Negative interest rates and when robots will set monetary policy

This freaks me out, negative interest rates. You get penalized for saving and effectively paid to borrow. What sort of world is this leading us into?

“To have negative interest rates in a cryptocurrency system […] there should be a separation between the unit of account and the medium of exchange.”


“Central banks (which are humans assisted by computers) still do a much, much better job at monetary policy than the bitcoin algorithm would.”


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What a strange article. Why are they even discussing how negative interest rates would work on a crypto-currency? That guy seems to want to have a central bank-controlled crypto-currency. Central control like that is exactly what this whole crypto-community is trying to get away from.

Besides, it’s not like central banks are doing a great job. All the QE and zero and negative interest rate policies don’t seem to solve the structural problems and create nasty side effects. Trust in central banks is plummeting as well (I’m looking at you SNB, with your sudden drop of the CHF/EUR peg!).

In addition, most of Bitcoin’s volatility is due to it’s small trade volume and it’s young age. If a crypto-currency is used by hundred millions of people as actual money rather than just a speculation vehicle then the volatility will be far smaller, and far less problematic.

Guys like Miles Kimball are the kind we should not be listening to I think. They think too much in terms of the old, broken, and corrupt system of money manipulation and believe it to be a necessity. Volatility may not be desirable, but I think in the end the current bank-controlled monetary systems will turn out to be far more damaging to the world economy than natural fluctuations in price levels that would be present in a true free market system.

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This is very much like the Discover card, the card that pays you to go into usurious debt. And very much like the American spyware credit reporting system where signs of addiction to life ruining credit actually raise your score as they show your willingness to let these people bury you. Also very much like the concern over the so called “paradox of thrift”

Even with positive interest rates for bank accounts those are so low today that all the fees that they charge can result in a net negative interest rate I suspect.

If I remember correctly, Safecoin has ZERO transaction fees! That means low friction for the flow of coins and conveniency for users since all the transaction fees are a pain in the a…, neck.

These people seem to have lost touch with what money is. It is like they are trying to move the shadow, rather than the object casting it.

In a free market for money, who is going to hold an asset which rots? Who is going to pay to lend banks their assets?

When people are coerced into using fiat money and can only move it digitally by using a private (cartel) bank, they can try this shit on… Not when people actually have a degree of choice though.

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Saw that article yesterday and skipped it without reading.
Now I read it and that guy is a moron.

Of course, monetary expansions have an effect on exchange rates, but if another country is not happy with that effect on its exchange rate, it should just match with its own, appropriately calibrated monetary expansion. That response is not a response in a “currency war,” it is normal monetary policy.

All savers in the reacting country should be robbed of a part of their savings by a central bank’s decree and it’s normal. I want in!!!

This reminds me of the discussion about the the price-rigging MaidSafe DAO :smile:
Topic: Currency stabilizing DAC's

Does anyone think MaidSafe should automatically rob everyone of a part of their savings (as expressed in the amount of real world stuff they can buy for their SAFE savings)?
Would that be “normal”?

Martin Armstrong’s take:

The entire problem we have with this proposal of negative interest rates first put forth by Larry Summers, is that this is another means for bankers to make a fortune through theoretical stimulus that will never reach the public. This crazy idea will have a DEFLATIONARY drag on the entire economy and threaten to tear the entire system apart for it is presented on behalf of a single group – the money center banks…

The entire view of interest rates is one-sided and part of the propaganda sold to us by the press since the New Deal. The general proposition is a claim raising interest rates will be bearish for the stock market on this one-dimensional idea that if it costs more then people will buy less. However, we put that theory to the test and it has proven to be a total fallacy.

The stock market has NEVER peaked with the same level of interest rates even twice. The bubble in 1929 took place with the lowest level of interest rates because of capital inflows into the USA whereas in 1899 rates went to nearly 200% because of capital outflows. The key is simply the spread between interest rates and expectations. If you expect to double your money in 1 year, you will pay 25%. But if you do not think you will make 1% in a year, you will not borrow at 0.5%.

Our problem is caused by academics with no trading experience, just ideas, and lawyers who think they can FORCE the people to do as they command with the threat of punishment. If they will not borrow at 0.5%, then Larry Summers pitched for the bankers as he always does. Let the bankers charge money to have an account so they will make money. They justify this by claiming making rates NEGATIVE will simply FORCE people to invest and spend. They wipe out savings and punish people who have saved. This is looking at the world ONLY from the banker’s perspective.

This entire focus is way too narrow in its scope. What about the elderly who were told to save for their retirement? They cannot make even interest at the nominal levels. Then we have pension funds that keep 40% to 80% of their investment in “safe” government bonds that pay nothing. Most pension funds average requirement to fulfill their objective is 8%. This whole idea of negative interest rates is creating a huge pension crisis coming on the other-side of 2015.75. Mr Summers and the bankers only look at themselves and to hell with society.

Car loans, fully secured, are going for 2.29%-4% depending where you are. Considering their cost of funds is effectively ZERO, this is actually a historical high spread in profit margins for bankers. Taking rates to NEGATIVE will only result in smart money moving to equities, and dumb and dumber will just do as they are told and pay the banks to hold their money until these is none left.

Now we look at government. The deficits have not stopped. They all borrow more every year. The crisis hits because they are now addicted to low rates. What happens when rates rise? Central Banks can try to manipulate short-term rates, but they cannot manipulate long-term.

That is why the Fed was buying back 30 year bonds trying to create a shortage of long-term so in theory others would lend long-term. That totally failed as everything the Fed has done. Why? Because they act ONLY indirectly and assume the banks will act as they intend. The banks have not lowered car loans or credit card fees and rates in proportion to the decline in rates at the Fed. They have pocketed the difference.

Central Banks act ONLY indirectly, and not directly. They count on banks lending. In the USA, the banks did not lend and instead they went to the Fed and demanded they be paid interest on excess reserves. The Fed complied and pays them 0.25% for excess reserves. The banks can pay ZERO and make money without risk and use the balance for trading.

This entire exercise is brain-dead and it will not end very nicely. All they are doing is wiping out pension funds and the elderly. All those years of advice save for retirement are proven to be total bullshit when banks can convince governments that people should be paying them for the privilege to trade wildly with their money. What a deal. Thank you Larry.

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Andy Perry’s take:

Money is a way of channeling and controlling trade, but where any particular instance of money fails, trade finds a way. Trade (as human interaction) is ubiquitous, like air and light.

Which brings us to interest rates. Earning interest is – was, a positive function of modern money, that is to say it is a positive reason why people wanted the kind of money that is available now.

Interest is validated as an expression of the contemporary social value of money in terms of itself. In other words, interest on money is paid in money to express its value at that specific time. This additional money that accrues to owners of money by virtue of possession expresses the fact that money is valuable. Interest proclaims that all things being equal, anyone within society should/will be able to use money to extract value.

It is a license, a legal permit, to extract value from within the society. ‘Extract’ value is important, as you will see in a minute.

This definition of interest is of central importance because it contains within it a model of the society into which the created money will go. It makes plain that there WILL be opportunities to use money profitably (in a way which can extract value), within the given society.

It follows from this that the interest function is in essence a statement about a given society. And it is fundamental to the way that modern capitalist societies differ from pre capitalist (‘feudal’) ones. Modern capitalist societies will offer opportunities for wealth extraction/ transfer, non capitalist societies do not guarantee this. This is the fundamental rhetoric and ideology of capitalism.

From this positive functionality of opportunity an apparent negative functionality is implied: That it is possible that there might be limited or no opportunity of profitable use that can be made of a given amount of money. This possibility is defined as ‘risk’.

But this can be shown to be a demonstrably false argument by means of a simple illustration:

If there were an infinite number of possible profitable ways to utilise money what would the effect be on interest rates? Despite the fact that there would be little or no risk, interest rates would be high. Because there would be high demand for money After all, what would incentivise the lending out money when there were countless easy ways to directly invest it at high returns?

And what would be the effect of an opposite environment of high risk and few profitable ways to utilise money? Then interest rates would be low because there would be little or no demand for money. In this environment, investment opportunities as opposed to money would be at a premium.

This directly refutes the idea that interest is an expression of risk. It is precisely the opposite. The amount of interest charged is NOT a reflection of risk it is a reflection of the lack of risk.

Further it directly refutes the idea that money produces wealth. Money extracts wealth from profitable opportunities. Without these profitable opportunities money is worthless.

As I argued above, interest is a statement about a society. So what does the MONETARIST refusal to obtain interest from the money they issue- ‘ZIRP’, say about society now?

It says that there will be no ways to profitably extract wealth. It is effectively the end of a capitalist society.

Interesting, but he doesn’t address the effect of inflation and deflation. In a deflationary period the value of money increases, so despite ZIRP/NIRP, which doesn’t increase the nominal value of a particular amount of money, the “real” value still increases over time through deflation. I think that undermines his entire argument? At least, if the deflation fully compensates the decrease in interest rate, then it does.

No, it doesn’t give you any right. Noone has to do business with you.

Duh… Worthless paper has no intrinsic value. That wasn’t too hard!
I don’t know where he got the idea that money produces wealth. Money is wealth which produces nothing. That’s exactly what it’s supposed to do - be a medium of exchange and store of value.
Money doesn’t “extract” anything, no clue where that Perry guy got those nonsensical ideas.

I’ve put the link to the full article in the post if you would like to follow up.

Well the author is wrong.

Further it directly refutes the idea that money produces wealth. Money extracts wealth from profitable opportunities. Without these profitable opportunities money is worthless.

A real money is always worth something because even copper or iron money can’t ever be cheaper than the material it’s made from.
A currency of course doesn’t produce wealth, it just helps it circulate. It doesn’t extract wealth, it charges for the risk to which the lender exposes himself.
If it has backing in something tangible, it can’t be worthless.

It’s a very confused blog post, IMO.

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Did you comment on his blog…his response would be interesting.

I just tried (content below), but it requires account on the site so I’ll just post it here.

====
Hi

  1. Because this post is about the nature of money, I think you should define “money” (it seems you mean “currency” rather than “money”?)
  2. Money (such as gold) has inherent value. You can coat airplane windows with it, enhance conductivity of connectors in your iPhone, etc. A currency can be intrinsically worthless, but then you could make it clear which one you are referring to to.
  3. “It is a license, a legal permit, to extract value from within the society.”
    But in a free society there’s no way to limit that. I don’t have to accept your money, I can pick any of several private currencies or forms of money that circulate around. I also can
  4. “If there were an infinite number of possible profitable ways to utilise money what would the effect be on interest rates? Despite the fact that there would be little or no risk, interest rates would be high.”
    They’d be high because there’s more demand relative to supply. Money is supposed to be scarce, otherwise it’d be worthless or close to worthless and people would not want to hold on to it (or denominate their labor or products/services in it).
  5. “And what would be the effect of an opposite environment of high risk and few profitable ways to utilise money? Then interest rates would be low because there would be little or no demand for money.”
    I’m not sure this dual (high risk + few profitable ways to utilize it) hypothetical setup is valid.If risk is high, interest will be high. That’s regardless of how one wants to utilize money. If there are few investing opportunities, interest rates would be low because of a relative lack of demand.
    Currently in the world there is too much capacity in most industries worldwide, so consequently although risk is small, there’s no demand for money (actually individual currencies, but since you didn’t make this distinction I’m playing along) simply because building another steel mill is likely to make that debt bad (ie you won’t make money from it).
    Risk isn’t always small. If you’re a steel producer looking to build yet another mill in China that’d be risky because there’s overcapacity and because you probably already have too much debt, your cash flow is negative so it’s clear that you’d have difficulties not only returning the loan, but also paying the interest.
    If you want to get a fully secured loan (e.g. you want a $1 million loan which you can secure with a $1 million in US T-bonds or a $3 million home), you’ll surely get it - no questions asked - and that’s regardless of whether you want to build a steel mill or not.
    Right now many folks can’t get loans regardless of how much interest they are willing to pay. That’s because they already have too much debt or - similar situation - no good collateral to secure it, so the bank chooses to stay away. Because of many rules (Basel III, etc.) banks have to keep value-at-risk (https://en.wikipedia.org/wiki/Value_at_risk) within set limits and aren’t allowed to make risky loans regardless how much interest the borrower is willing to pay.
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I gathered all your pearls of wisdom in one place. Look forward to your reply…

‘Duh… Worthless paper has no intrinsic value. That wasn’t too hard!’

A:Money is not paper or gold or anything else, it is a legal instrument recorded on a transferable object. Nothing is money until it is designated as such by the relevant legal authority. The mortgage on your house is written on paper, does that mean it is worthless because the paper is worthless? What nonsense! The value comes from what is printed on the piece of
paper, not the paper itself.

‘A real money is always worth something because even copper or iron money can’t ever be cheaper than the material it’s made from.’

A: I’m pretty sure this sentence doesn’t actually make sense; nevertheless refer to Greshams Law:
http://en.wikipedia.org/wiki/Gresham's_law

I don’t know where he got the idea that money produces wealth. Money is wealth which produces nothing. That’s exactly what it’s supposed to do - be a medium of exchange and store of value. Money doesn’t “extract” anything, no clue where that Perry guy got those nonsensical ideas.’
‘I don’t know where he got the idea that money produces wealth.’
‘A currency of course doesn’t produce wealth’,

A:Capitalist economics claims that money produces wealth. If it does not:

What do Capitalists claim Capital is then?

What do Capitalists claim Capitalism is about then?

What do Capitalists mean by ’ investment’?

What do Capitalists mean by ‘return on investment’?

‘…it just helps it circulate. It doesn’t extract wealth,’

A: Even in its simplest terms, this statement is plainly self contradictory.

How can wealth ‘circulate’ unless it is extracted from one place so it can be ‘circulated’ to another?

In what form can wealth ‘circulate’ if not in the form of money?

What do you understand by the term ‘accountancy’?

What do you think accounts are for?

I just tried (content below), but it requires account on the site so I’ll just post it here.

A:It does not require an account on the site simply supply your e-mail and a name.Its not difficult or complicated (well, for me at least)

1) Because this post is about the nature of money, I think you should define“money” (it seems you mean “currency” rather than “money”?)

A: noun: currency;
plural noun: currencies

a system of money in
general use in a particular country.

A:What do you imagine the difference is between ‘currency’ and ‘money’? Define this difference. If you know of any valid legal difference in the definition of currency and money please explain it. I used the term money specifically and advisedly.

2) Money (such as gold) has inherent value. You can coat airplane windows with it, enhance conductivity of connectors in your iPhone, etc. A currency can be intrinsically worthless, but then you could make it clear which one you are referring to to.(sic)

A:Gold can be used as money, but so can shells, pieces of paper etc. Money is a legal instrument. (see above). Aeroplane windows are irrelevant.

3) “It is a license, a legal permit, to extract value from within the society.”
But in a free society there’s no way to limit that. I don’t have to accept your (?) money, I can pick any of several private currencies or forms of money that circulate around.

I also can (sic)

A: -(?) For some reason you have been unable to finish this sentence- were you confused? What did you mean to say?

’ I don’t have to accept your money’

A:This is simply wrong: You do have to accept my money in settlement of debt, legally ordered payments, in payment of taxes etc etc . Look up the meaning of ‘legal tender’. The government has mandated this. Your statement is evidence of painful ignorance.

4) “If there were an infinite number of possible profitable ways to utilise money what would the effect be on interest rates? Despite the fact that there would be little or no risk, interest rates would be high.”

They’d be high because there’s more demand relative to supply. Money is supposed to be scarce, otherwise it’d be worthless or close to worthless and people would not want to hold on to it (or denominate their labour or products/services in it).

A:This does not in any way refute the point that interest rates are a product of demand, not risk; in fact you simply restate the first part of my point, albeit in a somewhat less elegant way. Then you make the strange generalisation: ‘money is supposed to be scarce’. Based on what theory?
Can you provide a definition of ‘scarce’? You suggest that people would not want to denominate goods and services in any particular money if it were not scarce. People within a given territory have no choice as to whether they have to hold the currency of that territory. They are required to hold that currency-in order to pay taxes for example, as Iexplained above. You either repeat what I say, in which case you are sort of on the right track, or else you deviate from my description and go into a ditch…

5) “And what would be the effect of an opposite environment of high risk and few profitable
ways to utilise money? Then interest rates would be low because there would be little or no demand for money.”
I’m not sure this dual (high risk + few profitable ways to utilize it) hypothetical setup is valid.

A: Really? Because that is the setup we are in right now!

If risk is high, interest will be high. That’s regardless of how one wants to utilize money. If there are few investing opportunities, interest rates would be low because of a relative lack of demand.

A:You try to characterise ‘risk’ as some invisible abstract force of nature that cannot be located within concrete tangible
reality. By conflating risk and interest you hope to glide past their supposed relationship: ‘If risk is high,interest will be high’. is a statement of religious faith dressed up as economics. There is no risk outside ofinvestment opportunities or the lack of them. If there is, show me where it is!

Currently in the world there is too much capacity in most industries worldwide, so consequently although risk is small, there’s no demand for money (actually individual currencies, but since you didn’t make this distinction I’m playing
along) simply because building another steel mill is likely to make that debt bad (i.e. you won’t make money from it).

A: ‘Currently in the world there is too much capacity in most industries worldwide’ Another meaningless generalisation! Raw material producing industries and finished commodity industries to say nothing of services, cannot be lumped together in
this way.

Try this ( free to dowload):http://www.smashwords.com/books/view/312882

That’s a strange ‘rule’ you come up with there.

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This goes right to the heart of my argument, which I am afraid you
haven’t really understood. You cite the beneficial effects of
deflation on the value of money as a way of offsetting the
non-beneficial effects of ZIRP. You argue that in theory at least,
deflation and ZIRP could effectively’ net-out’, meaning that there
would be no losers in a system which would be in your terms, self
regulating.

The first and most obvious problem with this is that it is highly
unlikely that the people who are disadvantaged by ZIRP are the people
who would be advantaged TO EXACTLY THE SAME EXTENT by deflation. When
I put it in these terms I am sure you can see what I mean. In other
words, if you are getting no interest on your savings, you are told
you must take the money out of the bank and buy a boat with it, why?-
because you will save a lot of money! But what happens if you don’t
want to buy a boat?
From this it should be clear that even if ZIRP/Deflation could by
some stretch of the imagination be described as OVERALL neutral, it
has to be admitted that it causes massive wealth transfers from
individuals within the system. Because it effects different MONEY
FUNCTIONS differently.

The second problem with your suggestion flows directly from this:

Deflation and Inflation are in no sense ‘real, they are estimations
based on aggregated information produced by governments. They are
primarily political tools. I am sure you are aware that the
methodology for calculating inflation/deflation figures has been
regularly amended in every major economy, usually to suit the
political requirements of the time. There is no clear, real and
genuine way to calculate deflation, so the idea that this misty,
indeterminate figure from the future can be used to offset the very
real concrete lack of interest from today is a bit of a stretch….

The third problem is the main one I was trying to describe and it
flows from the above two points I have made. You are describing
monetary policy as a totality which is to say, you are concerned with
the TOTAL amount of money netted out. But money is not like that. It
is not a single contract that comes to maturity and is then paid out.
Money is constantly being issued and retired, there is never a time
when it is accounted for in totality. The amount of money and the
‘real’ value it represents is a constantly moving target. So there
will never be a time when it will be possible to say what the
discrete outcome of any action will be. The only way to understand
money is as a series of ‘waves’ of contracts and the effect that
these contracts have IMMEDIATELY. The effect of the money issued
during the credit crunch was to save the lives of the banks. It does
not matter what the ‘real’ value of this money was, in terms of the
banks or the overall economy, without it the banks would have died.
Just like a billionaire would die in the desert without a single
bottle of water to keep him alive.

Show me an example of money that was not designated as such by a legal authority

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Am I to take it that you believe safecoin is illegal?