Wednesday, February 24, 2016

Jim Rickards on Where Negative Interest Rates are Leading

Jim has a new article out that pretty much says what we have said here on the blog about negative interest rates. Below are some quotes from his article and then a few added comments.

"The currency wars are intensifying. Out of desperation, more central banks, including Japan, are running headlong into negative interest rate policy, or “NIRP.”
Negative interest rate policy by the world’s central banks is getting out of control. The latest cut was from the central bank of Sweden, the Riksbank. Interest rates in Sweden were already negative, but the Riksbank cut them even further, from minus 0.35% to minus 0.50%.
The Riksbank has joined the European Central Bank, the Swiss National Bank and the Bank of Japan in this negative rate madness. It reminds me of the limbo dance craze of the 1960s.
Dancers had to lean backward and shimmy under a stick held by two other dancers. It was a contest, and the winner was the one who got under the lowest stick without falling over backward. The musical refrain was, “How low can you go?”
Central banks are engaged in a similar contest, but they may all end up as losers. They want inflation, but negative rates feed deflationary expectations. This causes consumers to hold onto cash in the expectation that goods will get even cheaper.
Stress is rising throughout the global financial market as investors start questioning the negative consequences of central bank policies.
Who knows what lies at the end of NIRP policy — or even if it’s reversible?" . . . . 
My added comments: Please note that Jim calls the use of negative interest rates an act of "desperation." Stephen Roach used the same word in his recent article We said the following in this recent blog article:
"According to this CNBC article, negative interest rates employed in Europe were a failure because they instilled a lack of confidence in the system by the public. Of course they do. It's basically looked upon as officials waving a white flag of surrender. Everything else we tried failed so now we are going to punish savings and force you to spend or invest. It looks very desperate to most people."
Jim goes on in this new article to suggest that all the talk now about negative interest rates in the US is to set the stage for potentially using them later on in 2017 or 2018. The point readers here need to take from all this is that we cannot just accept at face value statements that the economy is on the mend or that we are headed towards recovery. It is crystal clear from our monetary officials that even they don't have confidence in any statements they make to that effect because they are constantly talking about all these radical policy alternatives to try and improve economic conditions. If they were confident about the economy, we wouldn't be hearing all this talk about potential negative interest rates. It's really that simple. 
Unfortunately, we simply cannot trust our monetary officials on this important issue and are forced to stay alert and informed at all times. On top of that we need to have some kind of backup plan in mind in case we do get another major crisis. It would be great if we could just trust that those in positions of monetary authority will handle things while we just concentrate on our own situation. But they are making it clear that they don't have much faith in their own policies, so why should we? Implementing negative interest rates is the ultimate admission of total failure by monetary policy makers and readers here should view it in that light.

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