5 ms·

With the dollar getting so strong and since we are now post brexit, I expect capital flight. The people running the show have zero understanding of how banking

by MR4D 7y ago

With the dollar getting so strong and since we are now post brexit, I expect capital flight. The people running the show have zero understanding of how banking works. And no, I’m not being arrogant - negative rates destroy capital, which is not what you want in a bank. If you look at the largest European banks, they are all very weak (due to many factors, not just this one). However, negative rates is making them weaker. Further, the aging demographics of Europe are going to continue to drive lower and lower growth. In sum, I believe that all of this will cause smart money to leave Europe. At least in part as a hedge if nothing else.

pas 7y ago
What would be the solution for this? Which actors/groups ought to do what? Could you explain this a bit? Thanks!
- logicchains 7y ago
  The central bank could start raising rates. There are very good arguments for temporarily lowering rates to stimulate the economy, but the arguments for keeping it this way for 5-10 years are weaker. Especially if it discourages savings, as in the long term economic growth requires savings (in the economic sense, wherein there is a choice to "save" or "consume" our output, and only the "saved" output can be invested to increase future productivity). There is also little empirical evidence that such low rates help (or no evidence, because negative rates were never tried before). Japan's had low rates for a while and they didn't seem to help, but the argument could be made that without those low rates the situation would be even worse (you could find economists who'd argue both sides). Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative.
  - pas 7y ago
    They would if they could. https://www.ft.com/content/478fe908-5168-11ea-8841-482eed0038b1 https://www.ft.com/content/478fe908-5168-11ea-8841-482eed003... Sweden raised rates recently, but only back to zero. Swedish banks - for some reason - simply waited for the NIRP to pass and moaned. [from the link]: Johan Torgeby, chief executive of one of Sweden’s largest banks SEB, says lenders involved in fixed income “struggled for years” and calls the end of sub-zero rates “good news”. He adds: “We have never really understood what effect negative yields have on [boosting] consumption.” https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la... It certainly helps expanding the money supply. That should help increase savings, that then can be loaned out. (And simply increasing savings doesn't automatically lead to more investment: https://en.wikipedia.org/wiki/Saving_identity https://en.wikipedia.org/wiki/Saving_identity - I know wikipedia is not a proper source, sorry, anyway: "This identity only holds true because investment here is defined as including inventory accumulation, both deliberate and unintended. As such, this does not imply that an increase in saving must lead directly to an increase in investment. Indeed, businesses may respond to increased inventories by decreasing both output and intended investment.") https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... "Given this finding and its robustness when tested using a variety of standard robustness checks, we conclude that NIRP has acted as an empowerment to the ECB’s asset purchase programme (APP). Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so." > Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative. Isn't the problem that the market rate would lead us to deflation?
    - logicchains 7y ago
      >And simply increasing savings doesn't automatically lead to more investment Yep, but in the longer term (decades), all other things being equal a country that is saving 2% will have less investment taking place than that same country saving 5%. > Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so. One problem is we don't have clear insight into how risky these loans are. If a bank is incentivised to give out loans just to avoid having to pay the central bank interest, it may end up taking on riskier loans than it otherwise would have (if it didn't think they were too risky, it would already have made them). And even if this is not the case, and it's only giving loans because now even a low return of e.g. 0.5% looks good, there's a limit on how cheaply it can offer loans because it still has to cover all its own costs. >Isn't the problem that the market rate would lead us to deflation? Empirically it's not clear that would definitely lead to worse outcomes. Europe and the US managed to sustain high rates of growth during deflationary times throughout the 19th century, and while there were crashes during that period they weren't as severe as the Great Depression. In the short run it would definitely be painful, as savings rates increased, but there's a hard cap on this. E.g. everybody needs to eat, they're not going to starve themselves for a week just because food will be marginally cheaper next week. Like how people kept buying computers during the 2000s even though the price of compute was halving every year. There's an interesting argument for why deflation is bad that I read in a labour economics textbook once, termed wage stickiness. Essentially, if there's deflation we might see labour prices falling every year (but falling less than other prices, so purchasing power still increases). Wage floors (minimum wages, inflexible contracts) however prevent this from happening, prevent the market from clearing. This is one reason unemployment was so bad during the great depression: wage floors introduced by the government to stabilise things ended up preventing wages from adjusting to the new price levels, causing unemployment as the value of good produced wasn't enough to pay those wages. Imagine if the price of every good fell by 90% today: suddenly a $10 minimum wage would be the equivalent of a $100 minimum wage in real terms, causing massive unemployment. Politically, that's a hard problem to solve, so I can see why many people prefer inflation.
      - pas 7y ago
- MR4D 7y ago
  Tough question. Short answer is nobody really knows. What you're asking is sort of like this, "the big dam is breaking apart right now because of all the rain, and the rain isn't letting up. What do we do?" Demographic challenges are really tough to overcome because they affect the demand of everything. As people have fewer kids, there is not as much need for schools, or teachers, or pencils, or wood to make those pencils... As people get older, they tend to want smaller houses (kids are grown and out of the house). Smaller houses use less wood, less heating and air conditioning, etc. One last thought for you: Japan, doesn't have millennials. That's right - there was never a second big population boom after their baby boomer generation.

by MR4D 7y ago

pas 7y ago

What would be the solution for this? Which actors/groups ought to do what? Could you explain this a bit? Thanks!

logicchains 7y ago
The central bank could start raising rates. There are very good arguments for temporarily lowering rates to stimulate the economy, but the arguments for keeping it this way for 5-10 years are weaker. Especially if it discourages savings, as in the long term economic growth requires savings (in the economic sense, wherein there is a choice to "save" or "consume" our output, and only the "saved" output can be invested to increase future productivity). There is also little empirical evidence that such low rates help (or no evidence, because negative rates were never tried before). Japan's had low rates for a while and they didn't seem to help, but the argument could be made that without those low rates the situation would be even worse (you could find economists who'd argue both sides). Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative.
- pas 7y ago
  They would if they could. https://www.ft.com/content/478fe908-5168-11ea-8841-482eed0038b1 https://www.ft.com/content/478fe908-5168-11ea-8841-482eed003... Sweden raised rates recently, but only back to zero. Swedish banks - for some reason - simply waited for the NIRP to pass and moaned. [from the link]: Johan Torgeby, chief executive of one of Sweden’s largest banks SEB, says lenders involved in fixed income “struggled for years” and calls the end of sub-zero rates “good news”. He adds: “We have never really understood what effect negative yields have on [boosting] consumption.” https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la... It certainly helps expanding the money supply. That should help increase savings, that then can be loaned out. (And simply increasing savings doesn't automatically lead to more investment: https://en.wikipedia.org/wiki/Saving_identity https://en.wikipedia.org/wiki/Saving_identity - I know wikipedia is not a proper source, sorry, anyway: "This identity only holds true because investment here is defined as including inventory accumulation, both deliberate and unintended. As such, this does not imply that an increase in saving must lead directly to an increase in investment. Indeed, businesses may respond to increased inventories by decreasing both output and intended investment.") https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... "Given this finding and its robustness when tested using a variety of standard robustness checks, we conclude that NIRP has acted as an empowerment to the ECB’s asset purchase programme (APP). Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so." > Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative. Isn't the problem that the market rate would lead us to deflation?
  - logicchains 7y ago
    >And simply increasing savings doesn't automatically lead to more investment Yep, but in the longer term (decades), all other things being equal a country that is saving 2% will have less investment taking place than that same country saving 5%. > Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so. One problem is we don't have clear insight into how risky these loans are. If a bank is incentivised to give out loans just to avoid having to pay the central bank interest, it may end up taking on riskier loans than it otherwise would have (if it didn't think they were too risky, it would already have made them). And even if this is not the case, and it's only giving loans because now even a low return of e.g. 0.5% looks good, there's a limit on how cheaply it can offer loans because it still has to cover all its own costs. >Isn't the problem that the market rate would lead us to deflation? Empirically it's not clear that would definitely lead to worse outcomes. Europe and the US managed to sustain high rates of growth during deflationary times throughout the 19th century, and while there were crashes during that period they weren't as severe as the Great Depression. In the short run it would definitely be painful, as savings rates increased, but there's a hard cap on this. E.g. everybody needs to eat, they're not going to starve themselves for a week just because food will be marginally cheaper next week. Like how people kept buying computers during the 2000s even though the price of compute was halving every year. There's an interesting argument for why deflation is bad that I read in a labour economics textbook once, termed wage stickiness. Essentially, if there's deflation we might see labour prices falling every year (but falling less than other prices, so purchasing power still increases). Wage floors (minimum wages, inflexible contracts) however prevent this from happening, prevent the market from clearing. This is one reason unemployment was so bad during the great depression: wage floors introduced by the government to stabilise things ended up preventing wages from adjusting to the new price levels, causing unemployment as the value of good produced wasn't enough to pay those wages. Imagine if the price of every good fell by 90% today: suddenly a $10 minimum wage would be the equivalent of a $100 minimum wage in real terms, causing massive unemployment. Politically, that's a hard problem to solve, so I can see why many people prefer inflation.
    - pas 7y ago
MR4D 7y ago
Tough question. Short answer is nobody really knows. What you're asking is sort of like this, "the big dam is breaking apart right now because of all the rain, and the rain isn't letting up. What do we do?" Demographic challenges are really tough to overcome because they affect the demand of everything. As people have fewer kids, there is not as much need for schools, or teachers, or pencils, or wood to make those pencils... As people get older, they tend to want smaller houses (kids are grown and out of the house). Smaller houses use less wood, less heating and air conditioning, etc. One last thought for you: Japan, doesn't have millennials. That's right - there was never a second big population boom after their baby boomer generation.