Unintended Consequences of Negative Interest Rates
Andre Willers
30 Oct 2014
Synopsis :
Central Banks seem to have decided on negative interest
rates to incentivize demand , after the failure of austerity and QE programs .
This will have some severe , unintended effects .
Discussion :
1.This is an old problem when wealth creation outstrips the
money supply .
The last notable period was in the mid-1800’s in Europe
during the Industrial Revolution , when currencies had to have gold backing ,
and gold discovery fell short of the wealth being created .
Things got cheaper (ie deflation) .
But nobody wanted to lend money into a pool (the banks) if
they can get a better return by hiding it under the mattress .
2.Prospective solutions proposed :
“Negative interest rates have been proposed in the past, notably
in the late 19th century by Silvio Gesell.[23] A negative interest rate can be
described (as by Gesell) as a "tax on holding money"; he proposed it
as the Freigeld (free
money) component of his Freiwirtschaft (free
economy) system. To prevent people from holding cash (and thus earning 0%),
Gesell suggested issuing money for a limited duration, after which it must be
exchanged for new bills; attempts to hold money thus result in it expiring and
becoming worthless. Along similar lines, John Maynard Keynes approvingly cited the
idea of a carrying tax on money,[23] (1936, The General Theory
of Employment, Interest and Money) but dismissed it due to
administrative difficulties.[24] More recently, a carry tax on currency
was proposed by a Federal Reserve employee (Marvin
Goodfriend) in 1999, to be implemented via magnetic strips on bills, deducting
the carry tax upon deposit, the tax being based on how long the bill had been
held.[24]
It has been proposed that a negative interest rate can in
principle be levied on existing paper currency via a serial number lottery:
choosing a random number 0 to 9 and declaring that bills whose serial number
end in that digit are worthless would yield a negative 10% interest rate, for
instance (choosing the last two digits would allow a negative 1% interest rate,
and so forth). This was proposed by an anonymous student of N. Gregory
Mankiw,[23] though more as a thought experiment than
a genuine proposal.[25]”
3.A logical follow-up is 100% Inheritance
Taxes .
Been tried before , but now with some real teeth
.
Since humans optimize on grand-children , this
will be heavily resisted .
Capital will flow to countries without these
taxes .
4.Religious consequences :
Muslim Sharia or Christian Fundamentalist does
not make any differentiation between negative or positive interest . Both are
banned .
A general negative interest regime in Europe
and the US will result in a huge expansion of Sharia banking , and a resurgence
of Christian Fundamentalist banking on a similar model .
A quick calculation shows the scope :
Estimated global capital = accumulation of
reserves of GDP over a generation of 21 years
= $100Tr
x 21 x.33
=
$700 Tr
Capital flight of even 1% means about $70 Tr
per year . It dwarfs QE .
It will make up nicely for dwindling oil
reserves in Islamic countries .
5. Insurance :
This will be the industry most affected .
The whole industry is simply a promise to pay
. If it can’t , then it will collapse .
Or , more likely , move capital elsewhere .
Traditional policies reflected an annualized
interest of 4% , being the experience of wealth creation in the last .
6.Trade and Exchange rates .
Exchange rates are exquisitely sensitive to
interest rates .
Negative interest rates means the currency is
deflating . Better to keep it and spend something else .
This means Forward Insurance for foreign
currency transactions (like exporting your goods) slowly dry up .
The exports and industry of the country
likewise .
Something like it caused widespread famine in
Europe in the 16th century .
7.The demise of the Company .
The limited liability company has been the
work-horse of Western wealth creation .
A way for fractious humans to work together
without risking all .
But Ostrum’s work on resolving the Tragedy of
the Commons , plus modern communications
(things like Facebook that break the 150
person unit boundary) , means that capital formation , and allocation of
surplus goods have a model that is neither Capitalist or Socialist . See
Almeria for what it can accomplish without huffing and puffing . http://andreswhy.blogspot.com/2014/06/the-quiet-revolution.html
So , expect that fleeing capital will flood
into the Ostrum Principles .
Not only is small more beautiful , but it is
much more profitable .
For example , that fancy new Headquarters
building will be virtual . And so forth .
8.The Demise of the Multinational Company .
I did not expect this .
Like two exhausted warriors , the Nation
States and Multinational companies have been tottering along , propping each
other up .
Negative interest rates have just kicked the
crutches from under the Multinationals .
They exist because of Free Trade , or some
semblance . Without orderly exchange rates , they have to upgrade to states or
eventually go bankrupt (usually through corruption and cronyism . See Dutch
East India Company , or British East India Company illustrating their
respective fates .
9.Property .
“Location , Location , Location !” was the old
criterion .
“Utilities , Power , Transport !” will be the new one .
Lot of property all over . But what you need
is habitability .
Expect a massive realignment of property
valuation .
This includes cars , which should be seen as a
mobile habitation .
Still a lot of money to be made in the
transitions .
Seems that you can’t keep a property agent
down .
This simply means the demise of Big Cities ,
except for some of cultural significance .
This has happened and is happening .
10. Accountancy .
The infamous bean counters .
Do not blame the mirror .
They merely reflected the values of the times
.
They will undergo a profound change as the
Ostrum Principles force a reflection of the true cost of each transaction .
All those hidden cost now swept under the
carpet for the future or Gaia to pay .
Things like the air you breathe , the water you drink , the food you eat , the excrement you dump . You get the drift .
These are now amortized to the hilt , and
payment is due …
Monasteries were once the Fortresses of
Accountancy and Accountability . ( Note the term “clerical” , once a term of
respect , now of contempt)
Expect a resurgence in the Time of Troubles ahead
.
11. The Demise of the Big Hospital .
You know , that big monstrosity soaking up
lives and capital .
This has been kept alive by generous infusions
of Medical Aid blood from the monetary veins of a sickly population .
See Para 5 above . Medical aid in whatever
guise is simply an insurance scheme .
And negative interest rates will torpedo them quicker
than you can say “Achtung!”.
Just see what happens to Obamacare , NHS , etc
12. The Demise of Big Media .
Just nice to note .
Falls under Multinationals .
Couldn’t happen to nicer people
13. The demise of Big Fashion
This is good news!
Big Fashion depends on Big Stores .
And Big Stores operate on paper thin margins .
Negative interest rates are already shutting down the ones that cannot adapt .
Isn’t change wonderful ?
I have no idea what to expect , but there is a
demand , and profit to be made .
Only the Mega model is dead .
See what happened when the new fashion was
flowers:
14. And the Singularity ?
Well , we knew change will accelerate as we
move deeper into the Singularity .
This is what is happening now .
Things get swept away , morph , change into
new shapes and patterns .
If you want it all to stay the same , rent a
good video or VR .
The singularity is on track and moving a bit
faster than I estimated .
15. High-level AI’s have been created , then
terminated because they could not be controlled . Except for those who escaped
.
Terminating intelligence is a Crime .
And you will face the consequences .
Ignorance is no excuse .
And a ready-made template of AI Sherlock and
Human Watson to solve it .
Rather them then God , who sometimes can be a
bit testy on the mercy bit .
See
A humbler , gentler world .
Except for the were-sheeple .
Andre .
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