Friday, August 12, 2016

Mish On Negative Interest, Part II

Let me lay out a premise before I proceed to Mish's doubling down on his premise that negative interest rates are the desired result of given policy.  My premise is, first and foremost, you would not have interest rates in a free market.  Since a free market is voluntary, and interest rates are part of a regime backed by violence, we have patterns and practices which enforce interest rates, positive or negative.

Interest at any rate for any time on any amount always does damage, and that is why most ethical systems and all religions of the book condemn and forbid it.  Now in a free market it would not be outlawed, just not enforced. Now that is not to say in a free market there would not be people who are so stupid as to pay interest to those who demand it, just that it would otherwise be extinct.  There is an alternative and legitimate, necessary and sufficient form of finance available for any needful thing.

Some of Mish's commenters declare negative interest rates are insane, bad idea, etc.  This is tedious, because such commenters do not ask themselves "cui bono?" Just because it hurts you does not mean that others do not take delight.

Mish says -
In my article I stated upfront “Anyone with an ounce of common sense knows that negative interest rates cannot occur naturally, can only occur with government or central bank intervention, have nothing to do with free markets, and must fail eventually.”
Well, yes, they cannot occur in a free market.  But then, nor would interest rates at all.  He goes on to cite some realities of an economy (sometimes erroneously referred to as "the economy") from textbooks.  Then this..
While nothing legally might prevent negative rates, please note that there are no laws that prevent stupidity.
Here again, Mish's premise is this is a direct result of intended policy, and a mistake.  A mistake for whom?  Not for those who benefit.  And this:
Negative rates are logically impossible because they imply a negative time preference. That statement may be over the heads of most, so let me phrase it a different way.
I wonder whether getting screwed working with modern banks is even remarkable, let alone over the heads of most people.
“Negative interest rates imply that one would rather have 90 cents tomorrow than a dollar today!”Phrased that way, negative interest rates are logical idiocy. I am not trying to be harsh on readers like Tim. Indeed, I am thankful he brought the question up.
False dilemma and a straw man.  Interest in question is not about today and tomorrow.  Negative interest rates imply one would rather have a sure 90 cents back within a ten year note on a negative interest rate bond than a pretty sure 50% or more haircut on stocks, real estate or any other asset class within that same ten years.  it would be good to survey those who invested ten trillion dollars at negative interest rates as to their rationale.  I bet there are more reasons than the one I immediately perceived. Why Mish is flogging a straw man and a false dilemma is hard to understand.  Perhaps he is too beholden to Father Darkness, his stated mentor.  Then this:
However, Janet Yellen (or any economist) is either a clueless idiot or a big liar or both, to ever state or imply that time preferences can ever be negative or even zero.
Yikes, "ever be negative"!?  What do you call ten trillion currently at negative interest!?  And this as an aside:
In regards to the “natural rate“, economists note that it can only be observed, not set. I agree. Yet central planner fools at the Fed (central banks in general), all think they can set the natural rate.
i agree interest can be observed and not set, and that is how their very words convict the usurers.  They know well they trade in something that does not exist.  But the second part is sloppy on Mish's part. The Fed never tries to set a natural rate, its stated goal is to trade malcredit at 2 % above the natural rate.  Mish knows that.  Their goal of 2% is impossible, but they could care less about a base rate natural to a planned economy.  Their job is just to effect the back door tax on much of the economy that the 2% goal represents.

Mish finishes with...
In the doubtful chance that any Congressman or Senator is interested in hitting Janet Yellen hard with a series of no-win questions for her as opposed to wasting time in meaningless rants, please get in touch.
I wonder what these questions are?  To be fair, Yellen is an idiot, so pick a worthier opponent, say Bernanke or better yet Greenspan, who truly understands, or best yet, Volcker, who understands and has integrity.  I suspect given the errors inherent in Mish's premises his, questions would be equally flawed. Although not Yellen, but the others answering truthfully would not find Mish's questions much of a challenge.

Mish has some smart commenters...  regarding why people would buy bonds at negative interest rates, Tom says:
The only reason people buy bonds with negative interest rates, is to sell them for a higher price.
Doh!  That is so obvious I feel stupid for not thinking it...  negative interest rates are "tradeable'! (But he ought not say "only")  Financial stocks were stupidly high in 2007, but tradeable.  I shorted them.

Mish answering a commenter hits on a point which has a pedigree of which he is not aware:
There is a difference between negative interest rates set by central banks and fees one might have to pay for safekeeping. 
The word interest once meant a loss experienced in lending (or storing) money, a service fee for expense, not a profit for a speculated loss.  The term shifted from meaning a covering a legitimate loss to earning a (illegitimate) profit.  That is a story in its own right.

CDR says...
Negative and/or abnormally low interest rates will end when the top of the 1% tells the central banks to end them. Not before.
Yes!  These can be ended many ways, but not as long as the hegemon is pleasantly surprised.  Teaparty doc cites an old book -
As far as I can tell there has never actually been a natural money nor a natural interest rate. Both are abstractions that substitute for something other than that which they are, the values of which are determined both by real things and circumstances as well as human wants, desires, and fears.
Yes!  Something for nothing, where the victims end up with detritus and the rich get richer.  Noonan asks:
Here is another question: If you could borrow money at negative interest, guaranteeing a positive real return, why would you not borrow an infinite amount?
Read CDRs answer to this which is excellent, but he left something out.  My short answer is no, because markets shift, and the underlying obligation on your part can become an "infinite" liability.  Negative interest rate instruments are as risky as positive rate instruments.  That ten trillion at negative rates is exactly the amount of risk tolerated by investors.

The Hegemon did not ordain negative interest rates, it is a surprise.  But so far a pleasant surprise, since it is a steroidal benefit to the 1%, and advances class warfare, the raison d'etre of the hegemon, and earns him 100% obeisance (see "elections" Trump or Hill, Hegemon wins.).  If bad things come, good for the hegemon.

If at any time the Uncle Sam's offers are forced into negative interest territory, then Yellen will just front-run the event and proclaim it policy.

Deregulate banking.  Take away the rules and regs that allow these results, and currently forbid free market banks.  Let the 1% keep what they stole.  In a free market their assets would last maybe a month, before they were marked to market and any excess redistributed.  I know it ain't gonna happen, but it is good to have a clear view when you are obliged, by virtue of being alive, so sail in these seas.

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