Going Negative

“More money cannot cure what too much money created.”

                                   Frank Hollenbeck

There’s nothing positive to say about negative interest rates.

If seven years of zero interest rate policy (ZIRP) has left the U.S. economy is such sad shape, how could negative interest rates help?  Negative rates have already been tried in Europe and Japan, and they have failed to boost the economy.

And yet some believe the Federal Reserve Board is considering replacing ZIRP with NIRP.  We’ve written plenty about the failings of ZIRP, or zero interest rate policy, and believe it would be foolish for the Fed to consider NIRP, or negative interest rate policy.

How does NIRP work?  As Zerohedge explained, “The process can be as simple as the central bank charging its member banks for holding excess reserves, although the same thing can be accomplished by more roundabout methods such as manipulating the reverse repo market.”

In other words, central banks created trillions of dollars in excess reserves throughout the banking system and now they want to charge banks for holding those reserves.  The idea is to coerce banks to lend the money, which should stimulate the economy. 

But if banks aren’t lending much money now, with interest rates near zero, will they lend money when interest rates dip below zero?  Will they reduce their cost of excess reserves by loosening their lending standards, which would likely increase bad loans, or will they pass the costs on to customers?

Loosening lending standards, you may recall, was what caused the last financial crisis, when banks were providing mortgages to anyone with a pulse.  And passing costs on to customers won’t be easy.  Bank customers have historically received a small amount of interest for putting their savings in a bank.  They’re not likel

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The Art of the Unreal

“You ran up mountains of debt, as well as losses, using other people’s money, and you were forced to file for bankruptcy not once, not twice, four times.”

Carly Fiorina to Donald Trump

You may think that having a billionaire as president is a good thing, since he must understand how to manage money.

But what about a billionaire who has declared bankruptcy four times?  Given that the U.S. is $19 trillion in debt (and that’s just federal debt), maybe it’s a good idea to elect Donald Trump president.  His first act in office can be to declare the U.S. bankrupt and get us out of paying off all of that debt. Trump, Donald

To be fair, Mr. Trump’s bankruptcies were not Chapter 7 bankruptcies, in which anything of value is typically liquidated, leaving creditors with pennies on the dollar.  They were Chapter 11 bankruptcies, in which a restructuring takes place.

But creditors still lose plenty in such cases.  So you may interpret the bankruptcies to mean that Mr. Trump took advantage of other people to enrich himself, which would make him unethical.  Or you may interpret them to mean that Mr. Trump is incompetent.

Maybe, given his tendency to borrow more than he needs at very high interest rates, both answers are correct.  At least National Review makes The Donald seem neither ethical nor competent:

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Democrats Offer Socialism vs. Near Socialism

Being America, we can choose whoever we want to be President of the United States.  So how did we end up with this group?

We have a self-proclaimed socialist and a former first lady no one trusts (with good reason) fighting for the Democratic nomination.  And we have a billionaire who seems to think anyone whose family didn’t come over on the Mayflower should be deported as the leading candidate for the Republican nomination. Clinton1web_2831249b Bernie

Someone reasonable may yet emerge from the pack of presidential wannabes, but let’s take a closer look at what a Sanders, Clinton or Trump presidency would mean to your finances—and to America.  We’ll start with the two Democrats this week and take on The Donald and other Republicans next week.

As for the Democrats, this is not JFK’s Democratic Party or even Bill Clinton’s.  Both Hill and Bernie are campaigning as the saviors of the middle class by campaigning to the left of President Obama.

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Eroding Economic Freedom Means Slower Economic Growth

Being “the land of the free” apparently doesn’t apply to the American economy anymore.

Being a capitalist society with free markets, complemented by the Bill of Rights and the U.S. Constitution, have made America the freest country in the world with the highest standard of living.

And yet America’s standing is slipping.  The 2016 Index of Economic Freedom gives the U.S. a rating of 75.4 points out of 100—what your teacher would call a C.  That’s a drop of 0.8 points from last year, which is enough to nudge the U.S. out of the top 10.  But, heh, we’re way ahead of North Korea, Cuba and Iran.SR-trade-freedom-2016-chart-2

Ours is not an economy in shackles yet, but the degree of freedom needed to sustain rapid growth is eroding.  It was the eighth time in the past 10 years that the U.S. has lost ground. In contrast, more than half of the countries in the index—97 out of 186—improved their score this year and 32 recorded their highest level of economic freedom ever.

Hong Kong and Singapore lead the rankings with scores of 88.6 and 87.6, respectively, but the U.S. is also bested by New Zealand, Switzerland, Australia, Canada, Chile, Ireland, Estonia and the United Kingdom.

Ratings are based on 10 factors, including the size of government, regulations, degree of corruption, taxes and the openness of markets.

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Hard Landing

The Federal Reserve Board’s Open Market Committee met last week for the first time since raising interest rates in December and then published its usual policy statement full of mush.

It could have been written by Russia’s politburo.  It’s loaded with statements like this one: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

In other words, if we’re not already in a recession, we’re pretty close to one, so the Fed is not going to raise rates to normal levels anytime soon. 20160128_policyerror_0

We’ll spare you the rest of the policy statement, which can be summed up as follows: “Blah, blah, blah.”  If the Fed were being honest, here’s what the latest policy statement would have said:

Well, that was a disaster.

We’ve been hearing for years that it was time to raise interest rates.  Virtually every economist on the planet, not to mention all of the journalists who think they understand the economy, had been predicting that the Fed would raise interest rates in December. 

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