from social contacts to shopping to banking, puts every single one of our eggs in one very large and unregulated and unprotected basket. Have we learned from the reproduction rate of propagation of Covid-19 over international travel? Not at all. The replication rate of an unexpected general AI over gigabit broadband is in nanoseconds. Just punch a few numbers into Excel to see the consequences. In an environment where we have voluntarily surrendered our security for the sake of "convenience". Rome is burning, but we are blind to the smoke!