Let's dive right into this discussion of negative interest rates policy (NIRP). Before we talk about the impact, let's talk about this paper issued by the IMF on:
Enabling Deep Negative Rates to Fight Recessions: A guide
I will read this w/ u & cover key topics like money.
As a rule, before I read a paper, I glance at the title, abstract, authors, & the organization publishing. The IMF - led by a European & multilateral - responsible for helping countries w/ fiscal management & capacity building. Legarde was head & now will be the ECB head.
How u read an academic paper: Skim through the title, abstract, look for thesis, look at table of content, go to the back and read the conclusion & then the body. W/o reading the entire paper, the thesis👉🏻 is TO ENABLE DEEP NEGATIVE RATES TO MAINTAIN THE POWER OF MONETARY POLICY.
We already know that: this is not a discussion of WHETHER one should ENABLE NEGATIVE RATES but A GUIDE OF HOW TO ENABLE NEGATIVE RATES. They made that decision already & this is just how to make it palatable for the public.
Now u know what WON'T BE in the paper & what will be.
So to actively read we must know the WHY to understand the HOW they will show u & what they WON'T SHOW U.
Okay, let's go. How is an academic paper structured? Usually abstract, after executive summary & then literature review to show that this is not coming out of left field.
The table summarizes neatly the literature review. Their review is sparse w/ NO ACADEMIC cited advocating what they are saying but some area related but not exactly. Eisler wrote in 1932 & then nothing & a bunch of people on abolishing cash lately. But used anyway for legitimacy.
Btw, if u think the literature review is sparse (qualitative legitimacy), then the paper has NO quantitative evidence on why this needs to be enabled or why anything they argue is empirically true.
But they tell u what this is - a GUIDE to ENABLE NIRP to MAINTAIN POWER OF CBs👈🏻
And they are not hiding the WHY of this paper: POLITICS. This word is used so often in the piece. Read the highlighted part about why this needs to happen (has nothing to do w/ effectiveness but politics): THE USE OF DEEP NEGATIVE RATES FOR A SHORT TIME HAS POLITICAL ADVANTAGES
So the WHY is here in plain sight: TO HELP CALM THE POLITICS OF NEGATIVE RATES. Yes, they wrote that. They made the decision before discussing whether NIRP & now publishing a GUIDE on how to CALM THE MASS & NORMALIZE NIRP.
Here are the steps to MITIGATE THE POLITICAL COSTS of implementing NIRP (yes, they wrote this):
a) Measuring markets' perception
b) Making the market aware of CB tools & can help manage associated side effects
c) CONVINCE MARKETS that the CB willing to use new tools.
Digest that
So after 6 pages of ranting, the authors have 4 charts on rates going down & the only charts u'll get for a while. No discussion of output, wealth, employment, wages. Nothing.
Then this on p8. Political costs are repeated in 2 paragraphs. Politics. This is what this is about.
History of thought on NIRP (there's none):
a) Gesell in 1916 - proposed requiring stamps to be purchased to paper money periodically
b) Goodfriend 2000 on stamped paper currency
c) Eisler depreciation mechanism for paper currency
d) Rogoff on ban cash
Authors then cite BLOGS!😱
Before we proceed to discuss approaches to ENABLE NIRP to maintain the power of monetary policy, let's talk about something important & key for everyone to understand: HOW MONEY IS CREATED & the role of central banks & banks so u know why EVERYONE should care (scared) about NIRP.
Pay attention. This part is key to the why NIRP will impact you.
Central banks need BANKS to transmit their policy objective to the real eco(households, firms). Do this 3 ways: set the price of money (interest rates), quantity (quantity of assets they purchase), & regulations.
Central banks can only INFLUENCE & can't force banks to lend according to their policy/political objectives (some do through window guidance eg PBOC & SBV). This is what economists like to call rule-based approach & should be based on some sort of inflation or employment rules.
Let's use the Fed: has a price target & stable employment. If it is below that target for a long period of time, the Fed can say it'll help via loosening financial condition by: loosen regulations, lower rates & buy assets
When the Fed cuts rates by 25bps to 2.25% that impacts u
When the Fed sets rates high, pays banks more to park $ & when it sets rate low, wants reduce banks' incentive to hold cash
Ur deposit at the bank is the banks' liabilities (banks borrow from u). When banks lend u $, that is a bank's assets. Diff is net interest income for banks
CBs can only influence via their toolbox & up for banks to allocate based on risk appetite. Why did the ECB lower deposit rates to -0.1% in 2014 (now -0.4%)? Frustrated w/ Euro banks not taking enuff risks & firms in Europe depend on banks for funding (US equity & bonds more key)
Markets expect deposit rates to turn even more negative & that means the ECB making it very expensive for banks to park cash w/ the ECB & so in the process forcing banks to take risks to improve profitability because banks CAN'T fully PASS ON NEGATIVE RATES TO RETAIL depositors.
Now that we roughly covered key ideas important for you to understand, let's get back to the paper. I will cover their 1st approach soon - the CLEAN APPROACH (trust me, not clean & they know it & call for more research to make it clean as some law prohibits it).
Notice that no where in this paper they call for more research on the effectiveness of NIRP or anything they propose. Words are just thrown out as if they are facts. No reason to hide the agenda either -> here to ENABLE NIRP to EMPOWER MONETARY POLICY.
Okay, clean approach. haha
Clean approach = tax on holding paper currency vs electronic currency. Basically a tax on CASH or putting a negative interest rate on paper currency interest rate (PCIR). Example: Fed set PCIR at -1%. That means that after 1 yr, that 100 cash is worth only 99. DEPRECIATES CASH
👇🏻
Now u know what the clean approach is, u may ask, well, how does that help u losing $ on holding cash? Well, just does! Duh! Author said in 1 sentence: Negative PCIR makes it possible to stimulate investment & net exports as much as needed to revive the economy!
Just like that👌🏻
No empirical evidence. No charts. No studying of other countries that are without cash. Just like that. 1 sentence.
What about SIDE EFFECTS of the clean approach? Let me tell u, there are many! Author found 5! Yep! Lots of side effects & no support for why negative PCIR works👌🏻
We'll move on to the RENTAL FEE APPROACH (RFA). Let's not forget that the CLEAN APPROACH (CA) is a misnomer & actually NOT LEGAL. And so author says:
If central banks can find a legal way, then CA, but if THERE ARE LEGAL BARRIERS, then the RFA to enable deep negative rates🤗.Yep
Will continue with this thread tomorrow as I got morning meeting bright & early at 8am & need to hike the peak now. We're on page 20 btw in case u want to get a head start.
Thanks for reading w/ me📖🤓
Ready? Let's go, hope u're caught up w/ the Clean Approach & how that isn't actually clean 😬(legal issues, small detail 🤗).
Rental Fee Approach is a RENT payment on paper currency. Imagine Fed has -1% PCIR = Fed charges the banks 1% for taking paper currency from cash window👇🏻
Examples of Rent Approach:
a) Swiss National Bank (SNB) in 2014 NIRP imposes a charge on banks for excess paper currency withdrawals. Put it another way, imposes a negative rate only on the portion of the bank's reserves at the SNB that exceeds a certain threshold 👈🏻
b) BOJ
BOJ in 2016 followed the SNB & adjusts up the portion of bank reserves to which negative rates apply 1-for-1 when bank exchanges its CB reserves for cash. The BOJ only subjects the bank's own holding of paper currency but not include paper currency the bank passes on to customer.
Notice that the authors see this as a short-coming & said: THERE IS NO REASON IT NEEDS TO STOP THERE!
Because the there would be: NO LIMIT TO HOW LOW THE MARGINAL PAPER CURRENCY INTEREST COULD GO😱
Yep, wrote that. No explanation. Next, we got PAGES OF SIDE EFFECT. True story
What u've learned so far:
a) Authors don't bother to argue WHETHER NIRP is needed but rather we need to ENABLE NIRP to empower monetary policy
b) DON'T HAVE (care to) EVIDENCE WHY NIRP SHOULD BE ENABLED
c) But defo knows plenty of side effects. Pages & pages of side effects 😱👇🏻
The 3 side effects of RFA:
a) BANK PROFITABILITY PROBLEM😱
b) Cash-rental-fee-pass-through problem (yep mouthful) but means BANKS CAN'T PASS ON NEGATIVE RATES TO RETAIL DEPOSITORS w/o risking them taking $ out😱
c) the 'Gresham's Law' Problem😱
Don't worry, they have "solutions"
Let's go through these "solutions" (by that I mean either wishful thinking or bending reality or proposing solutions that are HORRIBLE FOR THE AVERAGE PERSON & the only people benefiting are, gosh I don't know who benefits).
Ready? I promise it is good & worth u reading w/ me.
"Solutions" of NIRP:
*Somehow banks' profitability improves due to the valuation effect of banks w/ a positive maturity gap experience capital gains as long-term assets have capital gains? Urgh🧙🏻♀️
*DEFAULT CHANNEL - NIRP improves firms' profitability & improves NPL 🧙🏻♀️
Yay!!! 🥳
*Fees & commission income channel - AUTHORS THINK THAT WHEN INTEREST RATES ARE LOWER, FEES & COMMISSION INCOME TEND TO RISE & IMPROVES BANK'S PROFITABILITY
Wuat?😮
*Net interest income channel - authors didn't have anything good to say & concede NIRP is bad. But didn't stop there
Authors think NIRP improves banks' profitability (3 channels ex 1, which their wishful thinking couldn't ignore that fact that it doesn't work).
Conclude: EMPIRICAL LITERATURE (as opposed to FACTS that banks' profitability is DOWN) shows BENIGN EFFECTS OF NEGATIVE RATES ON BANKS
Wait, but I haven't gotten to their "solutions", which should frighten u. Ready? They propose:
Banks modify existing deposit contracts to CHARGE FEES & INHIBIT CONVERSION OF ELECTRONIC $ TO CASH.
Charge a fee for a cash withdrawals at ATM machines. Put a limit on withdrawal 😱
Instead of going through all, let's look at this table on the SIDE-EFFECTS of RFA & tools to manage the side effect. Notice that the benefits FEW & the side effects plenty:
Bank profitability😱
Cash arbitrage😱
Pass-through of RFA😱
Reduced CIRCULATION OF $ 😱
To name a few.
Food for thought & all here in the table. To ENABLE DEEP NEGATIVE RATES, the RFA have 5 problems & 5 BAD SOLUTIONS that are very bad for HOUSEHOLDS
To achieve the political agenda & we're only 31/89 here, authors have identified a lot of problems & proposed few good solutions👌🏻.
Notice that nowhere here where they PAUSE a second WHETHER NIRP is worth the costs. This paper entire objective is:
Enabling Deep Negative Rates to Fight Recessions: A Guide
Don't bother to discuss the impact on households - ORDINARY PEOPLE who don't understand NIRP anyway 👇🏻
Read the comments for this FT article. Not a single person is applauding the ECB's NIRP. Many of the comments are very astute. The review for the ECB effort is overwhelmingly NEGATIVE & so the ECB will:
DOUBLE DOWN thanks to support from the IMF et al👌🏻
Draghi in July '12, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
7 yrs later: CPI 1%, GDP weak, risks piling as the ECB force banks to take more risks to preserve profitability..
That's not the worst part
The worst part about this is: the central bank is about to DOUBLE DOWN on this. People are now expecting deposit rates to go LOWER. The ECB to introduce tiering to help w/ the side-effects it created. And the ECB will have to change its 33% cap on ownership of govies to raise APP
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Reading this article with great amusement with tons of comments that are so emotional & not backed by why. And they all seem so surprised on outcome. I have been saying this all along - the pass-through of tariffs are not as you think it will be. Why? Because you need to understand how they work & who has the negotiating power.
First, this statement here: "China’s retaliatory tariffs on American imports, the most sustained and significant of any country, have not had the same effect, with overall income from custom duties only 1.9 per cent higher in May 2025 than the year before."
I mean, it seems to admire China's retaliation, as in it, that is the great thing to do.
Why didn't China collect more import duties even though it retaliated?
Well, because China is not GROWING its imports. It's exporting its deflation.
So its retaliation doesn't have as much "meat" so to speak. They need to sell more than they need to buy.
"But despite US tariffs hitting levels not seen since the 1930s, the timidity of the global response to Trump has forestalled a retaliatory spiral of the kind that decimated global trade between the first and second world wars."
They are so upset at the world for not retaliating. You can sense that in the usage. But remember, the US is a lot of countries' number 1 export market.
So you are not going to PISS off your #1 customer. It's just that simple. Why? Because a lot of countries just don't want to be powering their GROWTH via GROWING IMPORTS.
So what? Well, you then be captive to your "customer". You can always sell somewhere else.
Remember that India got like TONS OF TARIFFS. No one says much. They just say, well, they just tariff Indians & make it expensive for them to buy. Do they retaliate with the same tariff? No. They can, but why would you match someone's policies.
These are Trump's policies on US IMPORTS. You can also TAX your own imports. Btw, MANY COUNTRIES DO.
Let's talk about India today. I'll be on @CNBCi at 11am HKT to discuss this particular issue.
First, we all know that India is amongst the least trade exposed and least exposed to the US amongst the big traders.
That being said, the US is the MOST lucrative export market and one it MUST grow if it wants to GROW OUTWARD AND UPWARD through trade.
Why? Look at China PPI today - it's is -3.6%YoY. Look at the Chinese yuan. It is not appreciating like crazy versus the USD. So what? China manufacturing is TOO competitive and will COMPETE with India so exporting to China is not a HIGH MARGIN BUSINESS.
That is the same for everyone who is a big trader. China is a competitor. So fierce that even the Chinese government is struggling w/ this onshore deflated PPI situation so you can see why foreign competitors are pissed off.
First, let's zoom in - India's export as a share of GDP is roughly 2.5% of GDP in 2024. As mentioned, 0.8% is exempted now (pharma, electronics etc). But EXEMPTIONS ARE TEMPORARY. Today, we got threats of 200% tariffs on pharma for example.
Anyway, 1.3% of GDP faces 10% tariff now that will go up to 26% by 1 August if not successfully negotiated down.
India is not too exposed by Trump auto and steel but still somewhat.
Let's look at top 15 exports to the US.
#1 PHARMA, currently exempted but faces sectoral tariffs of a lot.
Look at what India exports to China - ZERO. Zero pharma. 3bn to the EU and 9bn to the US.
So here, you can see that INDIA NEEDS A DEAL.
You can go through all the sectors. Note something. In phones, the EU is a bigger market than the US. Yes 8bn vs US 7bn.
But the EU is not a country but made up of 27 countries. So the US is the LARGEST market by a long shot.
Look at all the ZEROS for China for top items. Not a good market for India.
As promised, here is a thread on Trump trade war and what Asian countries are going to do or shall I say who has more room to give Trump a deal than others.
@Trinhnomics interview at 17 mins.
First, let's start with one certainty: Trump tariffs are higher, and they are on sectors (50% steel, 25% alum, 25% auto & more under study), countries (China 20% fentanyl, Canada & Mexico 25% fentanyl w/ USMCA qualified products 0%, and of course 10% reciprocal tariffs on everyone w/ extension ending 1 August for everyone & China 9 August.
Okay, so what?
Okay, let me first discuss the below chart that summarizes the impact on Asia and why different economies will have different negotiating priorities with the Trump administration.
First, big picture. Exports to the US as a share of output (GDP) of respective countries.
Vietnam is the most exposed by a long shot to the US. And that explains why Vietnam was most motivated to climb down from that 46% level to 20% now (40% for transshipment - we discuss later).
Exports to the US was 30% of GDP in 2024. Yep, that high. Good news? more than 10% of GDP was already exempted as Vietnam's largest export was electronics, namely phones, and thus that was exempted.
The rest enjoy 10% until 1 August and then 20% tariff. On a sectoral level, Vietnam faces 50% on steel and 25% on auto but as a share of total, not a big deal, even if not good for those sectors.
Yes, it has been a while. I have been running around the world & Asia. It was nice seeing so many people and places to share views, but my inner nerdling self fundamentally enjoy sitting at desk listening to music to read and analyze. For those that I got a chance to meet, thank you! People make the world go around - we all yearn to understand our reality & seek to be understood.
Anyway, shall we review first half? And perhaps think about second half 2025, which starts Tuesday next week.
First, we live in a Trump world. By that, we can't escape his decisions, pushing, wanting.
What does he want? That is a question I get a lot. And most people tend to response with this, "He probably doesn't know it himself."
I don't agree. He does. He's clear about it. It's how he gets there and the people that he surrounds himself with to execute it is a big if but not what he wants.
I'll put three things that Trump wants and basically got so far despite everyone calling him TACO (Trump always chickens out).
Three things Trump wants:
a) Tariffs - he likes tariffs. He sees it as a tool to get what he wants, which is to grow US industrial prowess & rebalance US trade. We can disagree on whether this is the right tool or subsidies or industrial policies are better. But tariffs he wants and he gets.
People think TACO is the trade. But tariff is the trade. It's higher. You accept this new normal fine.
I'll give you an example. We got 50% on steel. 25% on aluminum. 25% on auto. +25% fentanyl on Mexico and Canada excluding USMCA products. +20% on China.
And +10% on rest of the world. For China, expires August. For rest of the world, 9th July. Probably gonna get extended.
Happy to be back in Hong Kong! The world is on fire, this time, the threat of war widening beyond just Israel and Iran but to the US and that means the gulf.
Meanwhile, Japan sees core inflation rising to 3.7%YoY and this forces the BOJ to hike (it really doesn't want to for many reasons) as it struggles with policy response - note that inflation has been higher than 2% for so long while policy rate is only 0.5%.
So who is most affected by this whole conflict? Well, we all in different ways but the most obvious outcome is oil. Let's take a look.
We Asians IMPORT 69% of oil going through the Straight of Hormuz and the Saudis export the most.
First, let's go through what's happening. Iran has been attacked by Israel and has shown that it is weak. Now that it is weak, it will have to fight back strongly or risk being seen weak.
So it's a question of how it will surrender not whether and when. Will it do that to the US or Israel? It will fight first. Second is the US, will they take this opportunity to wipe out the threat of Iran nuclear power?
If the US is involved, there is a chance of this widening out as US assets in the region will be targets.
Hence the question of the Straight of Hormuz.
20% of global oil consumption flows through the Strait of Hormuz. It is a narrow channel so if that gets choked up, we're looking at a big oil supply shock.
Who's affected? Producers - the gulfs like Saudi, Kawait, UAE.
Who are the importers? Asians, namely China, India, Japan, South Korea. They make up 69% of total imports.
Happy to be back in Asia. Paris was great for many reasons - but mostly because the vibe in Europe is much better as people feel more empowered by change that allows people to zoom out from usual distress over political stalemate, even if challenging.
What do I tell clients? Well, the same as I usually do. When you look at data, don't get fixated on a point in a series. Non-farm payroll/jobs data is an example. Markets get so fixated on what the expectations are & whether results are a beat or not. But what we should look at is a trend over time. Revisions happen. Downward revisions or upward. Seasonality happens (strikes/weather/etc). But what does the trend tell you & what does that mean for policy reaction function?
Well, if you zoom out, then what we see is that job gains are SLOWING in the US. And labor market data is lagging.
The ISM, both manufacturing and services, both point to slowing activity.
Meanwhile, we have CPI coming out in May - markets expect 2.5%YoY from 2.3% in April.
So what? What will le Fed do?
Inflation is an interesting figure. Why? Because it mirrors what Trump's doing on tariffs and also the dollar going lower, which means imports cost more now.
Both tell you that US goods inflation should rise over time. But what does that mean for US CPI? Well, most weights for US CPI is housing/services, which are non-tradeable in nature.
So while US CPI is rising, the Fed will want to see if core PCE is rising. Anyway, if employment is softer over time, and inflation is rising, doesn't that constraint the Fed from seeing through the fog and know what to do?