How Low Can Central Banks Go? JPMorgan Reckons Way Lower

I remember Reid Hoffman talking about some of the mistakes he&#x27;s made as an entrepreneur (<a href="http:&#x2F;&#x2F;ecorner.stanford.edu&#x2F;podcasts" rel="nofollow">http:&#x2F;&#x2F;ecorner.stanford.edu&#x2F;podcasts</a>)<p>He said one of the big ones he made was in times of frothy capital markets when all your competitors are well capitalized, its was a mistake to be frugal and not take as much investors money as they could.<p>We are currently in a time of very frothy capital markets. Money is just being given away. This is going to lead to, if it hasn&#x27;t already, a big jump in the gap between the rich and the poor.<p>These lower interest rates are allowing hedge funds to make money via currency carry trades (<a href="http:&#x2F;&#x2F;www.investopedia.com&#x2F;terms&#x2F;c&#x2F;currencycarrytrade.asp" rel="nofollow">http:&#x2F;&#x2F;www.investopedia.com&#x2F;terms&#x2F;c&#x2F;currencycarrytrade.asp</a>) while the average person is unlikely to be able to take advantage of this situation, if anything it make sit harder for the average person to save for retirement due to the paltry interest rates that are being paid on the products available to them.<p>I don&#x27;t know what the solution to this is.<p>I guess if there is any good news in this, its that every single government who matters has already forced their bansk to go through some pretty strenuous stress tests wrt negative interest rates and there hasn&#x27;t really been alot of bad news to come out of Europe, Canada or the US.....yet

Negative interest rates really aren&#x27;t scary, they&#x27;re just unusual in an era (since early 1980&#x27;s) where inflation targeting (which is closely coupled with interest rates) of ~2% is the norm for the world&#x27;s most important central banks. Here&#x27;s a good overview from Bernanke (pre chairman of Fed years). [1]<p>In the short run, nothing will change from a day-to-day consumer perspective. Your 0.05% interest-rate saving account might drop to a 0.01% interest-rate account. If you have <i>a lot</i> (tens of millions) of money that you&#x27;d like to put in a liquid savings account, you might be charged a slightly negative interest rate. Some banks are already doing this with institutional investors, but I doubt it will trickle down into commercial consumer banking. [2]<p>Kocherlakota, an ex-fed economist whose views I respect, called for negative rates yesterday: &quot;The FOMC needs to go negative - and that&#x27;s a gigantic <i>fiscal</i> policy failure.&quot; I have to agree.<p>As he points out, low real interest rates present &quot;an incredible opportunity&quot; for US gov to make huge, necessary infrastructure investments. Read more here: <a href="https:&#x2F;&#x2F;sites.google.com&#x2F;site&#x2F;kocherlakota009&#x2F;home&#x2F;policy&#x2F;thoughts-on-policy&#x2F;2-9-16" rel="nofollow">https:&#x2F;&#x2F;sites.google.com&#x2F;site&#x2F;kocherlakota009&#x2F;home&#x2F;policy&#x2F;th...</a><p>The only scary implication of negative rates comes from the fact that central banks do not want to go negative, but may be forced to. So they continue to lose control over once-powerful monetary policy tools. This is only scary if you put a lot of stock into a central bank&#x27;s altruism, benevolence, and ability to effectively guide an extremely complex and intertwined economic&#x2F;financial system.<p>[1] <a href="http:&#x2F;&#x2F;www.federalreserve.gov&#x2F;Boarddocs&#x2F;speeches&#x2F;2003&#x2F;20030325&#x2F;default.htm" rel="nofollow">http:&#x2F;&#x2F;www.federalreserve.gov&#x2F;Boarddocs&#x2F;speeches&#x2F;2003&#x2F;200303...</a><p>[2] <a href="http:&#x2F;&#x2F;www.bloomberg.com&#x2F;news&#x2F;articles&#x2F;2015-02-26&#x2F;julius-baer-charges-institutional-clients-for-snb-negative-rate" rel="nofollow">http:&#x2F;&#x2F;www.bloomberg.com&#x2F;news&#x2F;articles&#x2F;2015-02-26&#x2F;julius-bae...</a>

Firstly, note that these are negative <i>deposit</i> rates. As a bank you have to keep your spare money somewhere, and that is usually in an account at the local central bank which also serves as part of the interbank clearing system. Central banks are now proposing charging for keeping excessive reserves in this account.<p>The bigger picture is that wealth accumulation <i>cannot</i> outstrip economic growth long-term or even medium-term without causing serious strain somewhere. Pushing the rate of return on capital negative is the gentlest possible way to do this. But the real problem is real estate and its endless appreciation in value.

This is a disaster in the making: About 80% of small business loan applications in the US are denied. The cost of underwriting and servicing the loans and Federal regulations make these loans almost unprofitable for big banks. Negative interest rates won&#x27;t help.<p>Negative interest rates will instead force big business to seek <i>safe</i> returns wherever they can - and that will not be by investing in small business. That money may well be deployed in competition against small business.<p>Consider this... the US Small Business Administration&#x27;s loan portfolio is barely a rounding error compared to the cost of quantitative easing and national security expenditures these past years. Double or triple SBA loans and USGOV balance sheet will not feel it, but the impact on job creation, salaries and investment could well exceed any benefit in the US from negative interest rates.

Summary:<p>JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%. That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday.<p>In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%.<p>Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%.<p>What could prompt the Fed to go NIRP: a recession.<p>&quot;With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP.&quot;

Crony capitalism at its best. JP Morgan makes bets on central bankers moving lower, then publishes a study saying that they could. If they can shift opinion, then their bets just paid off.<p>Better yet if cronies of theirs in central banks buy the reasoning, the banks are likely to actually move lower, making for an even larger transfer of real wealth to the financial sector. Thereby paying off JP Morgan&#x27;s bets even more AND giving it a shot at more free money from central bankers trying to &quot;improve the economy&quot;.<p>The result is a very large wealth transfer to the financial sector. Who will then say that they, &quot;deserve it for being so smart.&quot; And then try to figure out how to top what they did the last time.

This negative rates thing is fascinating and scary. Apparently economists have been talking about it for years. I remember reading about the magnetic stripe on the dollar bills suggestion in the WSJ some time around 2000. The idea is that over time the dollar bill becomes worth less, and this is tracked by the magnetic stripe.<p>Just found this interesting paper from the IMF:<p><a href="https:&#x2F;&#x2F;goo.gl&#x2F;65CuKF" rel="nofollow">https:&#x2F;&#x2F;goo.gl&#x2F;65CuKF</a> (scribd)<p>What will happen if they try to do something like this?

I thought the only reason that banks had excess reserves was due to the fed paying 50 basis points of interest. This was the fed&#x27;s way of preventing +&#x2F;-$2.28 Trillion [1] from being loaned out thus adding $2.28 trillion x (fractional reserve rate...10 if mandatory reserves were 10%) to the money supply through lending. With negative interest rates excess reserves again become an expense, therefore removing banks disincentive to lend.<p>[1] <a href="https:&#x2F;&#x2F;research.stlouisfed.org&#x2F;fred2&#x2F;series&#x2F;EXCSRESNS" rel="nofollow">https:&#x2F;&#x2F;research.stlouisfed.org&#x2F;fred2&#x2F;series&#x2F;EXCSRESNS</a> [2] <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Fractional-reserve_banking" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Fractional-reserve_banking</a>

The world economy has seen plenty of downturns but the whole developed world turning to negative interest rates is a new thing.<p>Is this a sign that the economic dogma underlying central bank decision making is not really based on anything solid but rather just follows keynesian trends of the day combined with the race to the bottom of &quot;europe is doing it so we need to as well!&quot;<p>Fortunately I hold a large bitcoin position which I believe hedges me pretty well in this situation.

With negative interest rates, you would make money by taking out a loan. Banks literally have profit margins just from borrowing money and doing nothing with it. What would happen if we gave the same advantage to the general public?<p>Something seems very wrong.

What percentage of world debt is on negative interest rates?

Somehow this gives me the image of a &quot;high functioning&quot; meth addict discovering the rush delivered by this wonderful drug called heroin. Surely he&#x27;ll keep things under control.