
Negative Interest Rates Are Going to Ruin Everything - barry-cotter
https://prestonbyrne.com/2020/01/10/nirp-is-going-to-ruin-everything/
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anm89
I really believe this premise. I really believed this premise 10 years ago and
I believed it would be nearly impossible to continue 10 years further on our
current path without facing serious consequences.

One thing I learned in the last 10 years is that reality doesn't care that
much what you believe and markets can stay irrational vastly longer than you
can stay solvent, if not indefinitely.

And that's the interesting takeaway to me. What if all of this is nonsensical
insanity but it's nonsensical insanity that is capable of reaching some local
equilibrium that is stable for an extended period of time.

Or what if these central bankers are geniuses manipulating the quantum
mechanics of our economy in a way that will just always seem like nonsense to
outsiders.

Both of those seem like poor premises to me but I can't disprove either of
them.

I'm still proud to say I'm short the S&P because at the end of the day all you
can do is look at the cards dealt and make your best call but I'm much more
willing to believe that I go bust on that bet than I would have 10 years ago.

~~~
john_moscow
>Or what if these central bankers are geniuses manipulating the quantum
mechanics of our economy in a way that will just always seem like nonsense to
outsiders.

If you think deeper into it, you will see that the U.S. economy does not exist
in a closed loop. For instance, most of the physical goods we use gets
produced in China. The profits from producing them flow back, since purchasing
real estate in the politically stable "West" is much more reasonable than
holding your capital in China where you can get killed over it. A similar
process happens to the Saudi oil money and the VC market. Although it might
look like the central bankers have found a wonderful way to make money from
thin air and make everyone happy, I think we are actually just slowly selling
off strategic assets to the external buyers and spending the proceeds to buy
trinkets.

~~~
macinjosh
In America the ownership of real estate is not an absolute right. Your
property can be taken by eminent domain, by failure to pay fines, or more
commonly it can be taken due to failure to pay property and/or income taxes.

If they ever need to get the foreign owners out they will set a tax on foreign
owned real estate for an amount makes the investment not worthwhile.

~~~
john_moscow
Except the economy is getting more and more dependent on that external money.
Good luck banning foreign owners if 20% of your state GDP is real estate deals
(real numbers for British Columbia; they also tried foreign buyer tax,
although the Chinese figured out some loopholes). Good luck banning foreign
investments if millions of local jobs exist solely to make the companies look
like better investments, and millions more are tied to advertising,
accounting, cloud and other services provided to VC-backed companies.

You can't stop the slowly accumulating long-term effects without a
considerable mid-term depression, and no politician will go for it because the
majority of voters is very short-sighted.

------
gfodor
> Central bank rate setting is basically an adjustable rate mortgage for
> states and their entire economic systems.

The debt markets are complex but at a high level, this is an absurd analogy.
The debt the author is worried about are largely based upon fixed interest
rates for the life of the debt. As such, one can write down on a piece of
paper the obligations borrowers have, and they will not change over time due
to the structure of the debt.

If one is going to write an article about predictions based upon the interest
rate markets, one needs to do better than "wow, look at all this debt, surely
it will not be possible for parties to meet their expected obligations!" If we
were in a _high_ rate environment, would one argue there is _less_ default
risk? It doesn't make sense.

If you're going to make a prediction, make a prediction. Don't just say
"countries will default" if you can't explain what chain of causality gets you
there. High debt loads with low rates do not cause defaults: other events do,
ones that are hard or impossible to predict. So the analysis contains zero
real predictions or information, other than claiming that somehow an
unexpected crisis will be made worse by the debt. It seems equally likely as
not that debt will exacerbate whatever the next crisis is, it seems
_extremely_ unlikely that it will be the root cause.

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eranimo
> Well of course we shouldn’t have funded state entitlement programs with
> trillions in low-interest debt and ensured our governments and, by
> extension, our societies were addicted to low interest rate revolving credit
> facilities writ large.

The author doesn't mention the single largest source of increase in federal
debt the last few years: the military and tax cuts for the wealthy.

~~~
kyrra
Are you talking just discretionary budget only? Mandatory budget of the
federal government has been growing as much more than discretionary.

------
tick_tock_tick
The author provides no proof that asset prices are the result of inflation or
that the 100k salary for a restaurant manager is. The latter is normally used
as an example of how tight labor market right now not inflation.

I'm not surprised they don't show any statistics as the lack of inflation in
the past decade has been quite a surprise to economists.

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hakfoo
A large undiscussed issue here is that low (and negative) interest rates have
hidden the risks of wage stagnation on consumer demand. That obviously has
economic consequences, but it could get to socisl unrest pretty fast.

Your dad could afford to buy a Toyota Corolla and a new mid-line TV in 1980.
You can afford to finance one with low interest rates in 2019. But your son
won't be able to afford those things with spiked interest rates and more
restrictive lending paradigms.

A tangible example is carmakers offering 0% loans at 5-6-7-8 year terms. Even
though fewer customers can afford the price in cash, or with a more
conservatively priced 10%-APR 4-year loan, sales numbers remain high.

If the day of reckoning comes, and interest rates return to historically
normal levels, or dramatic 1980s levels, it's going to break that illusion.
Will consumers be angry when they realize they can't even have the quality of
life they've grown accustomed to?

~~~
smallgovt
>> Your dad could afford to buy a Toyota Corolla and a new mid-line TV in
1980. You can afford to finance one with low interest rates in 2019. But your
son won't be able to afford those things with spiked interest rates and more
restrictive lending paradigms.

This is a misrepresentation of the real statistics around wage stagnation.
Real wages (adjusted for inflation and/or purchasing power) hasn’t changed
much for the lower and middle classes in the USA for the past few decades. So,
the average American can afford to purchase exactly what they could a couple
decades ago.

Source: [https://www.pewresearch.org/fact-tank/2018/08/07/for-most-
us...](https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-
real-wages-have-barely-budged-for-decades/)

~~~
OnlineGladiator
> So, the average American can afford to purchase exactly what they could a
> couple decades ago.

Sure, if you ignore the cost of health insurance and medical bills. Also if
you ignore the cost of higher education.

~~~
smallgovt
No, the price index used incorporates both healthcare and education costs.

Source:
[https://en.m.wikipedia.org/wiki/Personal_consumption_expendi...](https://en.m.wikipedia.org/wiki/Personal_consumption_expenditures_price_index#Comparison_to_CPI)

~~~
OnlineGladiator
Those numbers don't pass the sniff test. According to that, the adjusted cost
of education has gone down!?!?! That clearly ignores college, or is just
factually incorrect. I also don't believe that the cost of medical treatment
has gone down, although admittedly I don't have numbers to support that
assertion.

~~~
hackeraccount
Price and medical care should be approached as though there's a giant sign
that says "Here there be dragons." There are a lot of weird incentives to have
multiple prices for the same medical good. For uncompensated care the
incentive is to have the price be as high as possible within the bounds of
sanity. The prices that insurance companies pay on the other hand tend to be
much lower while those same insurance companies have an incentive for a high
price for those without insurance i.e. the higher the un-insured pay for
procedures the more the insurance company is saving its customers.

------
stanferder
It's hard to argue with what the author describes as a hunch, but his
threshold for "end of the world" is pretty low.

I was working in an adjacent milieu at the time, and I wasn't happy when S&P
tanked, but really, no one cares about unemployed bankers, unless you're in
the position of the author and you know them personally. Even then, it's not
the end of the world.

Moreover the world isn't turned upside down when a Taco Bell manager makes
$100K. And ordinary people experience an absence of money at the ATM on a
regular basis when it runs out of _their_ money the day before payday.

Negative interest rates are uncharted territory, but the anecdotes supplied as
background information aren't that persuasive.

------
nine_k
Negative interest rates basically mean: "We accept your money to store it
safely, for a small fee".

Didn't banks do just that at the times when gold was the world currency? That
continued for quite some centuries, e.g. during the explosive growth of the
industrial revolution.

~~~
mikepurvis
Most banks charge a monthly service fee already anyway. So we're basically
already under negative interest rates; it's just regressive ones that are a
higher percentage the less money you have.

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smaryjerry
A lot of what the author said is negated by the fact banks build into their
loans that the rate can not drop below zero and that is before their spread
(profit) is added to the rate. What is correct is the rate cannot continually
go down further but it will actually make banks even more profitable because
they essentially have built in floors to the loan at zero. Meanwhile the bank
may borrow below zero. As for the effect on the overall economy, it does mean
that actions taking interest rates negative will be mostly ineffective should
they be used. However the fed has been slowly crawling back to a better
balance sheet with QT and higher rates over the last few years and even though
there have been 3 cuts in a row last year the fed is still better prepared
than say 3 years ago.

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mft_
So if we accept the premise that’s there’s (as a minimum) a significant
correction or (at worst) a major financial crisis coming... where/how would
you invest to either ride it out without too much of a haircut, or even make
some profit?

~~~
JamesBarney
You can sell an interest rate futures. But be warned you if you had done that
10 years ago when everyone thought low interest rates weren't sustainable you
would have lost a great deal of money.

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JamesBarney
This entire article tries to use an abundance of idioms and truisms to hide
that there is not a lot of substance here. And the little substance present is
confused.

The article is all over the place. For instance, the author worries we're
going to end up in a world with both a debt crisis AND hyperinflation.
However, none of the current debt is inflation-adjusted, so how can companies
be unable to pay off their debt when they have tripled their revenue(due to
hyperinflation).

He completely misunderstands the quotes from Larry Summers and the CEO of
Deutsche. He believes they support his case when they have the exact opposite
worry. Imagine you live in a house with a heater but no thermostat. The
furnace is failing, so even on a typical day, you crank the heater up to its
max setting to keep warm. Larry Summers and the Deutsche CEO worry that now
the heater is maxed on a typical day, we have no spare capacity for a cold
front. The author is worried that since we maxed out the heater that we're
going to overheat because he doesn't understand that there is an intermediate
step between adjusting the heater and making the house warm.

> I leave it to folks with advanced degrees in mathematics to model and
> quantify this hunch.

All you need to understand and dismiss his concerns is to have taken an intro
to macro class at your local community college.

------
ttul
Negative rates In Europe resulted from the Germans refusing to borrow more to
stimulate their economy after the financial crisis and from the EU failing to
find a political solution to deep structural issues that have constrained
growth. It’s those underlying problems that are the real problem.

------
xiphias2
There is inflation all over the world. Housing is not counted, although it's
the major cost for everybody at this point.

The only way to remain sane in this manipulated fiat environment is to
calculate gold/housing, stock/gold and Bitcoin/stock market and similar asset
ratios.

~~~
ls612
This is false. Housing is almost a third of the CPI.

~~~
im3w1l
I think for many people housing as a fraction of money spent is much higher
than that. I have had periods where around 75% of my spend was rent.

~~~
JamesBarney
Depends where you live. In San Francisco you might. But when I graduated
college I moved to Houston and over the last 10 years I've never spent more
than 10% of my income on rent. Sometimes spending as little as 6%. (When I
graduated I made 40,000 and spent $300 a month sharing a 2 bed room in a nice
neighborhood, a couple of blocks away from a bunch of nice museums.)

