The Giant Sucking Sound of Financial Repression

In the US alone, it impacts nearly $40 trillion — with consequences for the real economy.

This is the transcript from my podcast, THE WOLF STREET REPORT:

It’s called interest-rate repression. Or more poetically, financial repression. It’s where central banks manipulate interest rates down to where investments with little credit risk, such as Treasury securities, FDIC-insured savings accounts and CDs, pay little or no interest, or pay less interest than the rate of inflation. People such as savers and retirees, and institutions such as pension funds, that depend on this cash flow have lost their income stream. In addition, the purchasing power of their principal is getting gradually wiped out by inflation.

How much money are we talking about? In the US alone, this interest rate repression impacts nearly $40 trillion. This includes savings products, Treasury securities, municipal bonds, and high-grade corporate debt. $40 Trillion with a T. A 2% reduction across the board cuts this income by $800 billion a year. And this has had an impact.

Central banks have accomplished this interest-rate repression by pushing short-term rates to zero or below zero, and by buying bonds and other assets to push long-term rates down too. These were emergency measures during the Financial Crisis that have become the “new normal,” as it has been called. This new normal has been going on for over a decade now.

Other central banks, including the ECB and the Bank of Japan, pushed their policy rates below zero. This, in addition to vast asset buying binges by those central banks, produced $13 trillion in negative yielding bonds. But that’s a different universe of idiocy that we’re not going to get into today. We’re going to stick to US conditions.

To the Fed’s credit, it is the only major central bank that has raised its policy-rate target a bit, from near-zero to a range between 2.25% and 2.5%, which are still historically low rates. But it is under immense pressure by Wall Street and by the White House to cut rates again.

So now we have this situation where short-term Treasury yields are low, and long-dated Treasury yields are even lower.

How much money are we talking about here? Let’s see. There are $22 trillion in Treasury securities. They’re held by individuals and institutions, including insurance companies, pension funds, and the Social Security Trust Fund.

Then there is high-grade corporate debt. The category of triple-A to single-A-rated debt is about $3.3 trillion. These yields have been pushed down too.

Then there are $3.8 trillion in municipal bonds outstanding. Many of them trade below US Treasury yields. For example, the GO bonds of California, which is not exactly a paragon of fiscal rectitude. During trading last Thursday, the California 10-year yield was 1.76%. This was about one-third of a percentage point below the US Treasury 10-year yield of 2.08% on the same day.

Then there are $9.4 trillion in savings products, mostly savings accounts and CDs at banks. There are also about $3 trillion in checking accounts, payroll accounts, etc., but they’re not included here. These are just savings products.

So let’s add these categories up: They amount to $39 trillion.

A 1% reduction in interest spread across the board of just these four categories amounts to nearly $400 billion a year, that the holders of these products are being deprived of.

For example, the Social Security Trust fund, which holds $2.9 trillion in Treasury securities. Its investments earned an average effective interest rate in 2018 of 2.9%. That is down from 5.1% in 2008. And down from over 6% in 2003 and prior years. And it will fall further as some of the remaining higher-yielding long-dated securities from years ago mature and are replaced with new securities at lower yields.

Everyone talks about the Social Security Trust Fund, and what to do when it becomes insolvent as more claims will be drawn on it than money will be paid into it. It hasn’t shrunk yet, and reached a new record in June, thanks to rising contributions. But it will eventually start to shrink. And no one is talking about the Fed’s role in this shrinkage, namely the interest rate repression.

For the Social Security Trust Fund, the difference between earning 2.9% and 5% is $62 billion a year, that the fund is not earning in interest.

This is playing out across the public and private pension fund universe. To dodge the curse of low interest rates, pension funds are chasing yield, and have aggressively increased their allocations to risky assets, such as stocks and alternative assets, such as private equity investments, and high-yield assets such as junk bonds and leveraged loans and Collateralized Loan Obligations or CLOs. During the next downturn, when these high-risk assets will take a hit, this move could widen by an enormous margin the pension crisis.

The clear beneficiaries of these central-bank policies are the borrowers – just about all borrowers except consumers borrowing on their credit cards, whose interest rates have remained sky-high. These borrowers are being subsidized by current and future retirees, by savers, by fixed-income investors, and ultimately by federal and state taxpayers when they’re called upon to bail out the pension funds.

A 2% difference in yields across the board takes nearly $800 billion a year in income from savers, current and future retirees, and fixed income investors, and hands this money to borrowers.

This is a gigantic sucking sound, to use Ross Perot’s immortal phrase, as this money gets transferred from these people and entities over here to those people and entities over there.

In addition, there is the side-effect that these low yields essentially force fixed-income investors to try to make up for this enormous loss of income by loading up on risk. So they’re chasing yield wherever they can find it, meaning that in the process, they’re bidding up prices of risky assets, thereby lowering their yields too, further inflating the already enormous asset bubbles. Institutional investors, like insurance companies and pension funds, are a big force behind this.

The other thing that is happening is that savers and fixed-income investors are having their cash flows gutted by this interest rate repression. This has been one of the major issues in the economy. Many of these people spend every dime of this interest income. When interest rate repression laid waste to their income streams, they in turn reduced their consumption. They had less money to spend, and they spent less.

It’s interesting to note that 2018 was the year that produced 2.9% economic growth in the US, the highest growth since the Financial Crisis. And this happened when interest rates were rising, and income streams of these people were rising due to higher interest rates on savings products and Treasuries, and these people spent this additional money they earned, and they felt better and were more confident of the future, and thus contributed more by spending more.

The best way for the Fed to stifle economic growth is to pull the rug out again from under these consumers and gut their income by cutting interest rates.

According to this nutty strategy, the Fed would lower interest rates to stimulate inflation: In other words, it would target those savers and fixed income investors from both sides: First, cutting their incomes and then also cutting the purchasing power of this income.

Low rates are considered a stimulus, but for whom? For Wall Street and asset prices or for the real economy? Countries with negative interest rate policies, such as Japan, and the countries of the Eurozone are now being dogged by low and declining economic growth, despite, or likely because of the low interest rates and the destruction of cash flows.

Over the long term, and that’s what we’re talking about here – it’s been over a decade – interest rate repression is not a stimulus. It just creates asset bubbles. And it removes an enormous amount of income from people who would actually spend this income, and so they spend less, and this reduction in spending dogs the economy.

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  104 comments for “The Giant Sucking Sound of Financial Repression

  1. Joe
    Jul 31, 2019 at 10:03 am

    I think the whole system has changed and debt doesn’t matter as long as the government keeps the companies alive…endless debt.
    But, at some point failures are going to occur.
    Many companies now do very little on maintenance as well as cities…

    • Paulo
      Jul 31, 2019 at 3:01 pm

      Is there really any difference now in how China manipulates the economy and how the US does? I don’t see it if there is, as manipulation is manipulation. China has the communist party and their politiburo, and the US has ivy league colleges and citizens united.

      It is all starting to remind me of those old Godfather clips where average people become marginalised and desperate, then mobilise to look after themselves and operate under another system that is more accountable. Criminality is in the eye of the downtrodden, I guess.

      • NBay
        Jul 31, 2019 at 5:06 pm

        Just had oil and auto trans fluids changed in black market back yard garage in poorer area of town. I’m in an over 55 apt, where rules prohibit any car work, and getting too old for that, anyway. I just look for loose things and leaks. It won’t be dumped. Guy said it would be recycled into the constant loss rigs he works on.

        Yes I know it’s ecologically unsound. (maybe adds hydrocarbon to asphalt roads?) Can’t be justified, but then not everyone can use or afford an EV and place to overnight charge. Being nice to the planet has become a luxury for most, sadly. Driving less, planning trips around area, is good, but just forced on most, which is OK by me.

        • NBay
          Jul 31, 2019 at 5:15 pm

          BTW. Today’s Fed move. Could have been worse. Bad timing for me, as I need Feb-Aug 5 yr T-note in (haha) “portfolio”.

      • alex in San Jose AKA Digital Detroit
        Aug 1, 2019 at 12:15 am

        Paulo – Exactly. Before I had internet access (only took me about 4 years to get it here in San Jose Calif.) I used to buy cheap DVDs at Fry’s to watch, and one, about the mafia, went into great detail about how life was really hard back in Sicily and people would band together, or give their total loyalty to a patron, who would employ them. The system translated nicely over to the US – Italians were pretty marginalized 100 years ago here.

        • NBay
          Aug 1, 2019 at 9:05 pm

          Yep. When stepfather’s dad arrived just a bit earlier they were all on the very bottom in this area. Made money running booze, sold guapo to mayor and his pals, and today they almost run this area.
          Stepfather’s dad found shot up dead in broom closet when he was 7, but he was still included when they all made the big time. Told me guy who made booze run to Eureka, got $100 for it. Hear that was Kennedy dynasty’s start, and know a Pacific Palisades league Irish family who also made the big time, in NFL biz, that way. Wasn’t just Italians.

    • Ppp
      Jul 31, 2019 at 4:22 pm

      Wolf ignores reality. The Fed, and the U.S. for that matter, are irrelevant. The Eurodollar rules all. The Fed’s mini rate cut will have one effect: more hoarding of dollars. Liquidity will dry up. Shadow shadow finance is in charge, and it is a hurricane. Heading straight at you.

    • sidney weiner
      Aug 2, 2019 at 8:12 am

      Looking at it from a different angle,
      The medium term effect is that,the Bank is causing monetary inflation creating new money.
      Monetary inflation creates price inflation.
      Price inflation will impoverish the working middle class.
      The Economy,indeed the global economy, is mostly a consumer driven economy (70%?+).
      Working middle class Americans are the main consumers,….The main customers for big business.
      Destroy the Middle Class is like killing the Goose that lays the Golden Eggs.

  2. raxadian
    Jul 31, 2019 at 10:03 am

    And meanwhile money losing companies like Tesla get billions of cash that they burn faster than you can say “Ebenezer Scrooge”.

    Truly, reality always beats fiction in the end.

  3. Peter
    Jul 31, 2019 at 10:12 am

    Could debt be stretched over time as a tread? Example: our good friends purchases a home in Manhattan for $5.1 million. They both make about $400k in salaries combined and have a lot of student loan debt and private schools for two kids to pay for, no family assistance. In a casual dinner setting with other friends who are in similar situations, they were discussing all of the financing options available (companies provide them with down payments, etc). A new one for me: stretching the home loan terms down 40 or 50 years, versus 30 years for the mortgages. Is this common or situational?

    • Jul 31, 2019 at 10:21 am

      During the Japan bubble back in the 1980s, lenders there dragged out the 100-year mortgage, which is essentially a perpetual mortgage since it exceeds the life-span of an adult home buyer. So anything is possible, if you find a lender.

      You could also do interest-only, and refinance each time it comes due … at whatever rates you can get at the time. But you can refinance only if the price is the same or higher than it was before when you took out the mortgage. If the price is a lot lower, you will have trouble refinancing the mortgage. You may be able to refinance only part of the mortgage, and if you cannot pay off the interest-only mortgage and you cannot refinance it, you’re cooked as a homeowner.

      • Anon1970
        Jul 31, 2019 at 10:52 am

        Remember the Pic-a-Pay mortgages issued by World Savings Bank before the Great Recession? They ended up bankrupting World Savings and its owner Wachovia Bank, when borrowers defaulted on their mortgages in large numbers.

      • Unamused
        Jul 31, 2019 at 11:18 am

        Can we take that as a ‘no’?

        It’s not just mortgage debt. It’s debt of all kinds, and there are a lot of them.

        The tendency of debts to grow exponentially at rates in excess of the economy’s ability to create the economic surplus needed to pay creditors has been known for nearly 5,000 years. To accomodate this fact, and to prevent their realms from imploding, rulers in ancient times had debt jubilees, recognizing the inherent tendency of financial dynamics to cause instability, leading to debt bondage and forfeiture of land to creditors.

        In modern times we instead have financial crashes.

        The recent experiment in negative interest rates, to write down savings, appears to be a necessary compliment to the inevitable debt writedowns. Financial policy makers seem to be facing the hitherto unthinkable fact that many zombie companies and debtors have no foreseeable means of paying the amounts that they owe on paper.

        “No” appears to be the correct answer. Case-by-case bankruptcy has been shown to be inadequate to close the gap. So do NIRPZIRP policies. Debt jubilees, effective regulation, and taxation of the parasite class are politically out of the question. So it would appear that recurrent crashes, debt peonage, working-class poverty, supply/demand imbalances, market bubbles, and all the other financial distortions are features of the system, not bugs, made inevitable by the policies needed to service the cupidity of the privileged class.

        • a reader
          Jul 31, 2019 at 12:04 pm

          “to write down savings”

          That’s a good one, Unamused, I’ll be using this expression.

        • NBay
          Jul 31, 2019 at 7:15 pm

          Agree, sadly/fatalisically as usual. “Jubilee”

          The Biblical Debt Jubilee is to be held every 49 years, something less every 7 years?, forgot the exact details. Anyway, at that time all debts shall be forgiven, all slaves freed, all land restored, etc. Wrote chapter and verse down somewhere, but can find it if challenged by follower of Abrahamic Religions and same desert God. 40% of USA were polled to believe the Bible account of Creation by God is absolute truth, second only to Turkey, in what looks roughly like a poll of NATO countries. Per Wikipedia with citation of poll. (Only other website I’ve donated to. Actually get a kick out of ads here, one followed me from AlJazeera, expensive in home elevator.)

          Church holdings and privs were exempt and kept, though, I bet, as they interpreted Holy scripture/law and enforced those rules…were the “policy makers” of the times.

          All is in the Holy Bible itself. So one can wonder why the present day “thumpers” never seem to go into that passage, regarding God’s earthly expectations for his children’s behavior? (obviously just rhetorical question)

          PS: If I were still Soc major, could through some (then) 50 cent words around, too.

      • Patience
        Jul 31, 2019 at 11:24 am

        I’m guessing a similar strategy was used in times of serfdom in Europe.

        ie. During the potato famine era where many starved to death, they exported record grain; as payment?

        Seems to be a plan to create generational serfdom.

        • Kaz Augustin
          Aug 1, 2019 at 7:35 am

          Makes sense as the labour were the Irish but the landowners were English.

      • Michele
        Jul 31, 2019 at 6:07 pm

        That’s a fascinating fact about Japan. Maybe I’m misinformed but I’ve heard the Japanese like new buildings so they prefer tearing down and rebuilding to historic preservation. One hundred year mortgages seems to like a hard sell to a culture that prizes newness. How did that happen?

        Also, thanks for a great piece. I haven’t seen much ink spilled, digital or otherwise, about the effects on pension funds. I live in Minnesota where we our pension funds have about 63% of what is necessary based on an 6% annual expected return. I’m seriously considering a move but there are only a handful of states that won’t face serious pension fund problems.

        https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017

    • Just Some Random Guy
      Jul 31, 2019 at 12:23 pm

      There’s nothing magical about 30 years. 40, 50, 100, why not? Virtually nobody actually stays in a home for 30 years as it is. It all comes down to monthly payment, so why not 100 years? It’s essentially renting but with the benefits of ownership. Sounds like an ideal compromise between the two options to me.

      • d
        Aug 1, 2019 at 8:16 am

        A 100 yeaqr note is just a Fixed/Guaranteed term, interest only loan.

        They only became an issue when property values started to decline in some parts of the market

      • Jeff
        Aug 2, 2019 at 10:44 am

        That’s not true. I’m the first one to move out of my neighborhood in 35 years. Sold my house to the daughter of my neighbor across the road without listing it.

    • Kevin
      Aug 1, 2019 at 5:54 am

      I lived in Japan for two years in the late 80s, 50 and 100 year mortgages were common in and around Tokyo at that time.

  4. Iamafan
    Jul 31, 2019 at 10:22 am

    According to SIFMA it is approx. 42.685 Trillion. Just a little more, and growing rapidly.

    https://www.sifma.org/resources/research/fixed-income-chart/

    • Jul 31, 2019 at 10:54 am

      Yes, they’re including Asset-Backed Securities and Federal Agency Securities, which I didn’t include. The latter I should have included, the first I’m not so sure.

    • Dale
      Jul 31, 2019 at 11:34 am

      Not sure how this fits in, but the Fed Z.1 reports $45.4T for “All sectors; total debt securities; liability, Level” and $27.4T for “All sectors; total loans; liability, Level”.

  5. Rob Davis
    Jul 31, 2019 at 10:28 am

    Great article as usual sir!

    A question if I may. I thought the securities the SS trust fund holds are not marketable, is this not the case?

    Thanks in advance and keep up the great work!!

    • Jul 31, 2019 at 10:51 am

      That’s correct, they’re “non-marketable securities,” which means that they cannot be traded and therefore their value does not change, and their yield does not change. This is a good thing because it protects these securities from the forces and vagaries of Wall Street.

    • Rob Davis
      Jul 31, 2019 at 10:53 am

      Amended comment.

      I realize it doesn’t matter. I’m trying to get my head wrapped around the SS trust fund. From what I understand, the treasuries the fund holds represents the money “spent” out of it. Like an IOU if you will.

      When those treasuries mature, the government will have to borrow to cover them, just like any other “marketable” treasury.

      If so, then in effect, we are all paying for our SS benefits twice. First with FICA, then again with the taxes needed to cover those maturing securities.

      Am I correct here?

      • Jul 31, 2019 at 11:02 am

        Rob,

        Now you’re getting things tangled up. Just go back to basics. The only difference between the Treasuries in the SS Trust fund and the Treasuries in my account at Treasurydirect.gov is that my Treasuries are “marketable” and that in theory I can sell them before they mature, and that the Treasuries in SS Trust are not marketable and that it cannot sell them but has to wait until they mature. Both of us are getting paid face value for the Treasuries we hold when they mature. No difference.

        For the government and for the taxpayer it makes no difference who holds those Treasuries — whether it’s me, or the SS Trust Fund, or BofA, or China.

        • Jul 31, 2019 at 12:13 pm

          Yes but SSN holding orphaned bonds that are equivalent to the bonds I trade in the secondary market is a denigration of market principles. That would be like NYSE designating half the shares in a stock as closely held.

        • Jeff
          Aug 2, 2019 at 10:57 am

          That’s exactly right and due to constant refunding of existing debt, they have no choice but to issue new debt. If the Treasury didn’t borrow from SS they would just have to borrow from someone else.

      • Wisdom Seeker
        Jul 31, 2019 at 1:44 pm

        Rob, I’d say no but for a different reason.

        You never paid for “your” social security benefits in the first place, so you can’t pay for them twice.

        The payments you’re making now are going right back out again to someone else who is owed a benefit under the system’s rules. The only exception is that so-called trust fund, which represents the surplus of FICA taxes paid in over benefits already paid out. It’s a very small surplus compared to the program’s liabilities, though.

        And to make matters worse, Congress has already spent all that money elsewhere, which is why the Social Security Trust Fund merely “owns” Treasury bonds as opposed to something more tangible, like the nation’s gold, real estate, or a total stock market index fund.

        Bottom line is this: for you to get future Social Security benefits, either someone else has to pay a FICA tax so Social Security can pay you, or someone has to pay the US Treasury so it can pay the Social Security fund to redeem the Trust Fund bonds as they mature… Treasury can get that money in one of 2 ways: Either someone pays a tax (other than FICA tax), or Congress appropriates the money and borrows more on the national debt, and the US officially owes more to the usual investors.

        • Jul 31, 2019 at 6:15 pm

          Widsom Seeker,

          This stuff just cracks me up: “The Social Security Trust Fund merely “owns” Treasury bonds as opposed to something more tangible, like the nation’s gold, real estate, or a total stock market index fund.”

          Treasury securities are considered the most conservative investment out there, more conservative than any of the ones you mentioned. They will always pay face value in dollars when they mature. I’m happy to have them in my account at Treasury. Like stocks or like the stock fund you mentioned, they’re just electronic entries, but that’s modern life.

          People need to get a grip about the SS Trust Fund. It’s stuffed with nearly $3 trillion in Treasuries. And those Treasuries are real, just as real as the ones I own in my account.

        • Wisdom Seeker
          Aug 1, 2019 at 5:12 pm

          I stand behind my point: If the Social Security trust funds had been invested in something other than Treasury debts, the rest of us would not need to pay to make good on those promises.

          This has nothing to do with what Wolf or I have in our personal portfolios, but how the choice of Treasuries for the Social Security trust fund affects the rest of us when the fund unwinds.

          Treasuries are only bonds, i.e. promises by the US Government to pay later. Had Congress not already spent the money, the Social Security fund could have been invested in something other than promises. But for the Treasuries to pay out, Congress will have to come up with more dollars. Congress only gets money from the rest of us, either through taxes or by reducing spending which is currently someone’s income. (Congress could also print extra money, which seems free but devalues everyone else’s dollars so we pay anyway.)

          Had the trust fund been invested in something tangible with productive value, the assets could be sold and taxes would not need to be raised. But because the trust fund is in Treasuries, Rob and the rest of us will be paying extra in a few years so our elders can have Social Security in their old age.

      • Aug 2, 2019 at 2:55 pm

        Hi Rob, Re your comment: “From what I understand, the treasuries the fund holds represents the money “spent” out of it.” You are voicing a common misunderstanding. SS is the lender, not the borrower/spender. SS holds Treasuries because it has surplus excess cash. SS lends its excess cash to Congress because Congress is spending more than it receives in taxes. Rhetorically, one might say that the SS Trust is financing our foreign wars.

  6. Brant Lee
    Jul 31, 2019 at 10:29 am

    Let’s keep watch on the $9.4 tril in savings products. That amount will most likely show a steady decrease as America eats itself.

    • Jul 31, 2019 at 10:36 am

      Brant Lee,

      So far, savings products have shown a steady increase.

      • CoCosAB
        Jul 31, 2019 at 1:12 pm

        Just wait for the negative interest rates to start pounding those products!

    • Iamafan
      Jul 31, 2019 at 1:01 pm

      Remember this number includes:
      Savings deposits include money market deposit accounts.
      I am not sure what yield they get.

    • Wisdom Seeker
      Jul 31, 2019 at 1:55 pm

      Brant, one person’s debt is another person’s “savings product”. Larger debt on one side of the balance sheet means a larger credit balance somewhere else. Debt literally cannot exist without credit existing somewhere else.

      So it’s not that the country is eating itself, just that those in debt are owing more to those who hold the credit.

  7. a reader
    Jul 31, 2019 at 10:30 am

    With near-0% interest on savings, what are banks telling me?

    They are saying “We don’t need your money. We can create plenty of our own”.

    • Brant Lee
      Jul 31, 2019 at 10:34 am

      That is 100% right. In the days when money was backed by gold, they definitely needed your money.

    • Jul 31, 2019 at 10:48 am

      a reader,

      You need to go shopping for better interest rates at banks. You’re getting screwed. There are plenty of banks with savings accounts that pay over 2%. CDs too. Even much-hated Wells Fargo is now offering existing customers 2.1% on savings accounts if they bring in new money.

      • a reader
        Jul 31, 2019 at 10:52 am

        I do realise that, Wolf (and thank you for the reply). I just don’t feel this would make a material difference to me. I’ve been waiting for just the right piece of land to come up for sale…

        • Jul 31, 2019 at 11:06 am

          Yes, I’m also waiting for a specific opportunity, so I need liquidity when it comes up. But I want to earn something while I wait.

        • RD Blakeslee
          Jul 31, 2019 at 11:16 am

          “… right piece of land …”

          Been there, done that, 42 years ago.

          Don’t wait too long – your “interest loss” is the time left in your life minus the time you waited, starting now.

          Take the opportunity, while you can. It won’t last.

        • Kerry
          Jul 31, 2019 at 11:24 am

          You sound like a candidate for 28 day T-Bills issued thru TreasuryDirect. Decent yield and liquidity…

        • Jul 31, 2019 at 6:02 pm

          Kerry,

          I have an account there. But for instant liquidity I use savings accounts. Yield is similar, but no tax benefits. Money is available and transferable via the click of a mouse.

        • NBay
          Aug 1, 2019 at 9:38 pm

          T-Direct USED to sell your Treasuries, (Sell Direct), best offer of 3 at Chicago Exchange, I think, but no more. That’s why I too keep CD’s in bank for emergency liquidity without need to have/pay broker

      • p coyle
        Aug 1, 2019 at 12:59 am

        i took out a CD slightly over a year ago when my bank offered 2%. i knew from reading your articles that a better rate could be had by going through a broker, but it seemed easy and competitive at the time. the banker said (i’m paraphrasing here but not by much) “i know it doesn’t sound like much, but this is actually a really good interest rate.” he seemed almost apologetic. when the time came to renew it, they were up to 2.6% so it was a no-brainer. we will see what they offer next year!

    • MC01
      Jul 31, 2019 at 1:19 pm

      A little advice from somebody who goes through this all the time in Europe, where financial repression is a step ahead.

      You don’t really need to move your money around banks to get some yield. All you have to do is call another bank and tell them you want to open an account with them. You will be given an appointment and you will be given a “welcome” offer printed on paper (can’t find that online, ordinary savers may want it too). Take that offer to your bank and tell them you are thinking about moving some or all of your money unless they give you a better deal.
      Rest assured in under 48 hours you’ll be called back… with a better offer you cannot find online.

      Of course, these aren’t the times when investment-grade securities paid 4% at minimum but it’s no excuse to simply gamble away your money on stocks (indexes as a whole may only go up but let’s ask people who followed their banks’ advice and bought Deutsche Banks stocks how they are doing) or sit passively waiting for some miracle.
      To quote Fernanda Lira “History’s shaped by those who take a stand and fight for a change”: if you just sit there and complain about the lunatics running the asylum nothing will change.
      Each time a customer grabs the bank by the collar to get a better deal instead of passively accepting the junk peddled online we have a small victory. And the better part: you get more money and it’s 100% legal!

      • Wisdom Seeker
        Jul 31, 2019 at 1:59 pm

        The banks are getting hungrier. Some in the US are receiving written offers from competing banks, without even asking. Transfer enough money and they’ll pay interest AND give you a cash bonus worth far more than the traditional toaster.

        But then there’s the question of whether you want to have your money in a bank that desperately needs it? I suppose that would matter most to businesses and others who might need liquidity above the deposit insurance limits, since they’re subject to bail-ins.

    • MCH
      Jul 31, 2019 at 2:45 pm

      The 0.01% interest rate does have an advantage as a teaching tool for my kid. I showed the rate that comes through the savings account with about $4K, and the difference that you can get with a brokered CD or even more liquid short term treasury ETF. It was eye opening. I fear much of the country do not teach the young anything about money, and what we get are a generation of ignorant people who have no ability to teach others anything about money. Consequently, we all get taken advantage of by the banks. Whether out of ignorance or just stupidity, it is sad.

      What is worse is that there is no attempt to close this gap by our leaders. The politicians in the US just cares about lower interest rate to boost the economy so they can get elected/re-elected. Look at the bunch in last night’s debate, all they cared about is the degree of giveaway, none talked anything about responsibility or how our K-12 education is a failure in so far as teaching kids the basics of money management. Things like why its a bad idea to live off of your credit card.

      • p coyle
        Aug 1, 2019 at 1:08 am

        our soi-disant “leaders” have a vested interest in preventing both financial knowledge among the rubes and the paying of above inflation rate interest to said rubes by their banks. ponzi schemes, after all, don’t pay for themselves.

  8. nick kelly
    Jul 31, 2019 at 10:59 am

    The fact that interest rates are so low but savings are so high tells you that many people see storm clouds ahead. Lots of money managers for high net worth folks have unusually large cash positions.

    • worldblee
      Jul 31, 2019 at 2:56 pm

      I agree with that take.

    • Paulo
      Jul 31, 2019 at 3:21 pm

      Add to what N kelly says, the savings account isn’t an investment, it’s a mattress. I have money waiting at idle, at a rate = to inflation, waiting to buy a neighbours house when it comes up for sale. No hurry with property prices now starting to decline, or at least they have stopped increasing. If it doesn’t happen? Doesn’t matter.

  9. Jul 31, 2019 at 11:17 am

    Financial repression is a central bank policy, which through RRPO affects everybody, or state banks would raise rates. The disparity between federal and state finances couldn’t be greater. It may be that Ca Go Bonds are low yield because they are lower risk than Treasuries? USG has no way to raise revenue (other than tariffs) State pension funds go case by case, some good, some bad. SSN will survive if they honor retirement benefits and slough off entitlements; disabilities, medical, etc, to the states. There is a huge duplication of effort. We have come to the end of Lincoln’s Union, which is why we have the guy we have.

    • Unamused
      Jul 31, 2019 at 11:33 am

      Lincoln knew it was over, one way or the other.

      I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.

      He picked the war he thought he could win. He knew he couldn’t defeat the corporations. Napoleon couldn’t beat the bankers, and even FDR was only able to put some corporations on a leash, and only for a few years.

      • p coyle
        Aug 1, 2019 at 1:16 am

        for what it’s worth, unamused, you really crack me up. i do, however, have a morbid sense of humor.

    • James Mitchell
      Jul 31, 2019 at 11:54 am

      Do you mean Salmon P Chase or Steven T Mnuchin?

  10. nicko2
    Jul 31, 2019 at 11:22 am

    India economy is slowing, China economy is slowing, most of EU is slowing….. South America is pretty much a mess as usual. See a pattern?

    About the only economies actually growing are in Africa ( except south Africa… They’re in trouble again too.).

  11. nicko2
    Jul 31, 2019 at 11:25 am

    Canada reported surprise economic growth today 0.1 higher than expected, So no interest rate cut in canuck land.

    • Jul 31, 2019 at 12:56 pm

      To be expected with the election this October just like America will magically create 3 to 4 percent GDP figures right before the November 2020 election.

      • FluffyGato
        Aug 1, 2019 at 8:54 am

        You mean like the made-up numbers headed into the 2016 election? If you believe this only happens under the current regime, keep drinking the Kool-Aid.

  12. Lamb of Lite
    Jul 31, 2019 at 11:41 am

    Today 7.31.19: The Chicago PMI business barometer decreased to 44.4 in July from 49.7 in June, MNI Indicators said Wednesday. That’s the lowest since December 2015. Any reading below 50 indicates worsening conditions

    Month ago: The Establishment Survey’s nonfarm jobs figures will clearly be revised down as the QCEW data show job growth averaging only 177,000 a month in 2018. That means the Establishment Survey may be overstating the real numbers by more than 25%.

    https://www.bloomberg.com/opinion/articles/2019-07-05/the-myth-of-the-tight-u-s-labor-market

  13. Senecas Cliff
    Jul 31, 2019 at 11:49 am

    A few words of wisdom that will become much clearer to all in the near future.

    You can’t taper a Ponzi Scheme.

  14. Speedy Dee
    Jul 31, 2019 at 11:56 am

    Those financially repressed seniors should take out student loans and go back to school.

  15. akiddy111
    Jul 31, 2019 at 12:08 pm

    Central banks are not in existence to please everyone.

    Yes. Risk assets have climbed for almost a decade, But if stocks, bonds and real estate drop 30-50% or, worse still, limp lamely along for the next 10 or 20 years, then the financially repressed folks will sleep smugly and soundly with their 0.25% yield.

    As for the gold bugs, i have never fully figured those guys out.

    Personally, i have invested quite heavily in equities prior to, and through the 2000-02 and 2007-09 wrenching bear markets but i recovered each time with the 07-09 GFC being the tougher of the two. And i got back to prior peak by early 2014 in that instance. 2013 was a monster year for those who were long risk.

    It all works out the way it should in the end.

  16. Setarcos
    Jul 31, 2019 at 12:23 pm

    Great piece. A couple thoughts. First, regarding “But that’s a different universe of idiocy that we’re not going to get into today“ …. it is idiocy and yet we trade with them so we are affected. Second, “savers” had what it took to save despite all the cards being stacked against everyone. They don’t take the time to complain while they are busy saving and complaining does not appear to be a prevalent aspect of their nature. I have known a number of virtuous people who accumulated almost unfathomable sums on very modest salaries. Unfortunately, moral hazard is now the prevalent theme as incentives were turned upside down to appease those with loud “voices”, be it the elite or be it the masses who always want an excuse and someone to blame.

    Debits and credits are a feature of nature, be it on a financial statement or in how we conduct ourselves. When debits are incentivized, you get more of them.

  17. Just Some Random Guy
    Jul 31, 2019 at 12:31 pm

    I remember there used to be a joke about bankers on the 3-6-3 plan. They pay you 3% for deposits, they lend out the money at 6% and they’re playing golf by 3pm

    Today you can get around 2.5% on a CD. So not much has really changed. And what has changed is for the better. Since you get 2.5% on a CD and you can also get a mortgage for 3.75%. vs 6% from the “good old days”.

    The spread went from 3% to less than 2%. So where’s the problem?

    • p coyle
      Aug 1, 2019 at 1:30 am

      so where’s the problem?

      some of us don’t have mortgages, and would prefer the 3% on a savings account to having to tie up our dry powder for 6-13 months to get 2.5% on a CD.

      i think the fact that interest paid is tax deductible under select circumstances tells you all you need to know about who is truly running things.

  18. CoCosAB
    Jul 31, 2019 at 1:10 pm

    Coming soon to the USA…

    UBS: “We assume that this period of low interest rates will last even longer and that banks will continue to have to pay negative interest rates on customer deposits at central banks. Following similar moves by a number of other banks here in Switzerland, we confirm that we’ve decided to adjust cash deposit fees for Swiss francs held in Switzerland.”

    Final result?
    Starting in November, UBS Switzerland will charge -0.75% a year on individual cash balances above 2 million Swiss francs!

    Do enjoy NIRP!

    Are you guys ready for another Bail Out Party?

  19. akiddy111
    Jul 31, 2019 at 1:13 pm

    Fed drops 25 basis points minutes ago. Nobody in the entire world is surprised (except a few).

    Market sells off for 10 minutes and then does it’s customary u turn.

    Teenagers at their trading desks get their 15 minutes of excitement for the week.

    Where is the tech stock summer sell off this year ? Ah well, maybe next year.

    • Frugal By the Bay
      Jul 31, 2019 at 3:10 pm

      It’s usually in fall. Every major crash has happened in fall. The traders are gone in the summer and the third and forth quarters are when it gets real.

      • CoCosAB
        Jul 31, 2019 at 7:21 pm

        They need cash to buy the new yachts, and expensive gifts for Christmas!

    • Paulo
      Jul 31, 2019 at 3:25 pm

      Actually, it is down over 300 heading for 400 because they said it is the last rate decrease.

  20. MCH
    Jul 31, 2019 at 1:20 pm

    Oops, no more bullets. This classic line from one of the Die Hard movies come to mind, because one of these days, there is going to be a real financial crisis, and the central bankers are going to see that they have no other solutions to deal with this issue.

    Seriously, outside of rate cuts and NIRP, what else can the central bankers do but print a ton of money? At some point, NIRP will lose its effect, because, you can only be killed so many times before those extra negative points no longer matter to anyone.

    With the Fed now sending all the worst possible signals and still being the “cleanest shirt” or “the prettiest girl in the ugly girl dance,” I wonder if this is not exactly the same situation that eventually lead to economies going kaput and history taking a darker turn.

    • d
      Aug 1, 2019 at 8:27 am

      “Seriously, outside of rate cuts and NIRP, what else can the central bankers do but print a ton of money?”

      Sit on their hands and look up. like 1929.

      • MCH
        Aug 1, 2019 at 7:27 pm

        Except right now, it looks nothing like 1929.

        And if the air gets let out of the market, it’s not a bad thing.

  21. Nicko2
    Jul 31, 2019 at 1:30 pm

    Dollar index is shooting to the moon.

    • Escierto
      Jul 31, 2019 at 2:09 pm

      USD is at a two year high. Apparently the currency traders love falling interest rates or maybe they are just relieved it wasn’t a half point cut.

      • d
        Aug 1, 2019 at 8:31 am

        “maybe they are just relieved it wasn’t a half point cut.”

        Tells you how much money there is outsid eteh US looking for a paying Haven.

        this is almost a NO news is Bad news trade like 2009/10

  22. SocalJim
    Jul 31, 2019 at 2:00 pm

    The only reason I am retired in my 40s is because early in my career, I worked for one of the most famous firms on wall street. The basic theory they followed was figure out what the central banks are going to do then lever up. So, that is what I did, and I started right out of college. There is risk .. if the central banks lose control, you lose big.

    • p coyle
      Aug 1, 2019 at 1:38 am

      well, at least you knew what you were getting into. best of luck now that the legitimacy of the fed is getting some play on social media, rather than only in ron paul’s newsletter.

  23. Senecas Cliff
    Jul 31, 2019 at 2:02 pm

    I think the bankers takeaway from the great depression was that they did not want a long grinding period of deflation, in which the masses of people would figure things out and come looking for them. Instead the current system keeps the asset prices bubbling and the good times rolling (for some) , but when it turns down the ridiculous volumes of debt, and derivatives will send the economy straight to the middle ages. That way they figure there won’t be many people left to come looking for them.

    • NBay
      Jul 31, 2019 at 10:15 pm

      In European history, the middle (dark) ages were nothing compared to the Bronze Age Collapse. Iron was suddenly available to all. Tin + Copper = Bronze = Power = Rule = Civilization no longer worked. Trade totally collapsed. The following times were so dark that all that remains of what really happened then is Homer’s poems, destruction layers of ancient cities, and references to the dreaded “sea peoples”.
      Real pirate gangs “ruled”, not those in fine robes, nor in 3 piece suits.

  24. Rowen
    Jul 31, 2019 at 2:28 pm

    The solution is pretty simple, but politically impossible. If you want to increase aggregate demand, with consumer leveraging tapped out and birth rates decreasing, then wealth has to be moved from the people that hoard it to the people that want to consume it.

    NIRP.
    Deleveraging.
    Default.
    Redistribution.

    They all accomplish the same thing (a transfer of wealth/heat from high density to low, but via different mechanisms. It’s just entropy.

    • NBay
      Aug 1, 2019 at 11:58 am

      Political problem is mindset of the wealthy hoarders with $$ power to run governments and control “rule of law”. Their “mindset” is hard for me to grasp. Surely they are smart enough to know they won’t do well either in the end. Bronze Age rulers had no way to know it was coming, but today’s ruling class sure do.

  25. Gold is just..gold
    Jul 31, 2019 at 3:02 pm

    It seems the IMF is dictating that interest rate repression will go all the way not just to negative but ‘deeply negative’ (think -4 or -5%) as the only bullet left in the chamber to fight GFC mark 2 when it arrives, shortly.

    The move to a cashless society is part of a greater plan.

    Democracy, personal freedoms are/will be sacrificed for the ‘greater good’. We’re all slaves, but they haven’t got around yet to stamping our number on the forehead.

    In Australia (a pretty cool place back in the day – now just another socialist, welfare state hell-hole) last Friday night quietly, at 5-15pm at close of business, introduced legislation to facilitate the move to serfdom.

    The conversation in the link below is 48 mins or so but it’s all spelled out in the first 15-20 mins. Actually worth listening a bit longer to hear one of the commentators, who was an economic adviser to the Liberal Party (that’s the conservative right) slip up and calls his former bosses ‘***holes’ & more….. eg more interested in getting on the grog at Parliament House rather than reading legislation that deeply affects the public.

    I get the feeling the train is racing, flat chat, out of control and about to hit that sharp bend on the track. Won’t make it.

    https://www.youtube.com/watch?v=770M2s6ZD8Y&feature=youtu.be&fbclid=IwAR2vEHSudRzJHl7ppoGhm5I8Y3zwR2eqjkD3u5vYyqe13ZyDPkYVzfGMGMg

  26. Michael Engel
    Jul 31, 2019 at 3:54 pm

    Dollar strong, Europe wrong.
    The RMB devaluation will be limited.
    Dollar General, Dollar Tree, Ross Store don’t buy one $ goods
    from Germany, or France.
    Stores that serve the poor buy from China.
    But the 50Y global trade, since Nixon, have change trend.
    Higher min wage during recession will suppress the poor’s stores.
    Shopping in DLTR, ROST, AMZN will cost more.
    What worked since 1998, will not work the ole way.
    One day retail brightest become GE.

    • Nicko2
      Jul 31, 2019 at 4:05 pm

      Huawei came out with big profits this quarter even with US sanctions….they are selling to the rest of the world. The US isn’t quite the centre of the universe any more.

      • SocalJim
        Jul 31, 2019 at 4:48 pm

        Chinese Propaganda. They are hoping this mis-information causes business leaders to put political pressure on Trump.

      • d
        Aug 1, 2019 at 8:37 am

        You believe positive (For ccp china) financial statistics out of ccp china.

        After all H is a covert ccp Entity.

        A problem, Serious, you have.

  27. medial axis
    Jul 31, 2019 at 4:00 pm

    AISI, the GDP should fall over time, not rise. Simply because productivity should increase with time, as we find more efficient ways to produce stuff and services. That’s why it’s called economics, isn’t it? We find more economical ways to produce what we need the more we go on producing it. So we all ought be working fewer hours as time passes. We ought be paid the same rate per hour as before and prices ought drop to reflect the increased productivity. We all gain by having more time to do what we want to do. We work to live, not live to work.

    Can you imagine an uncivilsed tribe in the jungle that finds a better way to hunt for it’s food, reducing the time spent from 6 to 5 hrs a day, getting worried about not enough jobs? Of course, they are simple people, unsophisticated, unable to appreciate the benefits of being trillions in debt, like we advanced nations are.

  28. David Hall
    Jul 31, 2019 at 4:53 pm

    In 1971 Nixon took us off the gold standard. He put tariffs on all imports. The US was losing the war in Vietnam to Marxist guerrillas supported by Russia and China. In 1974 inflation reached double digit rates. Interest rates were higher, but inflation took it away.

    There is a looming underfunded govt. worker pension fund crisis. Like defaulted bonds the pension funds might pay off pennies on the dollar or cities might raise taxes to replenish them.

    The investor Charles Munger liked to read Benjamin Franklin’s, “The Way to Wealth” (1758). Its copyright expired and it is free available free online.

    • David Hall
      Jul 31, 2019 at 6:02 pm

      The 1974 double digit inflation was derived from a table of monthly inflation rates annualized. The inflation rate reached 15% within a decade. Ben Franklin published his book in 1748.

  29. Hotairmail
    Jul 31, 2019 at 5:27 pm
    • Jul 31, 2019 at 6:29 pm

      Yes, I saw that. The German Constitutional Court really doesn’t like the ECB’s QE and similar tools — this has been going on for years — but they are, practically speaking, powerless when it comes to a transnational institution like the ECB because they don’t want to blow up the common currency.

      The fact that the German government was more intent on getting its person (Ursula von der Leyen) to be President of the European Commission than its person (Jens Weidmann) to be President of the ECB, and agreed to a horse-trade with France on this issue, shows that the German Government doesn’t mind NIRP and QE, even if it kills its savers of which there are very many in Germany.

  30. Augusto
    Aug 1, 2019 at 8:15 am

    We live in a world where the focus is on having everything now…even if you don’t want it. Don’t save, buy stuff, keep the economy going, don’t pay off bills, get bigger lines of credit…
    The same goes for investments. Most retired people I know want to just park their money, get a little return, say 4%, but no, they are forced into the stock market, because you get next to nothing in interest, then are taxed on even that little bit, while stocks get all kinds of breaks in capital gains and dividends. Even as we head to disaster what do leaders want…even lower interest rates, and devaluations of the currency…

  31. Dajo
    Aug 1, 2019 at 9:23 pm

    You should fix your article GDP growth was revised to 2.5% in 2018. However it was 2.9% in 2015.

    • Aug 2, 2019 at 1:05 am

      There are different ways of expressing GDP. 2.5% is the 12-month change of dollar GDP for 2018. 2.9% is the change in the annualized rate for 2018. The BEA likes to express GDP in annualized rates, so that’s what it does. See page 8, line 1, in the “2018” column:
      https://www.bea.gov/system/files/2019-07/gdp2q19_adv_1.pdf

  32. Dajo
    Aug 1, 2019 at 9:28 pm

    The problem is not the Fed, it is wealth inequality causing excess demand for assets. The laws of supply and demand tell us that will drive up the prices of assets and drive interest rates down. The wealthy have themselves to blame, so of course, they will blame the government.

  33. Aug 2, 2019 at 2:52 am

    Ever since 2008 I’ve been asking why the insurance companies and pension funds ALLOWED the fed to do ZIRP. Both are giant industries with plenty of lobbyists and influence on state and federal governments. Both have actuaries whose JOB is to predict the future effects of economic policies. Both must have understood that ZIRP would kill them.

    Why didn’t they even publicly complain?

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