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Central Banks Plan For Negative Interest Rates (#GotBitcoin?)

A Central Banks Plan For Negative Interest Rates (#GotBitcoin?)

Abrupt changes in the policies of the world’s largest central banks have rippled through smaller economies, leaving them with the prospect of low and even negative interest rates for years to come despite having mostly healthy economies. Central Banks Plan For Negative Interest Rates (#GotBitcoin?)

Policy U-Turns From The Fed And Ecb Are Cascading Around The World.

Policy rates are negative at many central banks in Europe, and are likely to stay thatway at least into 2020.

The danger is that these easy-money policies could fuel destabilizing bubbles in real estate and other asset markets. They may also leave banks with little ammunition to respond to the next economic downturn.

Economies like Switzerland’s, whose central bank signaled no change in its negative-rate policies for years to come, are small compared with the U.S. and eurozone. Still, they are home to major global banks and companies that are sensitive to exchange rates and financial conditions. With financial markets so interconnected, problems in small countries can quickly spread to larger ones.

On Wednesday, the Federal Reserve left its key policy rate in a range between 2.25% and 2.5% and indicated that it is unlikely to raise rates this year. In late 2018, officials had signaled they expected between one and three increases this year.

Two weeks ago, the European Central Bank went further, saying it would launch new stimulus to support the eurozone economy via cheap loans for banks. It also said it expected to keep its key interest rate at minus 0.4% at least through 2019, a longer horizon than before.

The Swiss National Bank said Thursday that it would keep its policy rate at minus 0.75%, where it has been since January 2015, and reduced its inflation forecast to 0.3% this year and 0.6% in 2020. The SNB cited weaker overseas growth and inflation and “the resulting reduction in expectations regarding policy rates in the major currency areas going forward.”

Norway’s central bank took an opposite turn, raising its policy rate by 0.25 percentage point to 1% and signaled more increases this year. Norway’s reliance on oil production sets it apart from other European countries because higher oil prices provide a stimulus to its economy that its neighbors don’t receive. Its currency, the krone, rose about 1% against the euro after its decision.

Still, Norway’s bank lowered its long-term rate forecast, citing “a more gradual interest rate rise among trading partners.”

Norway’s central bank may not be alone in raising its key interest rate this year. While leaving its key rate unchanged Thursday, the Bank of England reaffirmed its expectation that “an ongoing tightening of monetary policy” will be needed if the U.K. leaves the European Union on agreed terms and with a period in which to adjust to new trading terms. But it also acknowledged that should Brexit be abrupt, a cut in its key rate might be needed.

Here’s why Fed and ECB decisions matter for countries that don’t use the dollar or euro: Switzerland and countries near the eurozone but not part of it—like Sweden and Denmark—rely on the bloc for much of their exports and imports. That makes growth and inflation highly dependent on the exchange rate. Central-bank stimulus tends to weaken a country’s exchange rate, so when the ECB embraces easy-money policies as it did two weeks ago it tends to weaken the euro against other European currencies such as the Swiss franc. Because the ECB is so large, Switzerland and others can do little to offset it.

In a sign of Switzerland’s dependence on ECB policy, the franc strengthened slightly against the euro Thursday even after the SNB cut its inflation forecasts. “They are hostage to the fortunes of what the ECB does,” said David Oxley, economist at Capital Economics. Many analysts expect the SNB to stay on hold this year and next.

Like Switzerland, central banks in Sweden and Denmark have had negative policy rates for many years, and analysts say that is unlikely to change soon. Capital Economics expects Sweden’s Riksbank to keep policy rates—including a minus 1% deposit rate and minus 0.25% lending rate—on hold into 2021. It is set to make a policy decision next month.

“The gravity pull is very strong” from the Fed and ECB, said Sebastien Galy, macro strategist at Nordea Asset Management. “The consequence is [non-euro central banks in Europe] mostly end up importing policy from the ECB, so you end up with housing bubbles and a misallocation of capital.”

The negative interest-rate policies are also costly for commercial banks. In Switzerland, banks have paid the SNB nearly 7 billion francs ($7 billion) to store funds since 2015. Danish banks have paid 3.1 billion kroner ($0.5 billion) since 2014 as a result of their central bank’s negative deposit rate, currently at minus 0.65%.

It isn’t just Europe that is affected by the actions of big central banks. On Thursday, Bank of Korea Gov. Lee Ju-yeol signaled he would maintain the current pause in policy tightening, saying the Fed’s “more-accommodative-than-markets-expected” statement would allow his bank “more leeway” in taking action.

The BOK last raised rates in November, and the consensus among economists is that it will now stand pat this year.

Indonesia’s central bank kept rates unchanged for a fourth meeting in a row Thursday. The Philippine central bank stayed its hand, too.

With the Fed expected to keep rates on hold into 2020, “this may afford Bank Indonesia a window to reverse its stance and cut policy rates in the near term,” and give the Philippines leeway for an easier stance, said analysts at ING Bank.

Updated: 11-21-2019

German Bank Boosts Bitcoin — Negative Interest Rates Hit Every Account

Bitcoin-cautious Germany has seen its first bank demand that ordinary savers pay it to hold their money — even as little as €1.

According to multiple local press outlets including the Süddeutsche Zeitung on Nov. 19, the Volksbank Raiffeisenbank Fürstenfeldbruck (VRF) in Northern Bavaria is now charging 0.5% negative interest rates on the smallest deposits.

Bank On Negative Interest Rates: “We Had To”

“We Had To Do It,” The Publication Quoted The Bank’s Management As Saying.

The reason, they said, was the cost of “parking” money at the European Central Bank (ECB).

In Germany, negative interest rates previously impacted only deposits above €100,000, which constituted an interest-free allowance. VRF’s move makes it the first lender in the country to target savings below that level.

“Recently, more clients have been coming to us from other banks where they’ve already used up their allowance,” the management continued.

Germany Could “Open Floodgates” For Banks

As Cointelegraph reported, negative interest rates are beginning to form part of the ECB’s monetary policy. The phenomenon ultimately means that some portion of savers must pay banks to hold their money.

Critics have warned that such moves would incentivize the public to move into cash, while alternatives such as Bitcoin (BTC) also stand to benefit.

By contrast, Bitcoin does not suffer from the inflationary meddling in its supply and associated destruction of its value, meaning HODLers would never be forced to pay to own it.

Last month, entrepreneur Cameron Winklevoss noted the cryptocurrency was the ideal method of escaping negative rates on bonds, which account for investments worth $17 trillion.

Speaking to Süddeutsche Zeitung meanwhile, the CEO of a German consumer portal warned that VRF could “open the floodgates.”

“We’re seeing a lot of movement on the market at present,” Oliver Maier said. He noted that the ECB’s decision to cut its benchmark interest rate for banks to -0.5% from -0.4% was the cause of the upset.

Updated: 11-26-2019

China Is The Next Country To Go To Zero Interest Rates

One week ago, we showed in one chart why the global economic recovery that so many expect is just a few months away, won’t happen: as the chart below shows, China’s credit intensity since 1994 has exploded. This means that before the Global Financial Crisis, China needed on average one unit of credit to create one unit of GDP. Since 2008, 2½ units of credit are required to create one unit of GDP. In other words, that China needs much more credit than 10 years ago to have the exact same amount of GDP. Injecting more credit in the economy is not the miracle solution it used to be, and the disadvantages of credit push tend to surpass the advantages.

This explosion in China’s credit intensity in the past decade has directly fueled China’s debt engine, the same debt engine that single-handedly pulled the world out of a global depression in 2008/2009. Alas, this will not happen again: China’s public and household debts are at their highest historical levels, respectively at 51% of GDP and 53% of GDP, and the private sector debt service ratio is becoming a burden for many companies, reaching on average 19.7% This records an increase from 13% before the crisis. Overall, China’s debt to GDP is fast approaching an unprecedented 320%!

So what does it all mean? Well, even as domestic demands for liquidity are growing, foreign capital keeps flowing in and the real economy continues to slow down, which all make the country seemingly approaching a zero rates monetary condition.

While those words succinctly summarize what we said last week, they originate in an English language op-ed published today in China’s nationalist tabloid, Global Times, which for once, is surprisingly accurate, and while mostly avoiding the propaganda that Chinese media is so well known for, explains well why China may indeed be the next country to see zero rates (as a reminder, Chinese real rates are already negative due to soaring pork prices).

And while we doubt that the PBOC will be able to cut enough to bring about ZIRP, or NIRP, any time soon especially due to the ongoing hyperinflation in pork prices, if and when those do stabilize the Chinese central bank may well follow in the footsteps of every other developed central bank. In doing so, it will only infuriate Trump who has been kicking and screaming at Jerome Powell, demanding that the Fed do just that.

What We Find Most Remarkable About The Op-Ed Is How Simply, Matter-Of-Factly And Correctly, The Author Explains Away Why Zero Rates Are Coming:

Mounting Debts And The Financing Problems In The Real Economy Will Promote China To A Zero Rate Condition


Structurally, China’s non-financial corporate debt ratio is too high, and interest rates are too high. Considering that the repayment burden of existing debt has squeezed out the effective demand for new credit, and China is likely to become the next zero interest rate country

Amusingly, The Anonymous Op-Ed Writer Has Managed To State In Two Sentences What Takes Financial Pundits Hours, Days And Weeks To Explain On CNBC:

Another phenomenon comes with low rates monetary condition is that prices go up with risk asset. The US stock prices have climbed to a new high.

That said, what we found most surprising about the Global Times oped is its conclusion: instead of some jingoist bullshit about how China’s negative rates would be the greatest, and most negative in the entire world, the publication takes a very measured tone, and warns that such a monetary stance may very well spell doom for China, to wit:

Zero or negative rates monetary conditions don’t mean that debt issues and the asset bubble problem will be resolved automatically, but the opposite. Growing bubbles in the global financial market in the long run will be a reminder of financial risks.

In a slowing global economy, zero or even negative interest monetary conditions are a new trend that gives new risks and challenges to China and the international financial market. Awareness and responsiveness need to be revamped.

Of course, by the time China is approaching ZIRP, the trade war between the US and China will be at such a heated, if not outright “kinetic” level, that few will notice or care what Beijing’s monetary policy is.

We strongly urge all US policymakers to read the following Global Times article, which is nothing short of a trial balloon warning what China is contemplating next in a desperate move to stimulate its economy, no matter the cost.

China Needs To Prepare For Zero Interest Rates

The US Federal Reserve’s (Fed) continuous interest rates cuts have triggered a race of interest rates cuts among central banks around the world, increasing excessive global liquidity even further. In this case, more countries are faced with monetary conditions of zero or negative rates. Recently, former US Fed chairman Alan Greenspan noted that “negative rates” are spreading around the world. Some financial institutions even believe the world will enter a low rates condition that hasn’t occurred in 1,000 years.

Under the condition of low or zero rates, the world’s debts level keeps rising, and the bond yields continue dropping. Another phenomenon comes with low rates monetary condition is that prices go up with risk asset. The US stock prices have climbed to a new high.

For China, the demands for liquidity are growing, foreign capital keeps flowing in and the real economy continues to slow down, which all make the country seemingly approaching a zero rates monetary condition. It asks policymakers and market players to be prepared. Mounting debts and the financing problems in the real economy will promote China to a zero rate condition. In the first half of 2019, China’s overall debts accounted for 306 percent of the GDP, up 2 percentage points from the 304 percent in the first quarter, according to a report from the Institute of International Finance (IIF). The number was just around 200 percent in 2009 and 130 percent in 1999.

According to data from the National Institution for Finance and Development, China’s enterprise sector’s debts account for 155.7 percent of the nominal GDP, up 2.2 percentage points from the end of last year. It’s far beyond the government sector’s leverage ratio of 38.5 percent and the resident sector’s leverage ratio of 55.3 percent. In the enterprise sector, private companies embattled with financing problems account for 30 percent.

Structurally, China’s non-financial corporate debt ratio is too high, and interest rates are too high. Considering that the repayment burden of existing debt has squeezed out the effective demand for new credit, and China is likely to become the next zero interest rate country, according to Zhu Haibin, Chief China Economist at J.P. Morgan.

The low rates or zero rates condition will in turn reduce the effect of current monetary policy tools. In the overall picture of global interest cuts, the low inflation level causes monetary policy to face challenges. In China, the problem is severe. Currently, China is facing the superposition structural consumption of inflation and production deflation, which is squeezing the space for monetary policy adjustments. Both targeted and “flood-like” stimulus can’t overturn the economic slowdown. New monetary tools and new aims are urgently needed in the zero rates monetary condition.

In the real economy, the zero rates monetary condition will highlight structural problems. The drop of interest rates doesn’t necessarily lead to investment increases. The stratification in liquidity and credit will remain under overproduction conditions and bring new problems to small and medium-sized enterprises. The enterprise sector needs to more urgently prepare for upgrades and maintain competitiveness. The zero rates monetary condition also asks for promotion in supply side reforms, and to resolve problems in the monetary transmission mechanism.

In the finance sector and capital market, the zero rates monetary condition is also challenging for the banking industry and shadow banking. On one hand, dropping interests will narrow the profit space for banks, pressing their performance. On the other hand, enterprises which take loans as main financing means still face structural credit risks that banks can’t identify. It asks banks to build up management and capital capacity to deal with tougher competition. Zero rates will make more investors turn to direct financing, which causes new challenges in evaluation, pricing, investment modeling and investment portfolio balance. It also requires strengthening investment market building, and providing a level playing field.

Zero or negative rates monetary conditions don’t mean that debt issues and the asset bubble problem will be resolved automatically, but the opposite. Growing bubbles in the global financial market in the long run will be a reminder of financial risks.

In a slowing global economy, zero or even negative interest monetary conditions are a new trend that gives new risks and challenges to China and the international financial market. Awareness and responsiveness need to be revamped.

 

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Your Questions And Comments Are Greatly Appreciated.

Monty H. & Carolyn A.

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