The Fed Slaps Down Negative Interest Rates

A serious rejection in its first major discussion of negative interest rates recounted in the FOMC minutes.

The minutes for the FOMC meeting on October 29-30, released today, shed some light on the laundry list of discussions arising out of the Fed’s current review of monetary policy strategy, where it tries to figure out how to line up the tools to be used during the next crisis, and which tools to line up.

All kinds of tools are being kicked around in addition to the tools used during the last crisis – these potential new tools ranged from “rate caps” on long-term Treasury securities to various repo facilities and negative interest rates.

But one potential tool was rejected by “all participants”: negative interest rates.

And the Fed had a lot to say about negative interest rates and their drawbacks for the US. This is the first time that a detailed discussion of negative interest rates – with pros and cons – were referenced in the minutes – showing how controversial that topic has become among central banks globally. You can essentially see the Fed’s distaste for them in the US.

In the quote below from the minutes, the paragraph divisions and bullet points are mine to make the pathologically long paragraphs of the minutes, which are purposefully designed to not be read by humans, more readable for humans:

“The briefing also discussed negative interest rates, a policy option implemented by several foreign central banks. The staff noted that although the evidence so far suggested that this tool had provided accommodation in jurisdictions where it had been employed, there were also indications of possible adverse side effects.

“Moreover, differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States.

“All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States.

“Participants commented

  • That there was limited scope to bring the policy rate into negative territory,
  • That the evidence on the beneficial effects of negative interest rates abroad was mixed,
  • And that it was unclear what effects negative rates might have on the willingness of financial intermediaries to lend and on the spending plans of households and businesses.

“Participants noted that negative interest rates would entail risks of introducing significant complexity or distortions to the financial system.

“In particular, some participants cautioned that the financial system in the United States is considerably different from those in countries that implemented negative interest rate policies, and that negative rates could have more significant adverse effects on market functioning and financial stability here than abroad.”

And then of course there was the backdoor – starts with “notwithstanding” – that any noteworthy central bank always leaves open about anything:

“Notwithstanding these considerations, participants did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool.”

And the Fed may not see any need for negative interest rates in the first place. The Financial Crisis was the biggest financial event in my lifetime, and the Fed is fairly happy with how the tools it used at the time dealt with it, according to the minutes, which repeated what the Fed has been saying for years. And this self-back-patting was the conclusion of the negative interest rate discussion:

“Overall, participants generally agreed that the forward guidance and balance sheet policies followed by the Federal Reserve after the financial crisis had been effective in providing stimulus at the ELB.”

The ELB is the “effective lower bound” on nominal rates. In a Fed discussion paper this year, former Fed Chair Ben Bernanke and two other authors explain what “ELB” means for the United States (underscore mine):

“In a low-rate environment, the scope for monetary policy to respond to a slowing economy or unwanted disinflation may be constrained by the effective lower bound (ELB) on nominal rates, which (for the case of the United States, examined here) we take to be zero.”

So here you have it: The spreading distaste for negative interest rates at the Fed add to the spreading distaste for negative interest rates in Europe, where they’re coming under increasingly heavy criticism for the damage that they do, including to the banking system and pension funds, now that Draghi finally rode off into the sunset.

Waiting for “a material reassessment of the economic outlook.” Read… Fed Moves from “Mid-Cycle Adjustment” to Mid-Cycle Wait-and-See: My Fancy-Schmancy “Fed Hawk-o-Meter”

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  107 comments for “The Fed Slaps Down Negative Interest Rates

  1. 2banana says:

    What exactly are the beneficial effects of negative interest rates?

    The final destruction of savers?

    Forcing pension funds into super risky investments?

    Having retired folks go way out on limbs searching for yields?

    Or just making it so easy for the common man to borrow so much?

    “That the evidence on the beneficial effects of negative interest rates abroad was mixed,”

    • MC01 says:

      In archaeology there’s a grim thing called “pot polishing”: it refers to the polished aspect of human bones that were boiled for a long time while rubbing against the pot’s walls by people desperate to extract the last bit of marrow but who are often too debilitated to break the bones apart. It’s considered the final step of starvation cannibalism and our Canadian friends probably heard it mentioned regarding the remains of Franklin’s lost expedition.

      Negative rates and massive asset purchases are the monetary equivalent of pot polishing: the desperate attempt to extract the last tiny bit of growth out of an economic situation/environment that has reached a point where no more would be possible, at least without some “house cleaning” of the most egregiously idiotic wastes of time and money.
      Negative rates and massive asset purchases have been a smashing success from that point of view: the amount of empty economic activity they instigated over the past three years has been enormous.
      But the problem is just that: to get those numbers to flash around and impress our mates the avenues of future growth have been drastically reduced. In fact Japan, the originator of these policies, is patently exhausted: not only they have been unable to come up with more monetary insanity, but they had to hike the sales tax to keep on generously funding the myriad of local corporate welfare schemes, from the 2020 Olympics to the Chuo-Shinkansen.

      But who knows what a desperate cannibal may resort to feast another day? ;-)

      • Bobber says:

        It’s a shame that bone polishing occurs in an area adjacent to the stocked kitchen.

        Let the economy correct on its own and there would be a long period of strong growth, after structural change is implemented. Legislators act only when forced to. Otherwise, they engage in theater, politics, kick-the-can, or just about anything to avoid a hard decision. As long as central banks assume responsibility for the economy, we are set up for obvious failure.

        Central banks are weak players, continually bluffing with bad cards, taking up space at the table. It’s time for them to quit so legislators can fill those seats.

        • NBay says:

          There still is something called “Fiscal Policy”, although I didn’t like the last major exercise of it one bit.

    • nhz says:

      beneficial effects are many, for the elite: concentration of economic power among a handful of multinationals that crowd out smaller companies because they are paid to take on more debt while small business can hardly get a loan (and pays 8-10% instead of negative rates). And concentration of financial power among private persons who take risky bets with real estate, which has paid off hugely in Europe over the last ten years – so much that no politician will ever allow rates to return to normal.

      Oh yes, bread and circuses too – many deadbeats have profited hugely from inflation of RE prices in Europe, like those who “purchased” a home way beyond their means with zero-down mortgages. I noticed another decline in rates here this week, 10-year fixed is now just 1.0% which amount to about 0.5% thanks to Dutch mortgage debt deduction – at least 2% below official inflation; I guess the decline from 1.1 to 1.0% allows another 10% surge in Dutch RE prices ;( Our statistics office reported this week how average (net) household equity has ballooned by 30% in the last few years, almost completely thanks to surging real estate valuations. Dutch banks seem to be preparing for negative rates on savings accounts just like in Switzerland, although for now only for those with over 100K in savings.

      People and companies that are suffering from negative rates don’t count for central banksters and e-con-omists. Join the crowd, be financially irresponsible to the max and be a winner too!!

      • MC01 says:

        I don’t agree on the “handful of multinationals that crowd out smaller companies”. I know what I am about to say it’s unpopular, but it needs to be said: not only it has never been easier and cheaper to service debt.

        If your company is considered a “good debtor”, meaning you regularly and fully service your debt and have a great credit history, you are a hot commodity for the banks. I regularly get unsolicited offers from banks for loans (one just ten minutes ago), to the point I just delete them without reading the details. Most banks will even extend a loan to your company over the phone, literally: many business-oriented apps allow you to do just that while sitting at your desk.
        You understand how easy it is to everextend oneself in this situation.

        But if your company is not such a good debtor but not a toxic one yet you are if possible an even hotter commodity, because you give banks that little extra yield they so desperately look for. This is especially true for companies with poor collaterals, such as retailers that don’t own their own real estate or third-party assemblers with little in the way of owned capital goods, warehouse and patents to act as collaterals.

        This morning I walked to my main bank and I was blown away by the number of clothing stores around. Exactly the kind of poor collaterals I was talking about. A quick check on the phone told me even big brand names are actually franchisees, each with a few shops to their name.
        These stores are a groat a dozen, maybe less: they are everywhere and all sell exactly the same stuff. Not only do they have to compete among themsleves and with malls but also with online retailers and weekly markets.
        Most of these stores would not exist without deeply repressed interest rates.
        The same applies to bars and restaurants.

        But on one count I agree with you: real estate is in cuckoo land. I am not merely talking about the price tags but about the ridiculous amount of empty building activity going on, all of it supposedly “high end”.
        Well, the government considers me “high end” for taxation purposes but I would only touch those overpriced horrors with a lot military-grade explosive.

        • nhz says:

          Possibly small company loans are different in the US then.

          What I hear in my country and much of Europe, banks do no longer bother to lend to small companies that need loans of a couple 100K, it simply is not worth the few hours they have to spend on arranging the loan. Instead there are lots of advertisements for new lenders that will lend to small business at outrageous fees, similar to payday loans – clearly there is a market. Now things might be different if you own a big farm and need 5 million for taking over another farm, or if you are a medium size business with lots of employees and stellar financial track record. But small business, which is the basis of the EU economy, is completely ignored by banking nowadays.

          At the same time these small companies have to compete with large zombie companies that are kept alive by the banks with ZIRP because they have huge debts that no one wants to acknowledge. Plus compete with the many new starters who start a business that doesn’t need to make money in one of the many empty shops (rents are next to nothing for temporary contracts), just because of a $6000 tax incentive for starters or a 10-20K free loan for business that promote “diversity” and other nonsense. In my own city if you would remove the shops that are owned by large retail chains that don’t make any money, and all the fake storefronts, 50-75% would be empty by now. But they still exist, thanks to the ECB and small business gets most of the bill for this nonsense.

        • MC01 says:

          We probably have the same worthless cash in our money clips right now. Real men don’t use wallets. ;-)

          The advertisements you see are for companies that are part of the ever-expanding shadow banking system: in countries were credit systems are dominated by a small group of relatively big players (such as The Netherlands and to a lesser extent France) these outfits are slowly taking over the most toxic part of the spectrum, no doubt under tacit agreements with the aforementioned banks.
          Shadow banking is one of the fastest growing industries worldwide and it’s huge in what Americans call the subprime sector.

          And rest assured that banks don’t ignore us. In fact they love us because we offer better collaterals than big companies (read: the list of creditors is much shorter and less crowded), yield something more and can survive a downturn with just a few bruises.
          Remember when the Age of Reptiles came to an end with K/T Event it was the smaller lizards and mamals that survived. ;-)

    • marcos says:

      It’s punishment.
      But the problem is a RESERVE-CURRENCY can’t play this game, it works for EU, but it will not work for USA.

      Punishment, well the problem is there are trillions of dollars in the USA that don’t get churned, people save and hold cash in banks, the GOV wants people to spend their money, turn over money is called ‘velocity’, e.g. how often the same money is reused per year or month. Lot’s of money in the USA just sits.

      So the point of NEGATIVE interest would be to ‘spank’ savers by actually stealing their money when it is left, much of this of course is drive cash into the stock market, which old retired people know better.

      But all this is here nor there, its not possible for the reserve currency to pay NO INTEREST otherwise, why would people use it to trade, if it lost value, just ain’t going to happen, another facet of Triffin’s Dilemma, when you decide to print fiat for free to infinite you must give up lots of perks.

      But I guess this is the final nail on the coffin, sounds like neg-rates is off the table, even the subject is out. To be expected, got to get to work on ‘helicopter money’ and just out&out stealing CASH from the rich, and giving it to the poor who will spend.

    • DR DOOM says:

      2babana : Add this gem to your list. KKR is taking Walgreens private in a record $70B LBO. Free money from the fed along with pension money will be the levers, the load bearing fulcrum will be we the people. The utter lack of economic advantage ,except for a few, does not matter. Our Congress is otherwise engaged , and thus not available to consider matters of we the people.

      • Jeff T. says:

        It took venture capital less than ten years to strip Bumble Bee and put it into bankruptcy. Why are the Vultures even allowed to exist?

    • elysianfield says:

      “What exactly are the beneficial effects of negative interest rates?”

      I would opine that the benefit accrues to the entities that offer positive interest rates…such as the US. Who is to say that the US did not ram negative rates down the throats of the EU banks? How many favors are still to be paid for after 2008?

    • Mike says:

      I agree with most of this comment, except the idea that the low or (in EU) negative interest rates truly make it easy for the common man to borrow more. That is just not the case: the common man pays 25% or more to borrow on credit cards, or greater percentage interest on sums for paycheck lending or other mechanisms to suck as much of their pay check away from them.

      Low or negative interest rates do increase the profits of lenders. However, I think that the “Federal” Reserve has a problem with not paying interest to its banks on their reserves (from free money previously given to them by that “Fed” through QE commissions, ultra low interest rate loans while they were insolvent, “Fed” dividends for QE needed to bail out the banksters, etc.)

      Unless they can figure out some scheme to enable the funneling of substantial sums of money to the banks while establishing negative interest rates formally, I predict that the “Fed” will not use that tactic of negative interest rates. Keep in mind that pensions and others have already suffered: the interest rates that they have gotten on safe investments for years have been below what (I opine) is the real rate of inflation.

      Inflation has been confined to the assets that the ultra rich desire, because they received all of the money: e.g., real estate, stocks, etc. That does not mean that ultimately inflation will not spread later, if international conditions cease helping the US economy.

      The US would have hyperinflation, if foreigners stopped investing in the US and expected payment in Euros or Yen, which we would have to get somehow through sales of internationally competitive goods or services, for all of the things that they provide to the US economy. We are the beneficiaries of luck and international problems: if the EU fixed its problems, and the Euro became the common currency for oil, etc., we would be up a creek without a paddle. Even the banksters sponsoring the “Fed,” which is actually owned by the banks, may be reluctant to risk the end of this with negative interest rates.

      • historicus says:

        “Low or negative interest rates do increase the profits of lenders.”

        “Inflation has been confined to the assets that the ultra rich desire, ”
        Yes. And the concentration of wealth does little for economic activity.
        One man with $100 million has not the economic activity as 100 people with $1 Million.

        And yes, we do import deflation.

  2. Cyclops says:

    Trump Was badgering Powell a few days ago to discuss negative rates! Obviously, Powell politely rejected Trump’s demands! The sheer follies of the White House is duly noted!

    • Blockhead says:

      Only the shear folly of the Whitehorse? How about the Shear Folly of the Fed?

    • nhz says:

      Probably only to push back on Trump for the MSM circus and suggest FED independence. Do you really believe the FED is more honest/clever than the ECB? They are all the same, and the FED will resort to negative rates too in some way, maybe by letting inflation heat up (like 4-5%) while keeping rates at the current low level, which amounts to much of the same.

    • silo says:

      Well like in Europe, which is having the bank actually PAY you money to buy a house, Trump would love that, think about buying a casino, and have the GOV pay you money

      Heck I’m sure Mar-a-lago has lots of debt, and I’m sure in Trumps mind he would love to have the bank pay him 2% for his debt,

      I know lots of guys like Trump, there dream is to DIE with max debt, and make it the other guy’s problem, not unlike people who parasite off of “Other Peoples Money”.

      • Gandalf says:

        After Trump’s $900 million worth of bankruptcies in the 1990s, he was radioactive to American banks. The people who financed his rise from the ashes were Russian oligarchs, a big chunk of it laundered via Deutsche Bank.
        The tax trails of his properties are being dug into, this will haunt him and his family for a long time. Pro Publica had a revelation about two sets of books for his properties, one for taxes, and one for getting loans and sales purposes which lowered income and value for taxes and raised them for financing.
        This is why Trump will never release his taxes unless forced to

  3. michael says:

    The FED minutes and bobble head chatter is a smoke screen.

    The FED also said they were going to keep increasing rates and subprime was contained.

    EU president Juncker told us clearly how to interpret these ramblings “when things become serious you have to lie.”

    • Cas127 says:


      Yep, the Fed has talked more than its share of shit over the last 20 yrs of interest rate repression – so why believe them now?

      Plus, central banks see surprise as a key tool.

      Plus, neg rates bail out the political class debt degenerates who have progressively driven the US economy into the ditch over decades.

      Political corruption of the US economy has been the way to bet for many decades – now that the bill is due, DC is incapable of doing anything else.

      They’ll just call neg rates something else for purposes of MSM public excretion – consumption enhancement, DC bonus dividends, or whatever twaddle they care to hide their guns behind.

  4. DawnsEarlyLight says:

    If only the Fed would start tweeting. We would surely take them at their words!

  5. DawnsEarlyLight says:

    Losing on inflation with low interest rates is one thing. How would the ‘average Joe’ take having to ‘pay the bank’ for holding his money?

    • nhz says:

      Good question, look to Europe:

      in my country official inflation is 2.7% (which is a VAST understatement of reality) and savings rates with the more solid banks are 0.01-0.03%. So savers are already losing 2.7% every year nominally. On top of that there is a wealth tax (not for the really wealthy, of course) that kicks in from 40-100K euro with an additional 1.2-1.7% yearly tax. So the real loss is already 4-5% every year for those with significant money in the bank if you believe the government statistics (and worse if you don’t believe the Ministry of Truth).

      Now that negative rates on savings accounts are being discussed (with one Dutch state bank saying that they will not do negative rates for accounts with less than 100K savings, but clearly most banks are preparing for negative rates on savings accounts soon), polls have found that a majority of savers say they will withdraw their money as soon as rates go negative. Which is stupid of course, because the initial negative rate will probably be -0.1% or so, just to see what happens, and withdrawing the cash will be more expensive that accepting the 0.1% loss.

      See: it is easy for politicians and banksters to boil saving frogs in cold water, people simply do not want to understand money.

      Plus of course, for the few that do understand there are no good alternatives. Withdrawing cash is expensive and risky for large amounts and you still have the 4-5% yearly inflation (although you could try to skimp the wealth tax by saying you spent it all in the casino, but I don’t think our tax office would accept that and still tax the withdrawn cash).

      • Jeff Relf says:

        Europe/Japan give us a glimpse into America’s future.
        Negative interest rates are yet another wealth tax.

        • Unamused says:

          Negative interest rates are yet another wealth tax.

          I think it’s more like a kind of inflation. It comes with all the loss of purchasing power you get with inflation but with none of the bad press. But I think your interpretation works just as well.

          That’s what I call it: thinking.

      • Steve says:

        The second a bank even mentions negative rates on savings, I would withdrawn a large, though maybe not all, portion of my savings.

        You will definitely take a small hit on the withdrawal, but the access risk is far too great. If Banks are serious about setting negative rates on savings accounts, I would bet my annual salary that they intend to cap withdrawals too.

        First mover gets to keep his/her’s cash. The rest get to hold the empty bag.

        Access Risk is a very real risk that needs to taken into account.

      • historicus says:

        Negative rates will collapse economic activity but save socialist nations who are failing economically.

        For every action, there is an equal and opposite reaction.

        So, as Hayek said, central planners decide and harm one group to assist another.

    • Wolfbay says:

      Isn’t it true negative rates hurt bank profits? The FED is there to serve the banks, therefore no negative rates.

      • nhz says:

        The FED isn’t there for the banks but for their owners, and that’s something entirely different. Just look at how EU bank stocks are doing, clearly the ECB could not care less about bank profitability. They are arranging the biggest wealth transfer in history (from the middle class to the 0.1%) and everything is going great for them, so why care about bank profits or other irrelevant issues?

      • historicus says:

        Negative Rates are the wealth tax that Liz Warren wished she had thought of…
        If Inflation is a tax, and if having Fed Funds under inflation rates, as currently, is further taxation…we are in central banker taxation mode.

        But call me old fashioned, but isn’t Congress the only legitimate taxing body in this country? And would a 2% tax on the holders of dollars pass a congressional vote? (I’m afraid to speculate, but guessing no for right now)

    • unit472 says:

      Actually many people already do pay the bank for the privilege of holding their money. Let’s say you have an average daily balance of $1000 ( or less) in your checking account. Your bank is probably going to charge you a monthly service fee, say $10/month, so you are getting negative 1% per month on your deposit.

  6. kiers says:

    Of course, Negative rates = bye bye to the banking sector! And the US always wants a “strong dollar”.

    But one point that goes unsaid:
    Sure, Europe has kept rates negative, in favor of keeping the yield curve (rates vs time) properly upward sloping! Whereas the US yield curve is ~flat.

    I Wonder what the economic tradeoff is between absolute rates vs slope of yield curve.

  7. van_down_by_river says:

    The Fed does pretty much the opposite everything they discuss, remember QT on “autopilot”? Remember when stepping into the Repo markets was just a temporary measure to get the banks through quarterly taxes?

    They are a pack of liars. Coming soon to the U.S. negative interest rates – 100% guaranteed. After all savers must be made to pay for government spending and financial system profits (just ask Christine Legard).

    • Kasadour says:

      Completely agree. That the FED is even talking about this- as in publicly ruling out negative rates- speaks volumes (namely, the FED is considering it). It’s like the FED reassuring the markets that Montana cow pies are not a QE eligible govt asset = Cow pies are a govt asset.

      • Bobber says:

        Unfortunately, the Federal Reserve has messed its own bed. They’ve made so many inaccurate statements, regarding both facts and forecast, their statements lack credibility today. It’s time for central banks to put the stone age tools away and let legislators do their job. If we can’t trust legislators to do their job, what is the point of a democracy? We should just put on our shackles. At least then, we’d see the people that whip us.

        Central banks are standing in our way.

        • DawnsEarlyLight says:

          A Democracy is two wolves and a sheep deciding what’s for dinner.

  8. otishertz says:

    Negative rates mean that citizens subject to a financial system are paying for the right to transact in a country or currency.

    This lays bare the fact that in a modern monetary system there is only transactional value and no store of value to a currency.

    As much as I abhor the notion I can see a justification for pay to play within any currency. Should this become overt policy there are a wide range of intermediate distortions resultant from mispricing of risk in the traditional sense.

    But whose to say after that it can’t work long term with the fed adding or removing “game credits” from the system as thier main policy mechanism.

    Eventually supply, demand, and other factors like incomes and debt levels might come back into the fore as pricing mechsnisms even with everyone paying to play.

    This is counter to everything I learned in school and I don’t like it but it could happen here.

    • bungee says:

      This lays bare the fact that in a modern monetary system there is only transactional value and no store of value to a currency.

      beautiful. its the way it should and will be.
      in our current system where people are saving and borrowing in the same medium, tension develops between the savers who want rates to go up and debtors who want rates to go down. our politics hinge on it. we hang on every insinuation from central banks. we make fed-hawk-o-meters (no offense). impossible to please or balance both sides, the center cannot hold.

      store of value function for money is in the crosshairs. so, in the big picture its goodbye foreign currency as reserves.

      because basically its either stop saving in money or go back to a gold standard. we’re not going back to a gold standard so just use money for transactions, period. this incidentally, will stop “the 1 per cent” from earning income just for having lots of money. it will be much more fair. in the future it will be obvious, but in the mean time the trick is to not save in money. no one is going to get a real yield without some real risk.

      • otishertz says:

        I never thought about it like that, thanks.

      • nhz says:

        You are totally wrong IMHO.

        This policy benefits the 1 percent (or more likely, the 0.1% in most developed countries) because they do NOT have significant money in the bank – they own companies, stocks and RE that benefit hugely from this policy. The middle class is hurt severely, especially small freelancers and business owners who are forced to keep significant money in the bank for paying salaries, suppliers and often for their private pension when they are older.

        What the FED and ECB do is facilitate the stealing of capital from the middle class for the elites, and to a lesser extent for the deadbeats at the bottom of society (breads and circuses, like ever more valuable homes for those who cannot afford to rent but who can easily get a mortage for an expensive home …).

        • bungee says:

          it will be “much more fair” not totally fair.
          “the rich get richer” no doubt about that. but i dont see it as an ‘us vs. them’ situation. it’s just a rickety, old system that will fail soon.
          remember, in the system i describe we wont be saving in the equities that rich people own. Our retirements will not be tied up with wall st where they can shear us from time to time and build a bloated financial service industry that sways the laws of our country. their holdings will be waaay less profitable once the huge pool of dumb money ‘savers’ is out of the market. and those that own equities will be taking some real risk with their money. they will care if the company is profitable or unprofitable. much more fair.

      • Wolf Richter says:

        Bungee, check your “info” email about the mugs.

    • Memento mori says:

      Excellent. We were told that money should serve as a medium of exchange, unit of account and store of value. But our modern money doesn’t seem to be a good store of value anymore.
      Where does value of modern money come from now days?
      What is the difference between money debt?
      If money IS debt, can the Fed really print it out of thin air?

      Here is some food for thought.
      It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

      Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

      The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town’s prostitute that, in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

      The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying he did not like any of the rooms, and leaves town.

      No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

      • Wolf Richter says:

        Memento mori,

        What you’re talking about in your fable are trade receivables and trade payables. No one is paying interest or earning interest on them. And it’s true, when trade payables are paid promptly, that helps everyone, except the payer.

        But trade accounts are not the same as interest-bearing debts (bonds, loans, etc.) that are owned by investors/banks for investment purposes (earn the interest). And on a balance sheet, they’re accounted for very differently too.

        • Petunia says:


          I worked my way through college doing bookkeeping as a Kelly Girl. Trade accounts can charge interest on late payments, usually stated on the invoice, and they give discounts for on time payments. I remember a 1% discount being the norm for on time payment and 1% a month interest charge being the norm for late payments. Most recurring late payers were never charged the interest until they had to be put in for collection. The on time payers always took the discount.

        • Wolf Richter says:


          Yes, sure, there can be penalties and incentives built into the payment agreements to encourage prompt payment. But that’s not an investment and serves a different function.

          Now it is going the other way: big companies, such as Amazon and Dell, have imposed longer payment terms to their sitting-duck suppliers, without compensation. It’s essentially up to their suppliers to cash-flow these companies. At the same time, these companies (Amazon, Dell, etc.) get instant payments from their retail customers who have to pay before the order even is finalized. When you get to be this size, you can do anything to your suppliers.

        • DawnsEarlyLight says:

          Wolf, banks operate on the fractional reserve system for deposits. If NIRP came into play, would we only pay interest on the ‘fraction’ of our deposits the bank is required to hold as a reserve?

        • Wolf Richter says:

          The interest rate and fees that banks charge on deposits in the NIRP countries are largely determined by market forces. That’s why banks haven’t charged large amounts of interest on all deposits — but only on large deposits — because the market won’t let them. So it depends on competition, rather than how much of their reserves are on deposit at the ECB.

          But yes, the ECB doesn’t charge banks for all their customer deposits, but only on the portion of the cash they have on deposit at the ECB, which is a lot smaller than all their total customer deposits.

        • Petunia says:


          I’m not arguing the point, but it seems unfair to single out the two companies you mentioned when this has been going on forever. The companies that choose to play in those sandboxes, being suppliers to large companies, know they will be squeezed and eventually dumped for lower cost producers. They get no sympathy from me.

          I know of a large company that hires workers at $15HR. Those workers need to use their own cars to travel to clients. The workers get reimbursed for mileage at only 80% of the amount the company takes as a tax deduction for mileage. The company is pocketing 20% of the value of the tax deduction and letting $15HR employees finance the travel. This shouldn’t even be legal.

      • otishertz says:

        The money multiplier effect shows how economic value and effort can compound through common human interaction via sharing and result in multiples of economic activity for every new unit of exchange as that unit passes between multiple hands.

        Side note; Time banks are a fascinating example of an economic system without money. They caught on for a while in Greece about 8 years ago during an earlier financial trauma. Basically with a time bank you have a bulletin board where people trade skills for time credits that can be traded for other services, thereby generating beneficial economic activity absent of money. There are variations on this that encompass trade in goods.

        Maybe our ideas about what is money are antiquated. What if a fundamental change has already occurred in our monetary regimes and we can only see it in the rear view mirror like Marshall McCluhan said about already being in the future.

  9. unit472 says:

    When everything is ‘data dependent’ and not based on any understood economic theory then you are making it up as you go. That seems to be the operative methodology of Central Banks.

    They don’t know what they are doing or what they are trying to achieve ( other than keep asset prices high ) so when nonconforming ‘data’ arrives they will do ‘whatever it takes’ to preserve their authority.

    • backwardsevolution says:

      unit472 – they DO know what they’re doing: keeping asset prices high.

      • nhz says:

        exactly; they know who they are working for and things are going extremely well for them, resulting in the biggest wealth inequality in history. Central banks will stay the course until the whole financial system crashes; of course they will keep explaining that there is sanity and honesty behind their destructive policies.

        • Xabier says:

          It is indeed all working to plan.

          The public are generally easily deluded by bubble asset valuations – principally property – into thinking that they hold real, durable wealth.

          They do not, but just try explaining that to them!

          Believing themselves wealthy, they will spend -and vote – accordingly……

  10. polistra says:

    The only tool that we need is a wrecking ball, to shut down the Fed entirely and remove it from the system.

  11. NeverFedNeverDread says:

    If you are curious enough to read Wolf’s articles, negative rates will most likely not affect you, even “IF” they reach American in the future. Why you ask, because curiosity leads to creativity, and creative minds have a way of legally avoiding the worst laid plans of overly controlling, and temporarily powerful systems.

    Art, precious metals, farmland, hard income producing assets, and even something as simply as a $100/year bank vault lock box…bring it on Feds, we are ready! And in the process, we will probably get wealthier as being a zero sum game with 95% of the nation not paying attention, the uninformed will pay the price instead…

    Trust your intelligence, and thus creativity…for as long as you have your health, and there are no physical wars, why worry about the rest? And thanks to people like Wolf, the information is out there to warn us in advance so we can undestand the changes that are coming. Simply put the universe is never going to stop from constantly evolving, so learn to adapt to the universe in which we all exist…

    • nhz says:

      art, precious metals, farmland – most of the alternatives have increased too much in cost already to make them safe alternatives.

      In my country the economic value of the best farmland is around 2.5 EUR/m2. However, you are very lucky if you can buy it for 7-10 EUR/m2, a cost that will NEVER be profitable for farming. You are basically holding out for the greater fool, or hoping that someone from the local government will make you a millionaire by changing the zoning of the area to allow home building (1000-4000 EUR/m2). But politicians only arrange these things for their friends and not for some small speculator who happens to own some farmland.

      precious metals: they are a hard asset, but with a price increase of 5-6x over the last 20 years you can hardly call them cheap.

      real estate: in my country for recently purchased homes you are very lucky if you can get net 2% ROI by renting them out. But after a price runup of 10x or more over the last 30 years, it is highly likely that in the next RE downturn that small gain from renting out will be dwarfed by the equity loss. But nobody thinks about that, they KNOW that RE only goes up and if not the government/central bank will come to the rescue.

      art: probably even worse than stocks given the ludicrous increase in prices over the last 20 years.

      You are basically counting on greater fools (central banks or the general public?) to buy your “investments” down the road for even higher prices.

      Cash in the vault or under the mattress: penny-wise smart, pound-wise foolish if you ask me: you skimp the 0.1-0.5% negative rate but still have the loss from inflation which is a lot worse than 0.5%, plus significant costs for withdrawing and depositing if it has to enter the banking system again (plus risk of a money laundering tax, if you are not careful).

  12. Crush the Peasants says:

    The time value of money is due in part to finite lifespans. If people lived forever and never aged, would it matter when one was repaid? Do negative rates presage a reversal of the aging process?

    • nhz says:

      Yeah, what does it mean that you can get 30-50 year fixed rate interest-only, no-money-down mortgages in Europe at interest rates close to 1% (way below inflation), even if you are 60 years old? It smells like free money. Does this mean that the future is bright and ZIRP/NIRP policies are producing Nirwana for the masses, or is it all a delusion?

      • Lisa_Hooker says:

        It’s a delusion.
        I will gladly pay you Tuesday for a hamburger today.

      • Petunia says:

        The 30-50 year interest only mortgage is an option on a higher price down the road, while you rent.

        The real nasty long term mortgages were issued in Japan during the boom years. It’s a 100+ year monster which passes an inter-generational obligation on to the heirs.

  13. michael earussi says:

    I hate saying this as I’m not a big believer in the efficacy of owning gold and silver, but if negative interest rates ever hit the U.S. I can see an appreciable increased interest in owing both.

    And BTW, it’s very easy to stimulate the economy without lowering interest rates, just redistribute wealth to the lower classes who will actually spend the money on goods and services instead of wasting it “investing” in useless Unicorns and other bubbles.

    • Happy1 says:

      If you redistribute money to the lower classes, the people from whom you attempt to pull that money will generally make efforts to minimize the effect of the taxes, either by sheltering income in tax free investment, by lobbying for tax code loopholes, by working less, or by overseas shelters or accounting dodges. Redistribution is not the best way to stimulate the economy, allowing people to keep what they earn is.

    • Petunia says:

      I promise to spend every last dollar they give me to stimulate the economy.

    • Bobber says:

      Actually, many wealthy are investing most of their money into thin air, via P/E expansion, which is really an investment in continued central bank profligacy, fecklessness, and moral hazard.

    • Jay29 says:

      So the question is….
      Where are we supposed to put our money?

      • Steve says:

        First: Pay off ALL debt regardless of the net interest rate
        Second: Buy land capable of producing food for you and your family (farming or hunting or fishing)
        Third: Buy some Silver/Gold/PM and keep some CASH on hand
        Fourth: Make yourself invisible as possible to the Government.
        Finally: Pray that when things go sideways, you come out on the bright side.

        • Paulo says:


          Add to the list a few hunting rifles and ammo, tools, stores, and skills. Plus, a good water source, and good friends. :-)

          As I read your list and smiled as I wrote mine, I realized the list is similar to to what we also have for family earthquake supplies. We also operate a decent HF/VHF radio shack for our community. All disasters require pretty much the same things for survival, and neg interest rates is the definition of a disaster, imho.

        • Xabier says:

          Good list.

          Although the experience of Russia after the Revolution shows that someone from the government, with a gun, will always show up however deeply you are buried in the wildest wilderness.

          Their existence and full stomach depends on finding you, so they will…..

  14. timbers says:

    “The Fed Slaps Down Negative Interest Rates

    A serious rejection in its first major discussion of negative interest rates recounted in the FOMC minutes.”

    Wolf is the Mary Tyler Moore of financial fraud reporting. Always seeing the bright side.

    Color me skeptical. The Fed’s low rates and QE are working (to it’s eyes) so why would it need NIRP now?

    It’s when ZIRP and QE no longer “work” and Mr Market pounds the table, that the Fed might change it’s words and reach for NIRP.

    The ECB needs NIRP to bridge the divide between Germany and Italy. If rates were high in ECB, Germany would be raking in the doe but Italy would be crushed and impelled to exit the Union, which would be a fatal blow possibly leading to the Union’s dissolution.

    NIRP in a way took back Germany’s ill gotten advantage when the Mark’s exchange vs other currencies was set too low when the EUR was created, because Germany wanted to fuel it’s export driven economy.

    NIRP was partial revenge against the Mark set too low.

    I HOPE that is what the Fed alluded too regarding the benefits of NIRP because aside from that, I don’t see any, and that so called benefit is a dubious calculation in it’s own right.

    • historicus says:

      NIRP and ECB are both Socialist attempts to save failed socialist nations…nations that overpromised pension and benefits without the ability to pay for them..
      sound familiar?

  15. Unamused says:


    EU president Juncker told us clearly how to interpret these ramblings “when things become serious you have to lie.”

    Which can only mean that things have become extremely serious, and that the assurances of CBs must be seriously discounted.


    the trick is to not save in money

    Which is why Blakeslee, I think, and others, have recommended putting your money into productive real assets, like potato patches and solar panels, and not into savings, which are negatively productive, or financial instruments, which are expected to crash.

    Since it’s dangerous to depend on a financial system that’s rigged against you, your logical recourse is to rely on yourself. But since your own resources may be too limited to be adequate or sustainable, your best recourse is to pool your resources with like-minded friends and pool the benefits of your production. If that smells too much like Marxism to you then set it up as a corporation and just tell everybody you’re capitalists. That way you can keep the chateau and the Bentley, recruit a Xenia Onatopp to drive you to the symphony, and Berlioz will be none the wiser.

    Memento mori:

    Where does value of modern money come from now days?

    Where it always come from. Ultimately the value of money is a function of the quality of the underlying economy that supports it, discounted for manipulations which are designed to exploit it as a financial extraction tool.

    Central banks can’t just up and rob you to feed their wealthy owners. They have to resort to more indirect means of taking your money, and their control of currencies gives them ways to do that. And they do so because they’re still trying to preserve all that phony paper wealth acquired before the 2008 fiasco, by restoring their impaired assets with the proceeds of real economic production.

    It’s why they never wrote off their losses in 2009, expecting that a few years of financial pilferage would eventually make them whole. That has worked so well they’ve come up with a lot more phony paper wealth to continue the process. Hence the bubbly financial markets.

    Crush the Peasants:

    If people lived forever and never aged, would it matter when one was repaid?

    Yes. It’s how immortals clean up on long-term securities, and besides, their bills come with due dates too.

    • Bonnie says:

      The chief diplomat of America has boasted loudly about his ability to lie, cheat and steal. And he works for a President that nobody would believe even if he said the sun was going to set in the west tonight. So, yeah, in this world, why should bankers be treated as the exception who can be believed?

    • Jon says:

      There is a lot of knowledge and wisdom in Wolf’s articles and the comments.
      Good to be aware of things around but wondering how can we find actionable data/information from all these ?

      I meant what should we do ? invest in real estate ? gold ? stcks ?

      I have almost all my money in stocks for last few year and i did exceedingly good although I don’t have much trust in the market. I can’t fight the system so I’d rather join it and enjoy the gains while the music is still on.

      • Lisa_Hooker says:

        You’re not allowed to sit on a chair until the music stops. Unless, of course, you own the record player.

  16. RD Blakeslee says:

    How can “we” achieve one-world government if our Fed refuses to adopt one-world (e.g. negative interest rates) policy?

    • Unamused says:

      Rewrite your comment to be a statement and not a question.

    • historicus says:

      You’re right if what you are saying is the Central Banking is back door globalization. It is also back door Socialism…for central bankers make economic decision by committee behind closed doors, and purchase stock and corporate bonds. (BOJ in particular) This continued ends in ownership.

  17. Clyde says:

    So, the Fed, owned by the bankers, have agreed that the best thing to do in a financial crisis is to hand lots of money ($trillions) over to the bankers, just like they did last time. I’m shocked.

  18. So are Reversal Rates the same as OLB? NIRP will never work in the US, the Fed has it right. In a race to the bottom in interest rates, they have an advantage. So then the Fed cuts rates? We hate your aunt’s house at Thanksgiving, and we should be there in a hour? More F&L.

  19. TSG says:

    What the Fed is hiding from us is the real reason that interest rates won’t go negative. Negative interest rates in the U.S. would cause all commodities, including gold and silver, to go into backwardation, since these are all priced in dollars. Alasdair Macleod has covered this with great clarity in one of his articles.

  20. Memento mori says:

    “Some of the most disturbing notes came from people who said, ’I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing,” Yellen recalled. “Savers are getting penalized. It’s true.”

    Let’s screw the savers some more with negative rates.

    • Wolf Richter says:

      Memento mori,
      Make sure you sell your bank stocks and other stocks beforehand. Check out European bank stocks (they’re back where they’d been in the 1990s) and Japanese bank stocks, which are below where they’d been in the 1980s.

      Draghi was trying to keep Italy in the Eurozone and didn’t give a crap about banks. The Fed is owned by the banks and works for the banks. HUGE difference. And the Fed knows it too.

      • Memento mori says:

        I am not selling anything but I will when Dow hits 30k which I expect it will do before the election. Then I will wait for the result of the election before I get back in again.
        I heard that argument about Draghi helping Italy, but I haven’t seen any convincing evidence for it. Then who is Swiss Central bank trying to save with the negative rates or the nordic central banks? Negative rates are coming unless a liquidation event is allowed to happen in this country and bankruptcy clears the massive debts which I dont think will be allowed to happen.
        The Fed might be owned by the banks but it did let Lehman fail. How do you explain that?
        Anyway, I found it touching the letters that Yellen was receiving from savers, it just shows how politicized the Fed has become.

        • Wolf Richter says:

          Memento Mori,

          To respond to your second paragraph: The SNB went into NIRP to keep the CHF from appreciating against the euro. It’s surrounded by euro countries, and trades with them. Same is true for some of the non-euro Nordics. Sweden is likely to back out of NIRP at the central bank’s December meeting. They’ve had enough, it seems. If it does so, it will be the first country to back out of NIRP and return to positive or at least 0% rates.

          Books have been written about your Lehman question :-]

      • Beardawg says:

        WOLF – your comment to Memento Mori confuses me. With ZIRP/NIRP, and the Big Boyz getting paid to borrow, then stocks (equities) and arguably real estate as well, will valuate to infinity….No?

        • Wolf Richter says:

          Just check the stock indices of Eurozone countries and of Japan, going back a couple of decades. Understand that the DAX is a “total return index,” which includes dividends, so it doesn’t match any of the other indices, which don’t include dividends. Use the DAXK to remove the impact of dividends.

    • historicus says:

      The financial history of this nation is that Fed Funds equal or exceed the inflation rate. When the Fed goes under the inflation rate, it is for emergency purposes like 08.
      Now, however, the emergency is keeping the market making new highs every day.
      Oct CPI up .4. And they still say there is no inflation….the way they measure it.

  21. IronForge says:


    While some have Resorted to ZIRPing and NIRPing, the USA_FEDRESV is in a Position of being One of the Few Sovereigns that Offer Positive Yields.

    The FEDRESV may be Too Big To NIRP – Staying Positive Reinforce the Relative Attractiveness of Safety, Capital Preservation, and Yield of USTs, the Operative_Currency – USD, and USA_Banks.

  22. Aussie says:

    When it comes from the mouth of a two headed snake, I always take the opposite direction; they will go to negative rates!

  23. raxadian says:

    So… does this mean no more rate cuts this year or what?

  24. JW says:

    I’m totally on board for negative rates, if the the rest of us gets to play by the same rules as the oligarchs demanding it.

  25. xear says:

    Powell reminds me of someone after dinner discussing the fact that they would never eat flavored yogurt.

    1 day without other food in the fridge and the flavored yogurt is all gone.

  26. NoEasyDay says:

    >”All kinds of tools are being kicked around in addition to the tools
    > used during the last crisis – these potential new tools ranged from
    > “rate caps” on long-term Treasury securities to various repo facilities
    > and negative interest rates.”

    How about the proverbial “helicopter drops” of cash à la Dubya? I used that check toward my mortgage.

  27. Iamafan says:

    I’ve been thinking of this for a while. But something just doesn’t make sense. How can the Fed’s Interest on Reserve for banks or Reverse Repo for foreign banks and FHLBs be negative? They will have to change their whole monetary policy. Printing money is so much easier.

  28. Iamafan says:

    Why get all excited with printed nominal negative rates when in reality, you have printed nominal low rates BELOW the Inflation Rate. It’s easy to get confused, we already are in NEGATIVE REAL rate territory and we have had it for sooo long.

    • historicus says:

      Exactly. Real negative rates to keep stocks up every day.
      No cycles, no dips…just up. The Fed’s job apparently is to keep the 45 degree trend from low left to upper right on the charts.
      Why is the Fed buying $60 Billion a month AND ALSO dumping hundreds of billions into the repo market?
      An economist might say the demand for money is so high at these low rates that the rates have to rise to get to an equilibrium. But the Fed creates false demand for debt, interfering with the free market.

  29. WSKJ says:

    great stuff, thx all

    OT: in the meanwhile, I have to figure whether I’m likely to live through the coming year, 2020, in order to select my best Medicare Part D Plan for the coming year. And yes, somehow THEY have figured out how to get virtually anyone on meds into the donut hole.

    Hope everyone is laughing now, I know that I’m enjoying the dark humor of it.

  30. Jeff T. says:


  31. Jdog says:

    As others have said, 0% is just a number, it is irreverent. Negative interest rates begin when the interest rate goes below the inflation rate and we have been there for the past decade. It is destroying our economy, but the real damage will not be seen until the inevitable crash.

Comments are closed.