Thursday, February 25, 2016

NIRP and Savings

We are, we are, we are
Rather helpless
Take us forever
A whisper to a scream
--Icicle Works

One proposition of NIRP is that charging depositors to keep funds inside banks will cause people to save less and spend more, thereby increasing economic activity in the present. This author suggests that the opposite will occur.

As interest rates on bank deposits go negative, people will save even more because they recognize the likelihood that they will need to live off of principal instead of interest. Thus they will hoard cash and other stores of value such as gold rather than spend.

This is consistent with observations by John Hussman and others that money velocity has been slowing as interest rates have fallen.

The author asserts that NIRP represents a Hail Mary pass by central bankers--a desperate toss from their own end zone in hopes of preserving a failing financial system.

A counterargument to this authors' NIRP = more saving proposition that NIRP is merely an extension of the financial repression thesis. As they recognize that they can't live off of interest rates gleaned from money resting in deposit vehicles, people will plow their money into investment vehicles that carry more risk as they scrounge for more yield and capital gains to make up their losses. Essentially, investors throw a Hail Mary pass of their own out of desperation.

My sense is that it is this proposition of NIRP--that investors will increase their purchases of risky securities like stocks and bonds to compensate for lower yields on cash--on which policymakers are hanging their hats. Stated differently, policymakers need higher asset prices in order for financial systems to remain solvent in a leveraged world.

This proposition, of course, is also doomed to failure.

position in SPX, gold

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