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👋🏻It's Wednesday & radio @Trinhnomics is on WHY NIRP is a DOOM LOOP 🎙️:
Negative interest rate policy (NIRP) is a TAX ON SAVERS to the benefit of BORROWERS. The only way to benefit is to be able to BORROW CHEAPLY (access to capital) or have tons of DEBT @ low rates.
So what?
Negative interest rate policy (NIRP) is a TAX ON SAVERS to the benefit of BORROWERS. The only way to benefit is to be able to BORROW CHEAPLY (access to capital) or have tons of DEBT @ low rates.
So what?
We know that households pay high taxes on CONSUMPTION (VAT in EU is 15% & Japan is about to raise VAT to 10%). We know that this tax is already REGRESSIVE, b/c for low & middle income people disposable income is low compared to RICH people.
Despite NIRP EU consumer loan is 5-7%
Despite NIRP EU consumer loan is 5-7%
Average corporate loan in the EUR area is 2% so a 3% spread over households. So the order of costs of funding is here:
Governments = NEGATIVE RATES (will go deeper negative)
Firms = ~2%
Households 5-7%
the CURRENT ACCOUNT SURPLUS (SAVINGS OF PEOPLE) channeled to HELP GOV DEBT👈🏻
Governments = NEGATIVE RATES (will go deeper negative)
Firms = ~2%
Households 5-7%
the CURRENT ACCOUNT SURPLUS (SAVINGS OF PEOPLE) channeled to HELP GOV DEBT👈🏻
Whenever u see a chart like this, I want u to think this: They are TAKING MONEY FROM MY PENSIONS or the INCOME OF MY SAVINGS or MY FUTURE (if u're European & Japanese; this is suppressing yield in the US too)
Global value of NIRP bonds >16trn OR GOV IS TAKING $ FROM UR SAVINGS👈🏻
Global value of NIRP bonds >16trn OR GOV IS TAKING $ FROM UR SAVINGS👈🏻
Why did I say that, well, government debts in the Euro zone is yielding NEGATIVE (and Japan too). What does that mean?
Say the rate is -1%, then that means that the gov can borrow for 100 & magically after 1 yr owe only 99👈🏻.
U ask, from whom does the gov borrow from? SAVERS.
Say the rate is -1%, then that means that the gov can borrow for 100 & magically after 1 yr owe only 99👈🏻.
U ask, from whom does the gov borrow from? SAVERS.
This is how the ECB is hoping to DELEVERAGE by helping BORROWERS at the MASSIVE EXPENSIVE OF SAVERS. Look at inflation -> >1% so real rates on gov bond yields in the Eurozone is outrageous. So u have been a good middle class & don't consume & have savings, then in for a surprise.
The theory that the ECB is going for is basic, which is a simple arithmetic of NOMINAL GDP rising FASTER than COSTS OF INTEREST EXPENSE. So NIRP. Bingo! Supposed to be short-term. Started in 2014 & now it's like a virus. Look at that chart again. How are we gonna get out of this?
Btw, WE DON'T. Instead of admitting that it made a huge mistake & experimented w/ something in which there isn't an EXIT PLAN, will likely:
*Introduce tiering to OFFSET THE NEGATIVE IMPACT OF ITS NIRP🙄
*DOUBLE DOWN ON NIRP by lowering it to -0.5%
*Change rules to buy more BONDS!
*Introduce tiering to OFFSET THE NEGATIVE IMPACT OF ITS NIRP🙄
*DOUBLE DOWN ON NIRP by lowering it to -0.5%
*Change rules to buy more BONDS!
So I want you to think about the leaders of the world in terms of the LOGIC they will justify the "enabling the power of monetary policy" mantra: They DID SOMETHING WHICH CAUSED VERY NEGATIVE IMPACT ON THEIR SYSTEM & so will fix it w/ TIERING but then LOWER RATES by -10bps more👈🏻
I mean, come on. Listen to yourself. It is absurd. Wait a minute. But something else. What they are doing is WORSE THAN YOU THINK. THEY ARE: PUNISHING GOOD BEHAVIORS. They are saying, if you save, then we will PUNISH YOU.
THE WANT TO REWARD U TO BORROW. HAVE DEBT. BORROW!!!!!!!
THE WANT TO REWARD U TO BORROW. HAVE DEBT. BORROW!!!!!!!
If u're w/ me so far, then u're like, gosh, HOW DO I BORROW AT EURIBOR +1%??? How?
Well, u can't if u don't have decent income, good credit, & savings to afford a DOWN PAYMENT.
And of course that is hard if u're a MILLENIAL in Europe b/c youth unemployment is off the chart😱!
Well, u can't if u don't have decent income, good credit, & savings to afford a DOWN PAYMENT.
And of course that is hard if u're a MILLENIAL in Europe b/c youth unemployment is off the chart😱!
While the ECB is telling u to CONSUME, it's not like it's helping u w/ higher wages & jobs. Ur rates if u don't have collateral, income etc WILL BE PIRP not NIRP b/c u're a pretty risky borrower. And VAT is ~15% so CONSUMPTION IS TAXED! COSTS OF CONSUMING IS HIGH.
What do u do?
What do u do?
U borrow at EURIBOR (3m is -0.4% for ) w/ a 1% spread (FREE MONEY as CPI is >1%) & buy hopefully where the real estate tax & rental tax not off the chart & LEVERAGE & RENT to people w/o access to capital & get richer on ur access to cheap capital. Means people taking more risks!
Pensioners, insurers, bankers, everyone who can will need to TAKE MORE RISKS to have more YIELD (can we call it yield anymore?).
So it's like a VIRUS, spreading FAST!
But for the rest, they save more b/c they know their pension won't be enough w/ NIRP so they must save more!!!
So it's like a VIRUS, spreading FAST!
But for the rest, they save more b/c they know their pension won't be enough w/ NIRP so they must save more!!!
NIRP is a tax on savers & a subsidy to borrowers. But not all borrowers are created equal 👉🏻 only those that can have access to very very cheap capital (governments, maybe some firms, & some households). It'll inflate bonds & real estate assets but everyone else'll be deflated🤗.
