Central Banks Begin A New Limbo Dance

[JaredVannett]

This is not a shill/plug post, but I listen to short videos from 'Elite Investor TV' now and again.

https://www.youtube.com/watch?v=TiJvZ_oNE3Y


In this most recent episode there were a few statements made about the global market that I couldn't quite grasp.

If any finance guru here could have a go at clarify the following points made in the video it would be appreciated

• a) 1:25 - https://youtu.be/TiJvZ_oNE3Y?t=82 - "Two sets of interest rates, a higher rate for savers, lower rate for borrowers... the difference funded by quantitative easing" .... trying to understand how that works and why QE is needed?

• b) 1:35 - https://youtu.be/TiJvZ_oNE3Y?t=97 - "Scenario where the state buys bonds in the market - whatever happened to free market capitalism?" Not sure what the problem is? (his reaction) - I do understand it is usually states usually sell bonds...

• c) 2:17 - https://youtu.be/TiJvZ_oNE3Y?t=138 - "continuing devaluation of the Yuan, means much cheaper goods for the west leading to deflation.... so? isn't that good thing for us in the west vs inflation?

Ps. I'm not in the financial industry, but I learn what I can in my spare time - so go ahead and school me

Edited by JaredVannett on Thursday 12th September 20:38

[anonymous-user]

Investopedia to the rescue!

• With negative interest rates, cash deposited at a bank yields a storage charge, rather than the opportunity to earn interest income.
• Negative interest rates might be seen during deflationary periods when people or institutions are inclined to hoard money, rather than spend or lend it.
• The negative interest rate is meant to be an incentive for banks to make loans during a period in which they would rather hang on to funds.

Put simply, everybody stops spending/investing if they think stuff will be cheaper next year than it is today - and the whole economy grinds to a halt. So central banks allow banks access to money on the basis they need to go away and make it work for a return, because if the banks try to hand it back to the central bank they'll be losing money as a result of the "storage charge".

Central bank policies over the past decade+ have IMO destroyed the value of "money" as an asset class. It remains useful for barter transactions but can no longer be held as a worthwhile "investment". Money could be held as a hedge against possible asset devaluation - i.e. if the stock market collapses your shares might fall in value by 50% but each pound you're holding in cash is still worth £1 (albeit the value of that pound is usually shrinking due to inflation).

So yes, if you hoard cash in a deflationary environment you can be getting richer even at zero interest rate or negative interest rate. Which brings us back to where we started; central banks not wanting the banks to be hoarding cash.

[Condi]

JaredVannett said:

• a) 1:25 - https://youtu.be/TiJvZ_oNE3Y?t=82 - "Two sets of interest rates, a higher rate for savers, lower rate for borrowers... the difference funded by quantitative easing" .... trying to understand how that works and why QE is needed?

• b) 1:35 - https://youtu.be/TiJvZ_oNE3Y?t=97 - "Scenario where the state buys bonds in the market - whatever happened to free market capitalism?" Not sure what the problem is? (his reaction) - I do understand it is usually states usually sell bonds...

• c) 2:17 - https://youtu.be/TiJvZ_oNE3Y?t=138 - "continuing devaluation of the Yuan, means much cheaper goods for the west leading to deflation.... so? isn't that good thing for us in the west vs inflation?

Not a financial wiz, but will do my best...

1) Normally the banks borrow (or pay interest) at a lower rate and lend at a higher rate - and thus earn a margin from the difference. What is being suggested is that banks pay more in interest, and charge less to borrowers. In theory, this encourages both saving and spending, paid for by the central bank printing money to fill the gap in the middle. In reality it is probably the last step before the complete collapse of the economic and monetary policy status quo.

2) States sell government backed bonds to raise money. What is being suggested is that governments will buy bonds in the market - effectively buying company debt. The idea is to encourage companies to raise money cheaply and invest in new tooling and products. When companies collapse and fail to pay their debts the government is left with a hole in its finances. At this point the government is deciding which companies benefit, rather than the private and corporate investors. Hence the question about 'free market capitalism' - when the government is intervening in debt markets it is no longer the free market making decisions.

3) An artificially low currency encourages investment into the country, but at the expense of somewhere else. So if Company X has a choice where to build its products, say with a £10m investment, and one place (eg China) is very cheap, but a second place (eg UK) is expensive, it will invest in China as opposed to the UK. So while here in the UK we can buy cheap products, the economy as a whole suffers because investment goes elsewhere, taking jobs, tax income etc with it.

Edited by Condi on Thursday 12th September 23:19

[JaredVannett]

rockin and condi Thank you very much, that is much clearer and makes total sense!

A few weeks ago I researched 'Negative Bond Yields' ... I had to read it a few times because I was convinced I was interpreting it wrong, but it appears paying to store money is actually a thing . I read about how central banks, insurance companies and pension funds have to own bonds either way to meet their liquidity requirement.