St. Louis Fed Promotes the Mathematically Impossible

It's bad enough when economic writers are clueless about how markets work. It's worse when Fed economists are clueless.

Check out this Tweet by @StLoiusFed.

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Understanding the Math

  • Negative interest rates cannot push people into more stimulating investments.
  • No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation.
  • In the equity markets, for every buyer of stocks, there is a seller, thus the sideline cash argument fails as well.

It's bad enough when analysts fail to understand basic economics, but even Fed economists are clueless about how markets work.

Negative rates cannot possibly do what the Fed suggests, but they can foster an artificial wealth effect when people borrow or spend more than they should.

Any economic gain spurred on by reckless borrowing will all be taken back and then some, in the next recession.

Zombie Corporations

Negative real rates also foster zombie corporations. The BIS defines zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

As it sits, 10% of corporations are zombies, unable to make interest payments from profits.They need cheap money to survive.

If the St. Louis Fed economists see a sustainable benefit from spurring zombie corporations, they are wrong about that too.

Mike "Mish" Shedlock...

So 0% isn't enough of a disincentive. You have to actually charge people to hold their money in order for them not to give it to you. It sounds crazy, but it appears to be true.

@KidHorn: I believe it has to do with the prevalence of mal-investment. People will accept a negative return if they think it buys them safe harbor.

I suspect the whole “negative interest rates are good for the economy” meme is really just political cover for the Fed to monetize government debt. How does that saying go? “If you owe the bank $100 that’s your problem. If you owe the bank $100 million that’s the bank’s problem.”

Legally is it ok to throw a shoe (like was thrown at Bush) on any economist who comes out with such an inane idea. Make it more than one for Rogoff. In fact throwing at Rogoff is easy. Anytime he takes a class the students can practice on him!

I sorta like the new website design. Will take some getting used to. Making it this far with the log in and such is an accomplishment.

Selling bonds which have a negative yield is a real trick if you are selling to a corporeal being, and not a phantom of financial engineering. The problem with bonds is you have both kinds of buyers, rational people and software programs. Those who think the Fed is independent never consider why a rational banker would take trillions in bad paper without compensation or some guarantee. A guarantee implied raises a lot of questions. The phantom bond holder usurps the rational bond holders collateral assumptions, even while the bond purchases are really nothing more than a government recollateralizing of bad debt. To sell an entity a bond with negative yield you must discount the paper to par, so government pays the bond buyer to hold the bond with little or no interest, that's the markets way of making the deal square. However the government can pin the (non entity) bond buyer at par.) If not they have to print the money which is rebated to the buyer. Since bonds have these two aspects they can offer them either way, at par only with deferred carry charges, or rebates up front. Would you buy a bond with negative interest with cash up front, if you could collateralize the ENTIRE amount of the bond in your portfolio, and buy something else with it, like another negative yield bond?

Mish, you forgot one chart :the CPI.

If the ECB CPI = +1.00% and government notes/bonds are bellow the CPI, the government get a nice discount on debt, in real terms. If the 2 years in Germany is (-) 0.7%, they are paying, in real terms,==> (-)0.7% - 1.0% (CPI) = (-)1.7% in dividends to investors. German debt is shrinking !

The sheeple love it. They think the Fed works for them. Things have never been better. Keep repeating it.

Combined with real rates of inflation, the super low interest rates make capital appear to be worthless. 20 years ago, a person who retired with a Million Dollars could reasonably count on income, net of inflation, of $30 to $40,000. Today that same Million Dollars, net of inflation, will yield zero, net of inflation.

Guess who gets killed in this? The middle class. It is now much harder to save for retirement, to send the kids to school or to save to start a business. "Savings" has been perverted to allow the Treasury to cheaply finance its $20 Trillion of debt. So, the real cost of government excessive debt is the destruction of the middle class capacity to improve their lives. Borrowers are enabled, but they, of course, cannot get ahead. Leaving the middle class as wage slaves without the capacity to resist government support (and control). Freedom comes from economic independence. Mssr's Bush II and Obama have pretty much destroyed that concept.

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