Thursday, February 18, 2016

Negative Interest Rates to Set Stage for Next Crisis

Stephen Samuel Roach, an American economist who serves as senior fellow at Yale University’s Jackson Institute for Global Affairs and a senior lecturer at Yale School of Management recently warned of new risk that will be introduced through NIRP.  He warned that NIRP will set the stage for the next crisis.  Or is this the beginning of one?

Here are some comments by him, NIRP "could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates — one futile attempt begetting another." and "could be the greatest failure of modern central banking. Yet denial runs deep. ".

How will this lead to?

"The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” — the uneconomic loans made to insolvent Japanese borrowers in the 1990s. Central banking, having lost its way, is in crisis. "

What is negative interest rate policy or NIRP?

More and more major central banks around the world are experimenting with this policy. 

Do you know that this is something new that has never been tested before?  

Some say this "are signs of "policy exhaustion" from monetary authorities", "dangerous experiment" and "sign of desperation, a signal that traditional policy options have proved ineffective"

According to Jim Rickards, NIRP are symptoms of currency wars intensified. "Stock markets are spooked, and investors are piling into Treasury bonds and gold." Where will this lead to?

Here's what Jim says

Helicopter Money is coming. Why, when and how?

What is the helicopter money that is gaining momentum? How is this going to be done? What is the consequence when this happens? Check Jim Rickard's latest take on the world economy.

"...The current behavior in the stock market is exactly what I’ve expected to see at the beginning of a recession, too. Stock markets are leading indicators of recession. They typically go down about six months before recessions begin.

Printing money is only half of what’s necessary to produce inflation. The other half is lending that new money… having people go out and spend it… have banks leverage that money through credit creation and so on. That has not happened."

If the banks are not lending out money to create spending, who will do it next?