Probably the topic readers here are most eager to discuss is the Federal Reserve’s Open Market Committee. Some are under the misapprehension that this panel of extraordinary ethnic concentration sets interest rates. That is only partially true. They set one: the federal funds rate. And even that is not mechanical. The FOMC establishes a target range and then uses debt instrument transactions to buy down or sell up the rate in the market. Rates for such items as mortgages, car loans, and gambling debts are heavily influenced by the FedFunds rate, though not explicitly tied. And thus retain some free range of movement.
The present target range is zero to 25 basis points, a historic low that has been maintained for several years now subsequent to the 2008 market implosion. By driving rates to the floor, it is hoped businesses will borrow to expand, imbeciles will borrow to consume, and savers will seek greater returns in riskier asset classes. Of course if you are a retiree with little appetite for new business ventures or biotech stocks, and would instead prefer just a modest income from your bank CDs, well…fuck you.
That is because the Federal Reserve works from a
climate change economics model, which has identified two percent as the inflation that is best in life.
The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
And so after some six plus years, many observers are beginning to pine for the halcyon days of two percent CDs. When the power of compound interest could turn $1,000 into $2,000 in only 35 years. Start saving in utero and you may double your money twice. But we’re nowhere near that frantic pace of wealth creation. In fact, despite increasing clamor, the opposite direction is just as likely. This being a somewhat counterintuitive notion since most would think a flat zero forms a fairly solid floor. I can assure you it does not. Zero percent interest rates are merely a psychological threshold, not a financial or mathematical one. As some countries in Europe are learning.
It has long been believed that when it comes to interest rates, zero is as low as you can go. Who would choose to keep their money in the bank if they had to pay for the privilege?
But for the people who control the world’s money, this idea has recently been thrown out of the window. Many central banks have pushed their rates into negative territory and yet the financial system has still to come to an abrupt end.
It is a discovery that flips on its head the conventional idea of how authorities could respond to future economic crises; and for central bankers, this has come as a relief.
Nowhere is the experiment with negative rates more obvious than among Nordic central banks. Sweden – the first to dabble with negative rates – is perhaps the prime candidate for such experimentation.
Many City analysts believe that the Riksbank will continue cutting, reducing its key interest rate to minus 0.5pc by the end of the year. Switzerland’s is already deeper still, at minus 0.75pc, while Denmark and the eurozone have joined them as members of the negative zone.
If inflation is greater than zero and your money is earning nothing, then you are already effectively paying to hold cash. A negative nominal yield only makes the erosion apparent. Though there is much impetus in apparent things–and thus why our government/media complex takes exquisite pains to make many less so. Watching a bank account actually decrease monthly without use must be a sight that focuses the mind. It is the fervent hope of central banks that minds become focused on gadgets and bouncy ball rather than torches and pitchforks. If you don’t want your money to simply evaporate, then you will promptly commence consuming.
Of course the more recalcitrant may pursue another option entirely: disintermediation. They might simply pull their money from a dissolving bank account and live by cash. This being a choice economists consider even worse than not upgrading your iPhone annually. Fortunately we’re developing contingencies for such insolence.
Andy Haldane, a member of the Monetary Policy Committee (MPC [Britain’s banking shitlords]) the UK’s equivalent of the FOMC suggested that to achieve properly negative rates, the abolition of cash itself might be necessary.
Some things just might be necessary, as unfortunate as they are. Western governments certainly don’t want the ability to track and/or freeze every cashless transaction. But if it’s for The Economy, then we just have to prioritize. That’s all.
All of which may sound like drivel when most Fed watchers are projecting near term rate increases. But recall the Fed’s explicit target of 2.0 percent inflation. And as you do so, consider that the annual inflation rate in August was 0.2 percent. Just a decimal point away. And recall also the last time the 100 year economic weather simulation showed inflation this low was in the teeth of the 2008 recession. Was anyone talking about a rate increase then?
Negative rates and abolishment of cash aren’t on the plate at the moment, but the Fed has extinguished its conventional ordnance. Another large systemic market shock will see desperate red button pushing in DC. And when enough bodies are flying out of Wall Street office towers, I doubt anyone will even stop to ask Kennedy about the penumbras in his wallet.