Wednesday, February 10, 2016

High Plateau Drifter rides again!

The latest from High Plateau Drifter (most recently):

OK, help me understand how negative interest rates will spur growth.

Anyone with bank deposits will see those deposits shrink. Thus only those who are risk averse, desperate to avoid losses and unable to find non-confiscatory alternatives will hold deposits. Over the long run the falling deposit volumes will contract the monetary base, which in turn will slow the growth of M-2 over the longer term.

NIRP is a transparent attempt to provide an extra profit margin for banks holding needed transaction balances at a penalty rate while placing those balances in reserves with the Fed at a positive rate. Penalize transaction balances and you get fewer transactions. It is a subsidy legislated by a government agency which lacks legislative powers, and a subsidy or income stream that provides an incentive for banks to sit on the deposits rather than lending them out to productive enterprises. Of course, NIRP is driven by falling yields on Fed assets like interest sensitive treasury notes and junky mortgages which make payment for bank reserves at fixed rates parked at the Fed more risky.

This is deflationary.

For proof of quick trouble, I submit the chart of the US dollar after a few Fed heads began talking about the mere possibility of NIRP.

If the most important mission of the Fed is to defend the value of the dollar so that foreign countries will hold their reserves in dollar denominated instruments, it would appear that all this chatter about NIRP is causing world wide capital to flee the dollar. And, surprise, surprise, we are beginning to see the first signs of strength in gold and silver.

This will end badly, very badly.
Note that the "High Plateau" ain't lookin' so high, anymore!

Previously by High Plateau Drifter: Skeptics to the Ramparts, Fun on the Permanently High Plateau, Surfing the zero bound along the permanently high plateau, and Back To The Future!


Anonymous said...

Cross posted at Sailer's blog,

If I was a Democratic party bigwig, I’d be terrified of this stuff — how stuff you said 20 years ago in a completely different political environment could come back and haunt you for being insufficiently progressive by modern standards.

I wonder how all this must look to, say, politically ambitious kids of about high school age. I’ve always thought the hyper-ambitious Marco Rubio types that political parties depend on have their political views shaped at least partially by their own career self-interest — whichever ideology seems the most likely to deliver a person like themselves to the Oval Office is the one they naturally find the most persuasive.

Well, right now, there’s an entire generation of ambitious, charismatic young white kids who are constantly being pounded over the head with the message that they have no future in the Democratic Party. How could they? In addition to being hostile to white people in general, the party presents no plausible career path to anybody who’s not black, gay or transgender. Hillary Clinton checked the right boxes at every single stage of her entire career and she’s on the verge of being bamboozled — again — by yet another freak electoral phenomenon that nobody would have seen coming just two years ago. And here’s Genius T. Coates roasting her over coals for doing what, back in the 90s, was considered the smart move. If you’re a calculating Tracy Flick type, how do you plan for any of this?

Meanwhile, you look at the Republican race, and it’s full of folks that you just know were president of every club in high school. Even the wild card Trump presents a plausible model for an ambitious kid who has loads of charisma. What go-getter student government nerd looks at Bernie Sanders and says, “if I play my cards right, that could be me?”

High Plateau Drifter said...

Bernie will raise taxes in a recession as a way of driving recession into a depression thereby turning political anger into outright rebellion. Tis the season of wickedly bad ideas

But there is something here that I am missing or do not understand.

How can negative interest rates, or rather fees on demand deposits, possibly help.

I don't get it!

Can anyone enlighten me?

CP said...

DXJ is long Nikkei short JPY/USD (i.e. hedged the yen).

The worst trade to be in right now!

AllanF said...

How can negative interest rates, or rather fees on demand deposits, possibly help.

I'm totally with you on that one. It is such a transparently bad idea on so many levels it begs belief. I can only regard it as a final impotent attempt of a geriatric old-guard so insulated from reality for so long that they've convinced themselves they can do no wrong. Such hubris is the stuff of epic history.

It is either that or the conspiracy theories are true: there is a cabal that has prepared to come out on top following a radical revolution and are now ready to set into motion the final act.

I don't see how there can be any plausible explanation in between.

Ultimately, negative interest rates are the elites saying that there will be no further capital formation... we have it all now, and we're keeping it.

High Plateau Drifter said...


"Ultimately, negative interest rates are the elites saying that there will be no further capital formation... we have it all now, and we're keeping it."


And also no long basing formations allowed after a crash during which a new generation of savers could pick up common stocks at low prices. The Fed rips away that opportunity every time.

Everyone on ZH thinks that the Fed is just the handmaiden of the banks, but in fact its powers go much further than that to preserving the wealth and capital of an entire class of people, and closing the door to upward mobility in the process.