Negative Interest Rates - How They Came About

Negative interest rates are well and truly with us here in Ireland with the news that Bank of Ireland are to begin imposing negative interest rates on pension funds that deposit cash with them. This means pension funds holding cash will be hit on the double (also inflation).

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.

The ECB gave the game away here : 

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. 

  

The Government's Spending on Covid Crisis is not Proportionate

The acting finance minister, Pascal Donohoe, said yesterday that the Covid 19 crisis has so far cost Ireland €13 billion and that Ireland will have a national deficit of €30 billion by the end of the year. The Taoiseach, Leo Varadkar, also said that Ireland cannot borrow cheap money forever. As the ECB prints more money, inflation will become even higher in Ireland and prices of goods will rise. Since natural levels of deflation have been prevented in Ireland since 2015 by the actions of the ECB, this means Ireland and the EU are starting at a higher inflationary point than would have been otherwise without the ECB bond buying, and is therefore on the road to very high rates of inflation. Negative interest rates may well be here to stay. High inflation may well suit the Government because it will make it easier to pay their previous debts, but it means savers and workers will continue to be robbed.

At the beginning of the crisis, the government generously paid out covid unemployment payments of €350 per week, almost double that of conventional jobseekers payments. It has since materialized that 40% of those on the covid payment were earning less than €300 in employment. Meanwhile, on the covid subsidy scheme, where employers are subsidized to keep employees on the payroll, employers cannot pay employees more than their average pay and still qualify for the subsidy.   So the schemes were very badly thought out. There is also some fraud occurring where payments were made to non resident people. 

425,000 people are on the employers subsidy scheme and 600,000 are in receipt of the covid unemployment benefit. Before the crisis, there was about 2.3 million people in the workforce. So about 44% of the workforce are now in receipt of government supports. In the UK, there was 28 million people in the workforce before the crisis. Now, 6.4 million people have been furloughed - the equivalent government subsidy scheme for those affected by the covid crisis and another 2 million self employed people are receiving supports from another scheme. That is a total of 30% of the workforce. 

So Ireland has one and a half times the equivalent numbers on covid unemployment schemes as the UK has. This means that the Irish government should be phasing out the support payments. However, it is only the British government which is talking about winding down their schemes to reduce the cost to the exchequer. 

This was partly a reaction to the Bank of England warnings about the UK facing the worst recession in 300 years.  Meanwhile, in Ireland, there is strong opposition to any talk of protecting the taxpayer in all this. Leprechaun economics dictates that we must go blindly into the night and not prepare for a recession. Faith in the ECB money printing machines has never been better. And anyway, sure equality measures will ensure that we will all be equally poor. Except, of course, the few at the top who benefit from high inflation.

Rise in PSO Levy Angers Irish Industry

It appears that reality is beginning to bite at The Irish Times in view of the many large industries (some of the biggest employers in the country) complaining about the rise in PSO Levy to fund more wind farms. 

Full Article Here.

In a submission to the CER before it arrived at its final decision, tech giant Microsoft, which employs 1,200 people in the Republic, said this penalises large energy users who are holding energy capacity in reserve to meet anticipated growth.

The multinational also points out that the rate at which the PSO has increased over the last five years represents a “rate shock” for large energy users and “puts the Ireland energy market at a disadvantage”. In a similar vein, Irish food and ingredients giant, Kerry, which employs 4,000 people here, warns that the charge will damage its competitiveness.

Irish Energy Blog has been warning about this for years now, but the warnings have fallen on deaf ears. The Irish Times have been calling for more renewable energy for a long time now and have allowed the wind industry to spread their propaganda far and wide. To be fair, they were not the only ones. 

The only journalist that is going to come out well of this is Colm McCarthy. Of course, there will be no accountability for what will happen in the next few years. An exodus of large companies coupled with a hit from any prolonged Brexit negotiations will see us well back in recession and rising unemployment once again. At a time of record low oil and gas prices.

Will we ever learn....

Little Evidence That Wind Reduces CO2 Emissions

Minister admits Ireland won't meet it's 2020 Emission Targets

Minister for Environment Alan Kelly has said it is no secret that Ireland is not going to meet the EU greenhouse emissions targets for 2020. He said that there was understanding in the EU that Ireland had come through a tough recession and that should be recognised in the targets set for each State after the overall target has been ratified. He said capital investment to adapt and mitigate was now beginning at a level that was required. He said this could not happen when times were tough. - Minister For Environment, October 2015.

A significant component of the Government's strategy for reducing emissions is to pepper the countryside with wind farms. The assumption that they contribute to lower emissions is backed up by little, if any, evidence.

The below graph shows little or no correlation between installed wind and solar and CO2 Reduction :

What did cause a reduction in emissions was the economic recession in 2008. In the below graph, it is self evident, that the resultant reduction in energy consumption (a direct consequence of the economic recession), brought about a reduction in emissions. The PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) had their combined energy consumption reduced by 15% between 2007 and 2014 causing a 30% drop in emissions :

So the Minister is wrong on both counts - 1) installing more wind farms will not reduce emissions and 2) the economic recession, rather than acting as a barrier to emissions reduction, actually brought about the most significant reduction in emissions for many a year.


Sources:

Euan Mearns and Roger Andrews - Energy Matters Website