NIRP Impoverishes Our Children

Interest rates are called the price of money; or, the rent you have to pay for renting money.

The important effect of this is that when you can take a high rent for your capital, this motivates you to postpone consumption, save, and rent out the saved capital.

Negative interest rates motivate you to do the opposite: Consume what you have and then some, go into debt, and get payed for it.

So credit shifts consumption into the now; from the future.

The attempts of the Central Banks to enforce NIRP (and ban cash to be able to enforce it) have to be judged with this in mind: It is ONLY necessary to forestall the inevitable debt default of the USA and some other high octane money burning regimes like say Greece or Italy. The reason these regimes spend like drunken sailors is of course vote buying via the welfare state. Those who call this as failure of capitalism ignore that the welfare state is not a capitalist entity, rather the opposite.

Well anyway. I wanted to preserve this important notion that interest rates shift consumption along the time axis. This will become important in all future economic modeling.

And I got motivated to write this post by the weapons grade lunatic Ken Rogoff who is on the warpath against cash.

zerohedge

 

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6 thoughts on “NIRP Impoverishes Our Children”

  1. It wasn’t that long ago that no bank paid interest on money in a demand deposit checking account and only paid nominal interest on such savings accounts. Indeed, a checking account was a NIRP account. You paid the bank to hold the money and pay the people you to whom you wrote the demand draft. Only after the Great Inflation and the high real interest rates that were normally hidden, were the rules changed to allow any demand deposit account, whether called checking or savings to earn nominal interest (which, of course, was subject to income taxes; where the bank fees were not subject to such taxes). That change was made because the Great Inflation had disintermediated banks, mostly the FNMA/FMAC “Savings & Loan Associations” and Glass-Stegall had forced ‘firewalls’ that didn’t protect anyone from the FED/US Federal Government created inflation in the first place. The big money in such interest was to be found by opening Certificates of Deposit, where you set the money aside for a fixed time (shorter the term, the lower the interest paid) and paid a penalty directly and indirectly (taxes) if you cashed it out early. Note that such time deposits didn’t and don’t have the same inflationary effect that fractional reserving of demand deposits do.

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      1. No. The Great Inflation started with FDR, when he closed the banks and finally nationalized them. Being, by necessity, a capital goods exporter after WW II, we’d become a money exporter also (USD being the reserve currency). That closure is more complicated than most know, for there were some treaties involved plus a bit of political scandal at home involving Congress and its ability to do insider trading (surprise, not!). That closure made the Great Inflation visible. The USD isn’t completely fiat (part oil, part gold); but good luck getting it, for it is the fiat one that circulates.

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      2. Ok. Makes sense. With FDR, Gold fractional reserve banking began.
        It also makes sense that with sound money – before FDR – interest rates must be lower as there is little to none inflation of the volume of money. But even with a stable money supply, the tendency is still: High interest rates – whatever counts as high under these circumstances – reward forestalling consumption; zero or negative interest rates reward immediate consumption and taking on debt.

        The natural interest rate would then be expected to be identical to the economic growth.

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  2. have to be judged with this in mind: It is ONLY necessary to forestall the inevitable debt default of
    This is one point, but I am not sure it is the most relevant one. How much does the deficit of Greece or even the US compares to the total amount of money in circulation? Here my 2 cents on it:
    There are 2 processes at work of creating added value:
    a) through production – which is work & energy consumption to create the respective value, but this does not create “the money” respective to this added value and
    b) the second one is through money creation by the banks – most of the money in circulation is created by the banks as debt
    When b) is creating much more money/value then a) you get to the situation where you have to destroy some of the money created through either inflation, debt forgiveness or NIRP. NIRP comes to play when the first and the second option do not work.

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    1. Lars, the powers that be fear nothing more than a collapse of the sum of base money and credit (QE was started only to re-inflate the sum of money and credit : After the financial crisis 2008 credit began to collapse: people saved and payed down their debt. Enter QE for the re-inflation).

      A collapse of the sum of money and credit must be prevented because it would mean deflation – which would bankrupt the welfare state: His gargantuan debts would EXPLODE in value , tax receipts in nominal terms would fall.

      So they don’t actually want NIRP for its effect of reducing currency and credit – they want NIRP just so they can get PAYED for being indebted (they want to be rewarded for consumption in the now of value to be created in the future). The deflationary aspect of NIRP is what they don’t want – but they can’t have the “positive” without the negative.

      If you now say, this is all upside down, this is a madcap scheme, you’re exactly right. That’s what it is. It can’t possibly work and it won’t.

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