Thursday, August 11, 2016

Mish on Negative Interest

Mish was my hero when he noted about the same time I did that money and credit are not the same thing, and he went further, and slew the hyperinflation dragon.  Because it is credit being issued, not currency, there will not be hyperinflation. He debated the formidable Dr. Gary North, Austrian School hyperinflation theorist, and crushed him.  Dr. North has not addressed the subject since.

Now negative interest rates have probably been around before, but as unknown to us as logic was to the medieval man until Islam reintroduced us (and I bet the Koran has something on negative interest rates).  But as it stands, we are all struggling with what this means.  In this post, Mish intimates that negative interest rates are the result of policy, not market.  Read his article and the comments, Mish has some very perceptive commenters.

Now certainly results can reflect policy, and it may be policy to arrange matters to result in negative interest rates, but let's look at a typical government policy, in say agriculture, from around the same time as we went off the gold standard lite: Get Big or Get Out.

OK, there is the stated policy.  Then there are the rules and regs to effect that policy.  Then there are the court decisions that benefit the big and hurt the small establishing patterns and practices (it is a crime to test for mad cow disease in USA for marketing purposes - advantage big, disadvantage small), big biz is subsidized, small biz is starved for finance by banking rules and regs; and the result is small ag was nearly wiped out except for some tax-avoidance wineries owned by doctors and lawyers (over 700 in Washington State... we need 700 wineries?  No 698 lawyers need tax dodges).  So the goal, policy, practices and result is if you didn't get big the last 40 years, you got out.

Isn't this different?  Aren't bonds sold at a given price, a very narrow event compared to the world of agriculture, then the market takes over?  Of course those buying bonds when the price hit an attractive level do so, presently that price is at a negative interest rate.  The buyers' reasons are clear, to take a guaranteed 2% loss in bonds is better than a likely 50% loss in stocks, borne largely by pensioners.

(Note that: pensioners are getting screwed by negative interest rates now; pensioners will get screwed by falling stock prices, at which point the interest rates will reverse...  point is pensioners will get screwed no matter what.  Again: pension, paycheck, property: you're screwed the next 40 years.)

Bond issuers and dealers could care less what the price is, they make their money regardless of the price of the "securities" they trade.

Yes, the point of this all seems to be expressly for a policy result:

1. Rich get richer, poor get poorer, a condition a Hegemon needs to maintain power.  Marxists were right that far, capitalism needs class warfare, so the Hegemon foments it.

      a. Negative interest rates hammer pensioners.  Check.

      b.  Negative interest rates are a monetary phenomenon, goosing the asset class on the other side of    the hedge, stocks.  Rich get richer, poor get poorer, check.

     c.  Real Estate can be landbanked, keeping prime real estate off the market, maintaining high rents for those who do rent, and too high rent for those who would like to rent.  And allows hot money from China, etc, has a place to hide.  Also, if all of that real estate was brought on line, rents would fall... so hot money must be following some rule "you can hide here, but don't make money here."  Real estate overpriced, check.

2. Landbanking is key to this rich get richer, or something, this is foggy...  landbanking is where false economy excess can be deposited, and with negative interest rates, it costs the owners nothing to sit on the pile.  And to landbank, that is purposely decline to earn on your investment, is tantamount to a negative interest rate.  Interest rates and are very much correlated in a false economy, but not direcly cause and effect.  So many threads, what does it all mean?

The bottom of the real estate market is not low prices, it is no customers.  We've seen that in the last 100 years in USA.  We are not at a bottom, there are plenty of customers at a lower price.  No one is forced  to offer a lower price right now.  Real estate marked to market would end the capitalist banking system.  I recommend it, but it ain't gonna happen.

Seems to me Big Credit has allocated resources to a certain result, and the Hegemon is pleased.  Not so much that this is a planned policy, just "so far so good."  Things are going where the Hegemon likes, but as everyone says "uncharted territory."  And always remember, no matter how bad it gets, the Hegemon wins all the more.

In a subsequent post, Mish doubles down on his position.  I'll lay out where I think he is wrong there in a post tomorrow.

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