Backwardation - Negative Interest Rates
Posted by CircuitGuy 9 years ago to Economics
Excerpt:
"Thus in a weak economic environment like this, with low inflation, banks and other financial institutions that want certainty of payment in the future are willing to pay interest to get their money back later.
Part of the problem here is that the fiat currencies of the world exist only to be units of account, and not stores of value. Thus in this unusual environment, they behave like any other commodity, where the prices for futures are often higher than the current spot price, which is known as backwardation."
My comments:
I recall reading 20 years ago about this in happening Japan because their banking system wasn't fully capitalist but had cronyism fueled by vestiges of ancient Japanese values. I remember wrongly thinking that could never happen in the US and Europe.
I would like to see a return to stable 3% inflation, a balanced budget, and positive real rates of interest with a normal yield curve. For the past few years I've started the year thinking we would be heading back to that by the end of the year, but we stay in this bizarre zone of tepid expansion and loose monetary policy year after year.
"Thus in a weak economic environment like this, with low inflation, banks and other financial institutions that want certainty of payment in the future are willing to pay interest to get their money back later.
Part of the problem here is that the fiat currencies of the world exist only to be units of account, and not stores of value. Thus in this unusual environment, they behave like any other commodity, where the prices for futures are often higher than the current spot price, which is known as backwardation."
My comments:
I recall reading 20 years ago about this in happening Japan because their banking system wasn't fully capitalist but had cronyism fueled by vestiges of ancient Japanese values. I remember wrongly thinking that could never happen in the US and Europe.
I would like to see a return to stable 3% inflation, a balanced budget, and positive real rates of interest with a normal yield curve. For the past few years I've started the year thinking we would be heading back to that by the end of the year, but we stay in this bizarre zone of tepid expansion and loose monetary policy year after year.
So central banks can lower rates during recessions to "prime the pump". It also makes wages less sticky.
I know these reasons don't apply to those opposed to a central bank.
"inflation is theft."
Only for money stuffed in a mattress. Money isn't intended as a store of value. It has no intrinsic value. Its value is in its wide acceptance as a medium of exchange.
The good thing about trading something of intrinsic value is that the fluctuations aren't masterminded by a central bank and the medium of exchange doesn't depreciate by design.
The bad thing is that the intrinsic value is tied up in exchange of other products/service and not being put to use. It's also bad that the fluctuations are unpredictable. Also, when it goes up, it encourages people to hold it even when other means of production are unused because people are holding their money. When it goes down, it encourages people to invest/consume.
The counter-argument to the things on my list of "bad things" is that human-controlled fiat money is subject to human foibles. Even if the humans were paragons of virtue, the argument goes, you still are turning over too much power to them. (There are certainly other counter-arguments I don't know of.)
I had assumed that this was a traditional model for people with lots of money that they did not want traced or which they wanted to be 'still there' when they got out of prison/ escaped from the country they were in.
Jan
In a truly Capitalist economy, with sound money based in gold, economic theory proves without question, and just plain common sense dictates, that the normal state would be a gently falling price level. Markets for existing goods would be expanding, and new products would be constantly being invented and brought to market. With a fixed or virtually fixed money supply, all prices, including wages would have to fall due to competition. Everyone would know this, and would rationally factor this into their plans and budgets with no problem whatsoever.
Even the pro-Capitalist Monetarist school of Friedman et. al. was wrong in advocating a "gently expanding" money supply, even if politicians and central bankers could be trusted to keep it gentle. In the long run it would have the same negative effects of any inflationary policy, except not as pronounced as a radical inflationist policy
It's been a few years since I've studied the subject intensively, although I have been getting back to it lately. My current thoughts as for what the medium might be, as a producer and consumer, i.e., trader, my preference as expressed in the market would be gold.
I have done some reading in the past, in particular Hayek, on a commodity reserve currency, but I also recall some good arguments against it. Until I refresh my memory, I will reserve judgement. But then as I've said, the market should be the final arbiter.
The same for new ideas like Bitcoin. As a life-long techie, is sounds "cool", but I'd need to study it more before offering an opinion on whether it is a viable "money".
I agree the gov't should not forbid trade with any medium of exchange.
Keep in mind as well, when the Fed reports on inflation, there's a little footnote that's usually said sotto voce that goes, " ex food and energy". So if you're like me, those are your biggest expenses, and anyone who doesn't think that inflation in those two sectors has been anything BUT tame and benign these last 6 or 8 years, hasn't been in a gas station or a grocery store.
As I've made clear in another comment, deflation (as long as it comes about as a result of an expanding free market) is a great thing for everybody.
Unless your comment was meant to be as sarcastic as mine.
I liked your point that if the economy works around inflation, it could do the same thing with deflation. We need more of that and less of just saying people are wrong without saying why or sometimes even about which claims.
Yes. And it's not happening. As I said, I keep thinking this year we'll return to normalcy. That's been for the past four years.
They briefly stopped the borrowing in the mid 90s, and I hoped something similar would happen.
Regarding rates and inflation, I still do not understand why they're this low.
And please don't say The Fed is in any way, shape or form independent of this administration or any other. I've had my laugh for the day.
If the Fed expands the money supply, I expect it to increase aggregate demand, causing unused production capacity to be put into use. If there really isn't unused capacity in the economy, then there will be more dollars chasing the same number of goods and services, and we'll have inflation. That's not happening though. We live in weird times.
Who is this "they" that you speak of? Who are these benevolent, selfless, all knowing beings with their hands at the controls of the largest economy on the planet with only our nations best interest in mind? Able to outmaneuver the random decisions of millions of people and create policy that is fair and beneficial to all while never allowing the temptation of all that power to influence their decisions?
It's not about whether or not "they" can "tweak" here and "adjust" there and guide the economy in a positive direction. It's about the idea that "guiding" the economy means that "they" know where and how the economy should be going and anybody who disagrees is wrong.It's about a corruptible system that attracts corrupt participants and cannot be expected to benefit anybody except those corrupt participants except by pure coincidence. It's about the fact that someone who defends and promotes a corrupt system and it's participants is trying to profit, himself, from that system and is, therefore, one of those corrupt participants.
This "they" that you speak of are not benevolent angels here to help us. They are the devil and it appears that you are not just "playing" as his advocate.
I am no expert on Mises. Actually economics discussions tend to leave me behind but I can see your point about bad ideas. I would say, however, that it is the planned economy that requires the assumption of "angles" and therefore puts further discussion into the realm of fantasy and makes a physical application of it an effort in futility.
Why Mises would feel the need to waste his time making that argument would seem to indicate an inability or an unwillingness to say that "angels" do not exist. Especially/even in the context of government related entities.
I'll be the first to admit reading Economics is an acquired taste, or more likely just depends on your personal interests. I took one course in high school biology (required) and yuck! I guess I'd rather dissect Marx than a fetal pig ;=)
Actually, reading most economists IS dreadful (it's not called "the dismal science" for nothing), but I enjoy Mises not just because his theories are correct, but his writing is clear, logical and straightforward. Not unlike Rand's non-fiction.
Anyway, to your point about "angels", I think his assumption about "good, well-intentioned" planners in his writings was to avoid/defuse ahead of time the argument (which is very common) that "it's not that socialist planning doesn't work, it's just that THIS plan or THESE planners were wrong. Elect us and we'll do a better job on say, the next "5-year plan." And don't we hear that from a lot of US politicians, too?
And whether it was a typo or intentional, you are correct in that there are certainly more "angles" in a planned economy than "angels"...
And again, you're right about the politicians. Analyze their arguments and it boils down to "I agree with my opponent, but I can do it better." It will work if it is just done by the right people.
An appropriate quote from The Peoples Cube; "We are the ones we have been waiting for"
I'm tempted to give you the benefit of the doubt due to some of your comments elsewhere but on this thread... Your left is showing and it hasn't been pretty.
Can you point me to a book or website about the first claim (corruption) since the entire explanation probably wouldn't fit here.
In his proofs of why these policies won't and can't work, Mises always (sometimes maddeningly so) assumes or grants for the sake of argument that the government functionaries in charge are scrupulously honest, and then proves their policies still fail.
But, on the I believe somewhat reasonable assumption that you add some corruption and cronyism to the mix, that only makes the failure worse.
What I am saying is that it cannot, not be corrupt. They have power over peoples lives backed up by the might of the US Government. This is a situation that breeds corruption. Necessitates it, even. It chooses favorites. It benefits one at the expense of another. The highest bidder gets the benefits.