Hail mary – a primer on negative interest rates _ seeking alpha

Over the past 30 years, many central banks have tried to re-order the natural drivers of economies. Money lender definition As opposed to savings and investment driving production and consumption, they moved consumption to the front of the line, meaning it came at the expense of savings and investment. Licensed money lender singapore These efforts disrupt the natural order of activities in a healthy economy and encourage an economic cycle fueled by debt. How to become a private money lender Central banks’ model, as shown below, illustrates how ever-lower interest rates are used to encourage additional borrowing to drive consumption and lift asset prices; all in the hope of ultimately achieving economic growth.


Currently, economic growth in most of the largest nations is deteriorating, and once again the central bankers are grasping for remedies. Singapore money lender act However, today is different than the past. Money lender license hk Unlike prior instances of stalled growth, the central bankers’ main policy tool, interest rates, has reached a supposed limit of zero percent. Hard money lender list To combat the situation, some central banks are employing a new tool to preserve the cycle shown above. Licensed money lender interest rate The method to their madness is a negative interest rate policy (NIRP). How to become a private lender with no money This article describes a NIRP and related matters every investor should be considering. Best money lender in singapore It also discusses a link between NIRP and a recent appeal of some leading economists to fight crime by eliminating large currency denominations.

A better understanding of negative rates may lead you to our opinion that the concept of a NIRP is sheer desperation akin to a last second Hail Mary pass in football, but with even lower probability of success.

A negative interest rate is a simple concept, yet those promoting such an economic remedy make the matter sound like a PhD dissertation and appear to be confusing the public. Money lender singapore review Before explaining what negative interest rates are, and why a central bank might promote them, we share a few headlines to highlight their developing global popularity:

England 2/18/2016 Daily Mail: ” Bank of England could set NEGATIVE interest rate: Move would mean that rather than earning money, savers would be charged for keeping their cash in the bank” United States 10/2015 Market Watch: ” Fed officials seem ready to deploy negative rates in next crisis”

When making a deposit in a bank, one is electing to forego consumption today and save money for the future. Licensed money lender tampines A deposit is effectively a loan to the bank that can be withdrawn at a future date without notice or penalty. The moneylender and his wife Traditionally, banks pay interest on deposits to compensate for the time value of money as well as the potential default risk associated with the bank. Licensed money lender association As importantly, they also pay interest on deposits to incent people to forego consumption and allow the bank to leverage the deposit into higher yielding loans to other borrowers. Money lender jurong This arrangement has defined banking since its earliest roots in ancient Greece nearly 4000 years ago.

Negative interest rates, however, are quite a different arrangement. The best money lenders They essentially ignore or negate the time value of money and any default risk associated with the entity charging negative interest rates. Private money lenders interest rates For example, imagine depositing $100 into your bank account only to find out that you have $98 left when you go to withdraw it in a year or two. Money lender law Not only were you not compensated for the time value of money and the default risk assumed, you actually paid the bank while still assuming these risks. Singapore money lender license Equally confounding, assume you approached your mortgage banker to take out a mortgage to purchase a house and were told that you would be compensated monthly for taking such action. Money lender license Welcome to the world of negative interest rates. Online money lender reviews It really is that simple; and that bizarre.

To consider why central banks are promoting a NIRP, we need to understand their goals and the tools at their disposal to achieve them. Licensed money lender singapore interest rate Most central banks are entrusted with the important role of managing their nation’s monetary policy to enable strong economic growth, full employment and moderate inflation. Licensed money lender review To accomplish this feat, many central banks adjust short-term interest rates to influence borrowing, investing and ultimately consumption.

Over the last 30+ years, many central banks have become increasingly dependent upon lower interest rates to meet their economic goals. Money lender license singapore Think of this strategy as continually pulling forward tomorrow’s consumption to today. Money lender interest rates in singapore At some point, you run out of tomorrows. Licensed money lender singapore forum The following graph shows the rise in total credit outstanding, GDP and the Federal Funds rate (the rate the Federal Reserve adjusts to influence borrowing and lending) in the United States.

The sharp increase in total credit outstanding or “debt,” relative to the increase in GDP, is a reflection of the rising leverage driving economic activity. Money lender ordinance In the 1980s, it took roughly $1.50 of debt to generate $1.00 of output. Licensed money lender in singapore Today, the economy needs almost $5.00 of debt to generate the same $1.00 of output. Money lender meaning in urdu Borrowing for long periods of time in amounts greater than your ability to service the debt with economic output, as shown above, is only possible with low interest rates and/or very gullible lenders.

Since 1995, U.S. Another word for money lender Treasury debt outstanding quadrupled, however, the total annual interest expense paid by the Treasury remains roughly the same. Money lender interest rates Declining interest rates make refinancing existing debt with new debt cheaper, and prolongs the borrower’s ability to service that debt, but there is a limit to how effective such a policy can be. What is a private money lender It seems plausible that as debt levels expand and most nations approach zero or even negative rates, that limit is being reached.

The investment asset class most affected by negative interest rates is cash. Money lender miri sarawak Cash is a term investors’ use synonymously with money invested in the money markets. Singapore licensed money lender The term also applies to bank deposits, but for purposes of this article, we focus on funds invested in money market mutual funds. Money mutual lenders list Money market investments are considered “money good” by many investors. Singapore money lender In other words, they are as “risk-free” an investment security as one can find as there is the belief is that there is little to no risk of loss of principal. Private money lender list Money market mutual funds typically invest in short-term fixed income products, such as U.S. Money lender professional Treasury Bills, collateralized lending agreements, certificates of deposit and high quality commercial paper. Singapore money lender news Many U.S. Kerala money lenders list money market funds are governed by the U.S. Money lender meaning in hindi Securities and Exchange Commission (SEC- 1940 Act -Rule 2a-7) which imposes very conservative limits on the assets these funds can hold and the way they manage their investment portfolio to ensure minimal risk of loss.

In today’s near-zero interest rate environment, money market funds are struggling to earn enough interest to pay a return to shareholders and cover their expenses. Best licensed money lender singapore Many funds have cut their expense entirely. Money lender tampines This situation is exacerbated when worsened fund holdings incur negative yields. The money lenders documentary In this scenario, money market funds are forced to either pay to manage clients’ money or devise other strategies to pass the costs of negative-yielding investments onto fund holders.

Such a negative interest rate situation is currently playing out in Europe as the ECB adopted a NIRP, which drove yields on many money market instruments in Europe to below zero. Money lender association Europe’s largest money market funds are taking action. The money lender One mechanism to pass on the costs to fund holders allows the funds to reduce the number of shares its investors hold but leave the net asset value constant. Money lender meaning in tamil For shareholders, this is similar to the previous example where you deposit $100 in your bank and see your deposit shrink to $98 over time. Singapore money lender review We suspect other legal, but deceiving, approaches will be employed to enable money market funds to keep their net asset values constant despite negative returns. Money lender meaning Money market funds are not a charity. Meaning of money lender They will find a way to pass on the costs of negative yields on.

A NIRP, per the central bankers’ plans, will force some investors from the security of money market mutual funds into riskier assets. Capital money lender reviews Short-term commercial paper, municipal bonds and longer-term Treasury notes may likely be in greater demand by such investors. Money mart loan interest rates Other investors may look to hard assets such as gold, silver and other commodities to help preserve their purchasing power. How to be a private money lender In both scenarios, cash investors aiming to avoid paying for safety will have to accept more risk.

In our article ” The First Rule of Holes,” we mentioned how monetary policy has increasingly encouraged more debt with little regard for the ability to service the accumulating debt on an individual, national and global level. Define money lender If the intention of negative interest rates is to incur even more debt, one must question whether a continuation of the monetary policies that created the problem in the first place can actually solve the problem. Money lender synonym We impart the wisdom of Will Rogers to help guide the central bankers: ” When you find yourself in a hole, quit digging.”

Furthermore, we should also consider if there is clarity among policy makers around the extent to which the global debt burden is causing weak and stagnant economic growth. Hard money loan interest rates Productivity growth in the long run drives economic growth. What is a hard money lender Unfortunately, productivity growth has been steadily declining globally, a likely symptom of the buildup of unproductive debt. Unscrupulous money lender Consider the chart below showing negative trends in productivity growth for the world’s 10 largest economies. Money lender list Note as well that 7 of the 10 economies are currently witnessing declines in productivity. Singapore money lender interest rate The U.S. Licensed money lender singapore review is leading the world’s largest economies with a paltry .33% productivity growth over the last 2 years and is on trend to follow most major economies into negative territory.

Governments and their central banks should encourage and reward financial discipline. Money lender license list Avoiding bankruptcy and the evils that accompany it are lessons everyone should heed. Singapore money lender list Strangely though, the idea of saving money appears to be a sin in the eyes of central bankers. Money mutual loans interest rates Those exercising fiscal discretion are being punished by what amounts to a tax on their savings in the form of a negative interest rate. Money lender license india Is this a prudent message and does it seed societal problems as an unintended consequence?

As children, we were properly taught by our parents to save money for a rainy day. International money lenders list The actions and policies of the central banks are now telling us that we should teach our children to disregard prudence and spend money like there is no tomorrow.

It is at this time when a NIRP is gaining popularity globally that we take notice that some of its loudest supporters including Larry Summers, former Treasury Secretary, and Mario Draghi, the current President of the European Central Bank (ECB) are advising an end to the issue of large currency denominations. What is a money lender They claim removing these bills will make criminal activities harder to commit. The money lenders To their point, forcing a criminal to transact with two suitcases full of $50 bills instead of one suitcase full of $100 bills will complicate mischievous endeavors.

Having to resort to negative interest rates is not normal, despite efforts to sell it otherwise. What is a money lender called In our opinion, it is a desperate effort aimed at maintaining a faulty economic model amidst crumbling support as witnessed by perennially weakening economic growth and soaring debt levels. Best licensed money lender in singapore Drawing a link between NIRP and the sudden interest in eliminating the $100 bill in the U.S. Define hard money lender and the €500 in Europe is not a stretch.

We believe the proposals to eliminate large bills are being conducted under the guise of thwarting criminal and terrorist activities. Money lender yishun The reality is that eliminating large bills gives the government and financial system more control over the financial activities of the population. Money lender review Making cash withdrawals more difficult, lessens the likelihood that individuals avoid the penalty of negative interest rates by storing cash outside of the banking system. Hard money lender definition Hoarding of cash reduces the ability of a NIRP to push savings into consumption or speculation.

At the end of the day, these proposals have little to do with stopping crime and much more to do with extending the power of the banking sector and financial authorities to socially engineering an outcome they want to occur (i.e. How to be a money lender individuals spend every dollar they have).

Negative interest rates are a tax! Not a traditional tax paid to the government, but an expense paid, on savings. What is a hard money lender for real estate Years of policy designed to encourage spending and discourage savings is likely reaching the end game; the point where those exhibiting prudence must be punished to keep the game going.

At some point, and likely soon, central bankers will be forced to realize the efficacy of lowering interest rates is vanishing and is hindering achievement of their goals. Extortionate money lender When this occurs a paradigm shift in the way monetary policy is conducted will likely occur. Money lender clementi Investors that understand this dynamic, and what it portends, will be in a much better position to protect and profit from the asset price adjustments that lie ahead.

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