
How Low Can Central Banks Go? JPMorgan Reckons Way Lower - randomname2
http://www.bloomberg.com/news/articles/2016-02-10/how-low-can-central-banks-go-jpmorgan-reckons-way-way-lower
======
chollida1
I remember Reid Hoffman talking about some of the mistakes he's made as an
entrepreneur
([http://ecorner.stanford.edu/podcasts](http://ecorner.stanford.edu/podcasts))

He said one of the big ones he made was in times of frothy capital markets
when all your competitors are well capitalized, its was a mistake to be frugal
and not take as much investors money as they could.

We are currently in a time of very frothy capital markets. Money is just being
given away. This is going to lead to, if it hasn't already, a big jump in the
gap between the rich and the poor.

These lower interest rates are allowing hedge funds to make money via currency
carry trades
([http://www.investopedia.com/terms/c/currencycarrytrade.asp](http://www.investopedia.com/terms/c/currencycarrytrade.asp))
while the average person is unlikely to be able to take advantage of this
situation, if anything it make sit harder for the average person to save for
retirement due to the paltry interest rates that are being paid on the
products available to them.

I don't know what the solution to this is.

I guess if there is any good news in this, its that every single government
who matters has already forced their bansk to go through some pretty strenuous
stress tests wrt negative interest rates and there hasn't really been alot of
bad news to come out of Europe, Canada or the US.....yet

~~~
thewarrior
Pardon my ignorance , but why is it that normal people can't borrow like hedge
funds ?

ZIRP as it's done today is basically a massive wealth transfer.

~~~
maxerickson
Normal people aren't structurally important parts of the economy.

Not that I think it's clear that hedge funds and big banks are structurally
necessary, but they've managed to create a system where they are considered
important by all the people that matter.

~~~
jakub_h
> Normal people aren't structurally important parts of the economy.

I suggest we try to remove them to see what happens! :)

------
roymurdock
Negative interest rates really aren't scary, they're just unusual in an era
(since early 1980's) where inflation targeting (which is closely coupled with
interest rates) of ~2% is the norm for the world's most important central
banks. Here's a good overview from Bernanke (pre chairman of Fed years). [1]

In the short run, nothing will change from a day-to-day consumer perspective.
Your 0.05% interest-rate saving account might drop to a 0.01% interest-rate
account. If you have _a lot_ (tens of millions) of money that you'd like to
put in a liquid savings account, you might be charged a slightly negative
interest rate. Some banks are already doing this with institutional investors,
but I doubt it will trickle down into commercial consumer banking. [2]

Kocherlakota, an ex-fed economist whose views I respect, called for negative
rates yesterday: "The FOMC needs to go negative - and that's a gigantic
_fiscal_ policy failure." I have to agree.

As he points out, low real interest rates present "an incredible opportunity"
for US gov to make huge, necessary infrastructure investments. Read more here:
[https://sites.google.com/site/kocherlakota009/home/policy/th...](https://sites.google.com/site/kocherlakota009/home/policy/thoughts-
on-policy/2-9-16)

The only scary implication of negative rates comes from the fact that central
banks do not want to go negative, but may be forced to. So they continue to
lose control over once-powerful monetary policy tools. This is only scary if
you put a lot of stock into a central bank's altruism, benevolence, and
ability to effectively guide an extremely complex and intertwined
economic/financial system.

[1]
[http://www.federalreserve.gov/Boarddocs/speeches/2003/200303...](http://www.federalreserve.gov/Boarddocs/speeches/2003/20030325/default.htm)

[2] [http://www.bloomberg.com/news/articles/2015-02-26/julius-
bae...](http://www.bloomberg.com/news/articles/2015-02-26/julius-baer-charges-
institutional-clients-for-snb-negative-rate)

~~~
atomic77
Negative rates are scary if they go low enough, where an inverse of the
problems with high inflation come about. Rather than try to collect payments
as fast as possible due to the eroding value of money, there will be an
incentive to delay receipt of payment as long as possible. Taxes will be
overpaid to be reclaimed in the following year. How would your local telco
handle being treated as an implicit temporary checking account?

I don't claim to understand all the implications, but it's an odd experiment
we would probably be better off not trying. What's worse, how do we ever get
back to some range between [-2,2] once we've gone that far negative?

~~~
roymurdock
Right, hyper [inflation, deflation] is bad and usually ends in the governing
body losing all power over the economy as people switch over to another
country's currency (Zimbabwe) or a new government's currency (Germany). That's
a discussion we should have when we get to -2.0% interest on _long-term_
assets.

~~~
atomic77
Fair enough, luckily we're not there yet, but what's concerning is that the
title of the article uses the words "way, way lower"!

------
pjc50
Firstly, note that these are negative _deposit_ rates. As a bank you have to
keep your spare money somewhere, and that is usually in an account at the
local central bank which also serves as part of the interbank clearing system.
Central banks are now proposing charging for keeping excessive reserves in
this account.

The bigger picture is that wealth accumulation _cannot_ outstrip economic
growth long-term or even medium-term without causing serious strain somewhere.
Pushing the rate of return on capital negative is the gentlest possible way to
do this. But the real problem is real estate and its endless appreciation in
value.

------
rrggrr
This is a disaster in the making: About 80% of small business loan
applications in the US are denied. The cost of underwriting and servicing the
loans and Federal regulations make these loans almost unprofitable for big
banks. Negative interest rates won't help.

Negative interest rates will instead force big business to seek _safe_ returns
wherever they can - and that will not be by investing in small business. That
money may well be deployed in competition against small business.

Consider this... the US Small Business Administration's loan portfolio is
barely a rounding error compared to the cost of quantitative easing and
national security expenditures these past years. Double or triple SBA loans
and USGOV balance sheet will not feel it, but the impact on job creation,
salaries and investment could well exceed any benefit in the US from negative
interest rates.

~~~
USAnum1
>"About 80% of small business loan applications in the US are denied."

Wow, I thought 80% was an overstatement. You are very much correct with
regards to the "big" banks.

See: "big banks – that is, banks with $10 billion or more in assets – approved
of 21.3 percent of small business loan applications in January 2015, up from
21.1 percent the month prior" [0]

Not the world's greatest source, but informative none the less: [0]:
[http://www.pymnts.com/news/b2b-payments/2015/big-bank-
backed...](http://www.pymnts.com/news/b2b-payments/2015/big-bank-backed-small-
business-loan-approval-rate-up/)

~~~
cm2012
Also, that's 80% of official applications. Countless others were given soft
nos - "don't bother applying as a start-up/fico under 680/time in business
under 3 years" etc.

~~~
icelancer
Yup. Couldn't even get a LOC for $15k when we had cash reserves of $35k and 2
years in business making $250k/year because we wouldn't become personal
guarantors on the loan and we were a risky startup.... that was cash finances,
no debt....

Okay. I don't pretend to understand. (We wanted the line to service hard goods
/ inventory instead of cash servicing inventory, which is a standard retail
tactic. Oh well.)

------
randomname2
Summary:

JPM estimates that if the ECB just focused on reserves equivalent to 2% of
gross domestic product it could slice the rate it charges on bank deposits to
-4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it
would be able to cut as low as -4.64%. That compares with minus 0.3% today and
the minus 0.7% JPMorgan says it could reach by the middle of this year as
reported yesterday.

In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s
is likely -3.27%.

Finally, if and when the Fed joins the monetary twilight race, it could cut to
-1.3% and the Bank of England to -2.69%.

What could prompt the Fed to go NIRP: a recession.

"With IOER at 0.5% and the Fed maintaining concerns about US money markets,
the US is not close to considering NIRP. However, if recession risks were
realized, the need for substantial additional policy support would likely push
the Fed towards NIRP."

------
btilly
Crony capitalism at its best. JP Morgan makes bets on central bankers moving
lower, then publishes a study saying that they could. If they can shift
opinion, then their bets just paid off.

Better yet if cronies of theirs in central banks buy the reasoning, the banks
are likely to actually move lower, making for an even larger transfer of real
wealth to the financial sector. Thereby paying off JP Morgan's bets even more
AND giving it a shot at more free money from central bankers trying to
"improve the economy".

The result is a very large wealth transfer to the financial sector. Who will
then say that they, "deserve it for being so smart." And then try to figure
out how to top what they did the last time.

~~~
rayiner
How is that "crony capitalism?" Companies try to shift opinion in their favor
all the time.

~~~
btilly
Crony capitalism describes any situation where success in business depends on
close relationships between business people and government officials.

Over the last decade, top financial firms have succeeded due to central bank
policies that the firms themselves have been part of shaping. For example
estimates are that "too big to fail" banks make an extra $34 billion per year
off of the implicit guarantee from the federal government.

Moving on, McKinsey studied the effects of the US government policy of
quantitative easing. See
[http://www.mckinsey.com/insights/economic_studies/qe_and_ult...](http://www.mckinsey.com/insights/economic_studies/qe_and_ultra_low_interest_rates_distributional_effects_and_risks)
for the full study. The bottom line is that it is estimated to have directly
enriched private companies to the tune of $460 billion dollars (about a third
of which went to banks), and cost American households $360 billion. That's a
pretty large and direct transfer of wealth!

This study examines how much room Europe has to pursue similar policies. JP
Morgan is effectively telling the central banks, "Here is how much money we
think you could afford to give us." But doing so in a sufficiently opaque way
that it isn't obvious that that is what they said.

~~~
rayiner
Even assuming any of that is credible, here were not talking about a personal
relationship with government. We're talking about public projections and
studies that at best influence government through persuasion not
relationships.

------
nissimk
This negative rates thing is fascinating and scary. Apparently economists have
been talking about it for years. I remember reading about the magnetic stripe
on the dollar bills suggestion in the WSJ some time around 2000. The idea is
that over time the dollar bill becomes worth less, and this is tracked by the
magnetic stripe.

Just found this interesting paper from the IMF:

[https://goo.gl/65CuKF](https://goo.gl/65CuKF) (scribd)

What will happen if they try to do something like this?

~~~
jpollock
They don't have to do mess around with face value. Individuals and companies
with billions of dollars in cash can't really stick it in a mattress and
ignore it. They have to find storage, pay rent, heating/cooling/humidity
control, security, etc. That costs money. Negative interest rates reflect that
cost.

Security guards alone would cost round_up(24*7/40) = 5 security guards
assuming you only need a single guard (and they never get sick or take
vacation), which at a loaded labor cost of at least $150k (low end) is $750k,
which is 4% interest on $18.75m. So, under $20m and you're happy to pay the
central bank the money to guard your cash.

~~~
nkurz
_Individuals and companies with billions of dollars in cash can 't really
stick it in a mattress and ignore it._

True. Far better to bury it somewhere remote. See this "news article" from the
future about how it plays out:

    
    
       The desert dollar industry 
       January 1, 2021
    
       These days, the desert is swimming in cash... literally.
       Over the last six months, a booming business in illegal   
       cash storage has sprung up in Nevada, New Mexico, and 
       Arizona where analysts estimate that $30 billion worth of 
       $100 notes have been hidden. By day, smugglers drive deep 
       into the desert, SUVs loaded down with suitcases full of 
       Ben Franklins. Once they've found an ideal spot, they wait 
       till the sun goes down and frantically dig a hole, only to    
       drive away the next morning with nothing but the cache's 
       GPS coordinates and a drone or two to guard it. When asked 
       about the sorts of people staying at her motel these days, 
       Smith shrugs. "I don't ask who they are and they pay cash."
    
       ...
    

[http://jpkoning.blogspot.com/2015/12/the-desert-dollar-
indus...](http://jpkoning.blogspot.com/2015/12/the-desert-dollar-
industry.html)

------
irln
I thought the only reason that banks had excess reserves was due to the fed
paying 50 basis points of interest. This was the fed's way of preventing
+/-$2.28 Trillion [1] from being loaned out thus adding $2.28 trillion x
(fractional reserve rate...10 if mandatory reserves were 10%) to the money
supply through lending. With negative interest rates excess reserves again
become an expense, therefore removing banks disincentive to lend.

[1]
[https://research.stlouisfed.org/fred2/series/EXCSRESNS](https://research.stlouisfed.org/fred2/series/EXCSRESNS)
[2] [https://en.wikipedia.org/wiki/Fractional-
reserve_banking](https://en.wikipedia.org/wiki/Fractional-reserve_banking)

------
anon4this1
The world economy has seen plenty of downturns but the whole developed world
turning to negative interest rates is a new thing.

Is this a sign that the economic dogma underlying central bank decision making
is not really based on anything solid but rather just follows keynesian trends
of the day combined with the race to the bottom of "europe is doing it so we
need to as well!"

Fortunately I hold a large bitcoin position which I believe hedges me pretty
well in this situation.

~~~
sageikosa
They'll come for your bitcoin just like they once came for gold (if they so
desire).

~~~
TheOtherHobbes
If it gets to that point, you might as well stock up on alcohol and chocolate
for barter.

In a post-bank economy they're going to be a lot more valuable than bitcoins
or PMs.

------
Taek
With negative interest rates, you would make money by taking out a loan. Banks
literally have profit margins just from borrowing money and doing nothing with
it. What would happen if we gave the same advantage to the general public?

Something seems very wrong.

~~~
obblekk
If you borrowed $100 but kept it in a bank account, then you'd be losing to
the negative interest rate on that sum too (and friction of having to make
regular payments).

The only way to benefit is to borrow and invest that money, which is exactly
what the fed wants (with the expectation that productive investments will
boost economic growth).

I think the real issue is that if you're paying -5% for a loan. It's rational
to invest that into something that returns -1% (and profit by 4%). This means
people are incentivized to invest in unproductive resources... Which might be
a bad thing in the long run.

~~~
jaycroft
Or borrow and keep a stack of $100 bills under your mattress to be used to pay
back a smaller sum at the end of the term?

~~~
15155
That's why cash must be (gradually) banned, among other reasons. See Germany,
Norway.

~~~
dav-ycombinator
No need to ban cash for arbitrarily negative rates to work. Simply introduce
an exchange rate between physical currency and deposits.

Simply introduce an exchange rate between the dollar and it's physical
representation.

Barriers are largely people's lack of understanding of how this works and how
huge the benefits would be for society.

~~~
dav-ycombinator
> Maybe if you think government and society are the same thing.

No, I just think that neutral monetary policy which leads to full employment
(defined as natural employment under given tax/regulatory regime) is good for
society.

Also good for govt's ability to manage budget, but that's secondary.

------
acd
What percentage of world debt is on negative interest rates?

~~~
pjc50
Very little at the moment. Remember this is only negative short term deposit
rates at a few central banks. There's quite a bit at zero or near-zero rate
though.

More governments should take the opportunity to borrow money at zero rates and
invest in socially useful things.

~~~
ThrustVectoring
Borrowing money is simply the government doing socially useful things now in
exchange for giving up the ability to do so later. Sure, low interest rates
give you better terms on this, but it's not obviously clear that this is the
correct thing to do. Roads and bridges need maintenance, and in the future
there will be more old people that we want to take care of.

~~~
trophycase
Except if you don't invest in infrastructure and useful social things, there's
no future of note anyway. I don't really think the economy will do too well if
nobody can make it to work.

~~~
ThrustVectoring
Right, there's obviously transportation and infrastructure projects that are
positive-value. We should do those. What we shouldn't do is invest in
transportation and infrastructure projects without evaluating whether or not
they're positive-value. Even if we have unprecedented ability to cheaply
invest in infrastructure, that doesn't mean that all projects are worth doing.

------
atomic77
Somehow this gives me the image of a "high functioning" meth addict
discovering the rush delivered by this wonderful drug called heroin. Surely
he'll keep things under control.

~~~
CyberDildonics
A government aggressively trying to borrow less money gives you that image?

~~~
kolbe
"borrow less" is the new "pay back what you owe"

~~~
CyberDildonics
Not paying back what you owe is default, and the countries in that position
aren't the countries being talked about.

~~~
kolbe
That is an incorrect definition of "owe." Owing begins at the inception of
incurring a liability, not at the moment of being legally required to pay the
obligation.

And even if you had used the correct definition, retorts like yours are
pointlessly pedantic, petty and add no value to a discussion.

~~~
CyberDildonics
Countries are paying back what they owe. How does your original reply add
anything or even make sense? If you are this worried about it you should
probably at least understand what you are talking about.

