Negative ECB Deposit Rate: But What Next?

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Yves here. A vocal subset of readers likes to complain vociferously about the loss of purchasing power of modern currencies over time. But there are multiple fallacies with this reasoning. First, only the most risk averse keep their savings in cash for long periods of time. They invest them in some manner, even if it is in low-risk assets like Treasury bonds or long-dated certificates of deposit. Except in the post crisis era, where central banks have intervened aggressively to reduce prevailing interest rates to negative real return levels for safe assets, the prices of intermediate and long-term assets incorporate inflation expectations. So the problem is not inflation per se, but when the rate of inflation turns out to be meaningfully higher than what investors thought they’d get when they made their investments.

The second, as some readers have articulately pointed out, that what you can buy in the future (by saving) with those supposedly depreciated dollars is more often than not markedly better than what you could buy 30-40 years ago (you do have offsetting crapification in many categories, like mattresses and tools, but even services we love to hate, like telecommunications, offer way more bang for the buck. Hardly anyone made long distance calls in the 1960s because they were so costly. My family was comfortably middle class, yet we’d mail cassette tapes updates to my uncle (and he’d send his own back) rather than speak at length on the phone.

So now the Eurozone is about to enter into “be careful what you wish for” land for the hard currency types: negative deposit rates. This article argues that the immediate effects will be minor (which if true raises the question of what the ECB thinks it really is going to accomplish). The recent example of negative interest rates in Denmark suggests that banks will not change retail interest rates, which would seem to represent a third rail as far as the general public is concerned. But this precedent for a major currency is likely to get a lot of media play, which has the potential to make depositors deeply uncomfortable even if they see no immediate change in their bank’s product pricing. The long-term impact of lowering the level of trust in the financial regime may be much greater than the experts anticipate.

By Zsolt Darvas, a senior fellow at Bruegel, and Pia Hüttl, a resesarch assistant at Bruegel. Originally published at Bruegel

There are widespread expectations that the ECB will cut its interest rates today. Both the current 0.25 percent ECB main refinancing rate and the current zero percent deposit rate, which banks receive when depositing liquidity at the ECB, are expected to be marginally reduced. The latter would imply a negative deposit rate, meaning that banks would have to pay interest for placing a deposit at the central bank.

Figure 1 shows that the banks’ deposits at the ECB are declining steadily. Moreover, when the deposit rate was reduced to zero in mid-2012, banks shifted half of their deposits to excess reserves. Since currently banks can hold excess reserves on their current account at the ECB at zero interest, a negative deposit rate should therefore be accompanied by the same negative interest rate on excess reserves or a cap on excess reserves holdings, to avoid the shifting of all deposits to excess reserves.

With the normalization of money markets and the repayment of the 3-year longer term refinancing operations (LTRO), the sum of banks’ deposits and excess reserves may return to their pre-crisis close-to-zero values. A negative deposit rate may even accelerate the repayment of the LTRO. Therefore, the direct impact of a negative deposit rate, in terms of changing the incentives to hold deposits and excess reserves, would be minimal.

Figure 1: The ECB’s interest rate on the deposit facility (percent), banks’ deposits at the ECB’s deposit facility (in EUR bn) and banks’ excess reserves at the ECB (in EUR bn), 1 January 2007 to 3 June 2014

Source: updated from Claeys, Darvas, Merler and Wolff (2014) using ECB data. Note: banks’ excess reserve is the reserves banks hold at their current account with the ECB minus the minimum reserve requirement. Due to huge volatility of daily data, we use a 30-day moving average.

The Danish central bank adopted a negative deposit rate between July 2012 and April 2014. The main objective of the Danish negative deposit rate was to reverse the appreciation of the Danish krona exchange rate, which to a large extent originated from capital flight from the euro area to Denmark, due to the euro crisis (see our earlier post on Denmark here). The ECB has a different goal: boosting inflation and inflationary expectations.

After the introduction of negative deposit rate in Denmark, the Danish Krona depreciated against the euro by about half a percent from 7.43 to 7.46. However, the Danish evidence suggests that the rate cut did not lead to changes in retail interest rates, nor an increase in bank lending.

These findings and the small and declining amount of deposits at the ECB (Figure 1) suggest that a negative ECB deposit rate may not change retail interest rates and bank lending in the euro area. At best, it could weaken a bit the exchange rate of the euro, if the rate cut is not yet fully priced in. But a small change in the exchange may not have a big impact on inflation either.

The main question for Thursday is what other measures will be deployed by the ECB’s Governing Council, and perhaps even more importantly, if Mr Draghi’s communication will pave the way for further actions, such as asset purchases.

See also policy contribution ‘Addressing weak inflation: The European Central Bank’s shopping list‘, comment ‘Easier monetary policy should be no worry to Germany‘ and analysis ‘Negative deposit rates: The Danish experience’.

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  1. frosty zoom

    actually, most people have no savings and obviously no investments. therefore the loss of purchasing power of modern currencies is hardly a fallacy. isn’t minimum wage now at $2.11 (adjusted for inflation)?

    also, many people with bank accounts already receive a de facto negative interest rate from their bank deposits, however brief they may be, because the $19.27 monthly fees far outweigh the $.000124 they receive in interest.

    1. Jim Haygood

      As Zucman says in his presentation on wealth inequality (slide no. 28),

      (Memo: Bottom 50% always owns  ~ 0 net wealth)

      ALL of the gains from investing accrue to the top half, and none to the bottom half. Inflation amplifies the gap in nominal returns between the two groups, acting as a sadistically effective engine of wealth redistribution from poor to rich.

  2. John

    I seriously doubt banks are in a lending mood these days, even if the ECB & Co charge for deposits. The bubble collapse in recent years is still fresh on their minds and has made banks sit on cash rather than lend it. I get glowing reports from my bank on their profitability and wonder how did they do it?

    Then again, this is the euro zone we are talking about where we always manage to turn a manageable situation into an enormous disaster. Government spending is simply out of the question to boost demand. That goes against the grain. I talk to countless people and they are of the belief that frugality (spending only what we have in the bank) is the way to prosperity. It is this way because alternative viewpoints are not tolerated and are quickly squashed. It is very similar to the old Japanese saying: Hammer the nail that sticks out.

    Here in Belgium we held national elections in conjunction with electing members for the European Parliament. The major parties had a common theme: slashing government spending to create jobs. We have not learned anything. In case you were wondering, a sector that can use some serious cash, Belgian infrastructure requires billions of euros of work. We hold the record for the worst traffic jams in the world.

    Heck, look at Lithuania which will be adopting the euro. They were praised by Ollie Rehn yesterday because they stuck to brutal government cutting. Reforms as they call it. (I always feel like smashing the TV when I hear such nonsense). Yep, Lithuania is giving up their currency and sovereignty to join ClubEuroZone. Meanwhile the average Lithuanian is in deep depression economically. Huge numbers of people have left the country in search of work elsewhere. In the neoliberal world, it is job done. Now the capitalists can come in and take what they want at rock bottom prices. The people that will be left behind will be made to pay for past sins with higher prices, higher taxes, reduced services, more expensive healthcare and always low wages, always.

    With that in mind I guess the ECB & Co may have no choice except to try something (anything) because national governments refuse (and cannot) raise demand. Countries that can spend more and improve the life for millions are ready to give surpluses away. Disgusting.

    1. mmckinl

      “” In the neoliberal world, it is job done. Now the capitalists can come in and take what they want at rock bottom prices. The people that will be left behind will be made to pay for past sins with higher prices, higher taxes, reduced services, more expensive healthcare and always low wages, always.””

      This is exactly what the powers that be want. Stealing public infrastructure for pennies on the dollar while condemning their populations to debt servitude both individually and through government debt. It truly amazes me that people can not grasp that these banksters and oligarchs are sociopaths. They could care less.

      1. EoinW

        To take that line of thinking one step further I must ask: if they know what’s going on what can they do about it? Many readers here see what’s going on – as it is happening in all our countries to varying degrees – but what do we do about it? Let’s see, we post on blogs and complain that people don’t see what we see. it’s true that the majority of people don’t know and don’t want to know but what would they do with that knowledge if they suddenly did acquire it? It’d be nice if the majority would all have a “Road to Damascus” moment at the exact same time, however we can see that isn’t happening and won’t happen until it’s too late. With understanding comes the mental pain of comprehension.

        1. Moneta

          We know that most of the wealth is in the hands of the 55+ and we also know that the top 15-20% is still fine.

          Many them want the status quo because in their eyes, social changes usually take a while to shape up. Therefore this group is betting that they will not be here when the true change will occur.

          If we want change, we need this group on our side because they are the lackeys of the 1%.

          So here in Canada, one way we can get this group to swing to the side of the 99% and start fighting is by cutting pensions and letting real estate tank.

          Maybe there are other ways like drastically raising the minimum wage at the muni level…

          1. EoinW

            MP golden goose pensions could be cut with the full support of everyone but the politicians. The catch being the politicians are the only ones with a say and that’s not the kind of austerity that tickles their fancy.

            A bank bail in – which can now be done legally since the 2013 federal budget – would wipe out the 55+ savings instantly. But then you’ve won their support after it’s too late. Same problem with the real estate bubble popping, massive damage must be inflicted upon society before one gets massive public support for change.

            To further muddy the waters, the media will likely not even report on falling home values. Instead they’ll be talking about recovery long after the collapse is under way. At least a bail in would get people’s attention immediately. But then the media will be debating whether people’s money has been stolen or just borrowed a bit more permanently than before. I’m sure the day will come we’ll use tactical nukes and, instead of ostracizing the war criminals, our media will be arguing whether nukes have even been used.

            No worries, the barn door will be closed good and tight long after the horse has bolted.

        2. NoFreeWill

          The willingness to use violence is the only thing that will make the powers that be take notice, and I’m surprised that people on this blog are so slow to wake up to the fact. Revolutionary demands are the only ones that have a hope of providing hope.

    2. Moneta

      A clue is that they are selling bank loans to investors…. if these were so good, wouldn’t they keep them on their books?

    3. Ben Johannson

      I cannot comprehend the logic that it is better to forgo a current benefit in favor of a future one for which there is no guarantee, which is austerity in a nutshell.

  3. Finster

    An interesting piece, though very few discussions of the topic sufficienty clarify the three limits to credit/money creation of banks:

    1. Balance sheet constraints (is the bank sufficiently capitalized to increase lending?)
    2. Financing (where do I obtain the flow).
    3. Regulatory anchors. This is where the main refinancing rate, deposit rate and interest on xs reserves belongs. In addition point 1 is regulated via capital weightings and Basel rules.

    Only in understanding all three and their respective incentives plus the principal agent incentive structure in the banks themselves can we understand the credit and money creation in the system on a bank and aggregate level.

  4. Jim Haygood

    From ZIRP to NIRP (Negative Interest Rate Policy): we’ve walked through the looking glass, and emerged on the other side (the Bizarro World, in case you didn’t recognize it).

    Central banksters resemble a group of kids playing ‘gross out,’ with each jaw-droppingly vulgar act supplanted by yet another enormity.

    Draghi has upped the ante so spectacularly that the markets are expecting Yelco to paper the North American continent with a verdant carpet of freshly-printed hundreds. S&P 2K by the solstice is still possible, comrades, if we all pull together as a team!

    1. OpenThePodBayDoorsHAL

      What I find so amazing is that the huge majority of market participants and commenters do not see this as a hair-on-fire signal that our money system is completely and utterly broken. Look at the fine robe the Emperor is wearing, isn’t it lovely? It’s as though there is a giant festering cancerous mole on someone’s face but nobody wants to mention it. If this was the space shuttle then the O-ring just sprung a flaming leak…how is that not obvious to all?

  5. James Levy

    “only the most risk averse keep their savings in cash for long periods of time.”

    Yves, I think you’ve fallen into a trap there. You fail to note that millions of Americans have no savings. They live paycheck to paycheck or are destitute and/or homeless. It’s easy to forget those people, and you did. Inflation does hurt them, unless they are treading water and their debt burden is being reduced through the inflation. But that assumes that their income is keeping ahead of inflation while their debts are fixed, which may be a dubious assumption.

    1. Yves Smith Post author

      Yes, I should have been more explicit, but the hard money types are arguing that savings lose value as a result of inflation. My point is their own argument is bunk because it’s based on the assumption that savings are held in the form of cash.

      1. Jim Haygood

        If the data are to be believed, the bottom half have no savings.

        If your only asset is a SNAP card, inflation subtracts from its value. The only ameliorating factor is that if you hit the WalMart at 12:01 a.m. on the first of the month, you’re only exposed to a minute’s worth of inflation. Hardly even a gnat bite.

        1. MyLessThanPrimeBeef

          They would benefit the most from Money Creation via the Little People spending it into existence.

        2. craazyboy

          The SNAP card looks good…

          Hindsight helps a lot when investing. If you were a gold bug and bought at $300, your after inflation return is looking pretty fantastic, even today.

          If you were a 30 year treasury buyer in the mid 80s, you had a lot of “inflation expectations” cranked into your yield. Inflation moderated over time and this became real yield. Big win.

          If you are like most middle class boomers, it took many years to finally accumulate some savings. Retirement being the reason to have them. The age old advice to retirees is to very much underweight stocks in your portfolio. I say this applies even more with our currently overpriced and outrageously rigged stock markets.

          That leaves bonds. We are at a secular low in yields, and if you go long term as a buy and hold – sometime in the next 10-30 years inflation will steal your anticipated real gains, probably more The CBs of the world want that to happen!

          You can go “higher risk” for yield – say Spanish or Greek bonds. Then the ECB wants to find a way to deval the euro – so you get currency loss too. Stay with US stuff and you can buy securitized mortgages, car loans, credit card debt, and junk bonds – now even magically re-rated to AAA, but less yield due to lower risk, of course. I think anyone reading NC would pass on any of that.

          Then, I think I should get paid a little for the use of my money. Banks don’t lend for free, so why should I lend to banks for free? Ya, it’s FDIC insured but historically zero risk did pay a couple real percent. That’s another concept they are trying to shitcan – and is another way money just flows up.

      2. MLS

        Your point about savings is likely true (even allowing for the large number of people that have no savings) but it does not mean inflation isn’t destructive. It shows up most acutely in food and energy, which often run for long stretches at rates higher than the overall core inflation rate. These are staples of any household and the working poor pay a much larger proportion of their income to meet these needs than do the middle class and wealthy. Thus, inflation is often particularly hard on those individuals and families, the ones that can least afford it.

        The fact that wage growth doesn’t keep pace (for a variety of reasons, I won’t start that conversation here) only exacerbates the problem.

        1. zapster

          The problem I see is that the term “inflation” used to mean across-the-board rise, and it included wages. Whatever this is needs to be distinguished from that older meaning. Here we have wages not rising, but food and fuel spiking–which is what the vast majority of us spend a big chunk of our income on–and core inflation still coming in low by a variety of measures. The trouble is, core inflation is kind of irrelevant to our lives, if food and fuel is constantly cranking up. What this is is a side-effect of inequality. It’s too much loose money at the top bouncing around like a demented fairy spiking whatever it touches. Housing in some markets is through the roof, in the rest it’s stagnant. On and on. Luxury goods are selling but little else is.
          I nominate “fairyflation.”

      3. 50%er

        Yves, I follow what you are saying but for those who are currently afraid of the stock market, it sure feels like going backwards. Personally I have all my money in the market to protect myself against inflation but am very quesy about it.

        A couple of years ago, I put $10,000 in a local bank just as an emergency fund for one year. I earned about $4 for the year and then got a statement saying I owed them $32. No joke. I didn’t pay.

        1. Yves Smith Post author

          How is the stock market a protection against inflation when the profit share of GDP is at unsustainable levels and stocks can lose money?

  6. Malmo

    Can EU banks take their excess reserves under NIRP and gamble in the stock markets local and global or would banks rather loan excess reserves under NIRP, and to accomplish this end ease lending standards?

    1. scraping_by

      It will definitely encourage money velocity. Whether there’s anything worth the investment is another question.

    2. Ben Johannson

      Reserves can be used to meet requirements for making loans, for purchasing securities and settling payments between banks. They can’t be used to go out and buy up stocks, however.

  7. Chauncey Gardiner

    Negative real interest rates are the functional equivalent of expropriation. Why is the ECB (presumably in coordination with other CB’s through the BIS) adopting this policy?… really.

    1. Ben Johannson

      Because they think there is a mystical interest rate at which the economy will reach full employment equilibrium, and that because zero hasn’t worked that rate must be somewhere in negative territory. Krugman has been pushing that fairy tale for years.

  8. scraping_by

    One thing that slips past many of the news stories is that the negative interest rate applies to institutional accounts and not to small saver passbook accounts.

    If it applied to individual accounts in excess of a certain amount, it would be a backdoor progressive taxation. Since it’s just big money accounts, it’s more like sucking up some of the excess liquidity printed in the last six years.

  9. financial matters

    It definitely sounds like nonsense. Reserves and bank lending aren’t the problem. The problem is unemployment. Getting money into people’s hands creates demand. Demand encourages businesses to take out loans to increase production.

    And as Yves points out it leads to a negative psychology. Even though this is just between central banks and commercial banks it conjures up images of ‘breaking the buck’ and Cyprus or MF Global types of expropriation.

    Although this could be a good thing If it start’s to get more peoples attention.

    Asset purchase at least have a well proven outcome. Improving the lot of the 1%.

    1. MyLessThanPrimeBeef

      Getting money into people’s hands.

      Between the two, what do you like more:

      1 Additional money creation by the government, as the middle man, spending more of it into existence.

      2 Additional money creation by the little people, directly, spending more of it into existence (and into other little people’s hands).

        1. MyLessThanPrimeBeef

          Me too.

          It’s time we say, ‘Enuf of descriptive already.’

          Let’s remind ourselves, Descriptive ≠ Etched in Stone.

      1. skippy

        Um… most of the money is created by the private sector and little people don’t create money, they just consume it. In addition the little people have been conditioned over some decades, the resulting generational effects pretty much preclude any such ability even if such a thing were possible.

        Skippy… the increasing environmental challenges makes all rear view mirror approaches moot, so whats next.

        1. Malmo

          “Um… most of the money is created by the private sector and little people don’t create money, they just consume it.”

          It doesn’t necessarily have to be this way.

          What are the environmental challenges that make #2 so insurmountable relative to #1?

          1. skippy

            Fracking for energy credits et al destroys future potential, along with other biological – resource tipping points, which have already been surpassed or on the verge of thingy. So little people groping around to find ways of creating personal value, in a random hit or miss experiment, in the knowledge of the conditioning aspect, sounds more like a “lets leave it up to the gawds” sort of plan.

            On #1 its not a tool problem but, that of the control user, which is political in nature. Hate to say it, but, society creates value and not the individual e.g. if the political [fiscal] issue is not addressed, those that might be able to create value on a small scale will just end up as low hanging fruit. Pretty much the SOP these days, start something and hope you get plucked, for a one off pay day and not beaten to a pulp. Its almost like a NASCAR pile up, slowing down only exposes you to more risk, better to punch the gas and come out the other side, decide if you want to race again or retire in comfort.

            Skippy… a country full of exceptional individuals all seeking personalized value…. sounds like a neoliberal paradise.

              1. Yves Smith Post author

                Hugh violated clearly published comments policies and persisted after being told why his conduct was out of line. Hugh refused to change course. Commenting is a privilege, not a right. Anyone who breaks house rules after being warned is not welcome.

                We enforce those rules whether the commentor is in line with our views or not. We’ve had several instances of commentors who increasingly treated the comments section as their personal soapbox and took it upon themselves to enforce their personal party line, which happened to fall in with NC’s worldview. We’ve also had the more mundane issue of readers getting abusive with other readers in comments or talking up far too much airtime on posts on their pet topics. When we contact them privately to tell them that their conduct is running afoul of our policies, a few shape up, some go off in a huff, and those who can’t refrain from their problematic conduct go into moderation or are blacklisted. But some like Hugh choose to continue the war on other sites and make patently false accusations.

                And they all want to make it about their content, and not their conduct. This, as always, was about conduct.

  10. flora

    Take these lines from Matt Stoller’s linked article about “Con-Artist Dems” about Geithner:

    ” In traditional bank runs, depositors would be afraid their bank could not honor deposits. Banks would put bricks of cash in the windows, a visible “wall of money,” to assure lined up customers they needn’t worry, that the bank was solvent. ”

    Add Yves last line from the into to this piece:
    “The long-term impact of lowering the level of trust in the financial regime may be much greater than the experts anticipate. ”

    This will be interesting to watch.

    1. MyLessThanPrimeBeef

      There is also the moral issue of a central banker forcing people to take more or higher involuntary monetary risks.

      It’s like someone telling you to take involuntary physical intimacy risks.

      1. flora

        oh, I think the OCC, the SEC et al have been making those suggestions to Main Street for some time now.

  11. redleg

    You are right but this violates the trickledown worldview of the oligarchy. Change must overcome the double inertia of self interest plus admitting their paradigm is utterly backwards.

  12. MLS

    At best, it could weaken a bit the exchange rate of the euro, if the rate cut is not yet fully priced in.

    With the benefit of market action, we can safely say that this move was priced in. As I write this, the Euro has bounced off it’s low of $1.3514 and now sits $1.3633, higher than immediately before the ECB announcement.

  13. Fiver

    Western Central Banks have been passing the Wand of monetary ‘easing’ in some form or other since March 2009, and it has demonstrably failed the public interest everywhere – US (3-4 rounds depending on whether ‘Operations Twist’ counts) UK (3?) EU (3 rounds) Japan (3 at least). In addition, China, until very recently pumped solid rocked fuel into its already mammoth bubble. So there is no doubt purchasing power across the developed world has fallen as each of these currencies has in turn been degraded – it’s just a question of whether it has fallen for you, and the things you want to buy. If it’s food, energy, health care, education, housing, you’re out significantly more money. If it’s everything else you buy, i.e., everything in your house, all consumer toys, the great bulk of what you see anywhere on store shelves, you are indeed seeing smaller price increases. But why?

    Seems to me the ‘inflation’ bogeyman is alive and well and has taken up semi-permanent residence in asset prices. ‘Wage push’ inflation, first crushed by Volcker, has been exported elsewhere along with the many millions of middle-class jobs that have disappeared across the developed world to be replaced by workers in China, India, Turkey, Vietnam etc. working at somewhere between %5 and 10% of what it costs to pay to do the same work in the US.

    US and developed world middle-class real purchasing power has flat-lined for nearly 20 years. The mechanism for driving ‘inflation’ was deliberately broken by globalization by essentially capping wages and some salaries. If all that production was returned to the US and Japan and Canada and the UK and Europe wage/goods inflation could once again be the arena for ‘inflation’, but as is obvious now, the inflation arena now sports stocks, houses, property, commodities etc. The developed world’s middle-middle, lower-middle and working poor income segments, were they to somehow re-patriate their former jobs and start tomorrow, would bring a huge spike in wage and goods inflation with them, along with higher interest rates. The Fed-inflated assets would quickly slide back towards the mean – remember the wage-earners of today are not investing in anything, just able to buy more of what they need, thus won’t be investing and won’t for some time even given a more reasonable wage environment. The economy would be far better and the Fed could itself revert an old stodgy, faceless, creatively challenged bunch of farts ‘tweaking’ away to keep inflation under %3 and employment high.

    Neoliberal corporate and financial globalization are the root-causes of these huge and growing asymmetries within the developed world, and between that world and the developing world – global corporate offshoring of production to sell that production back into ‘developed’ markets has proven disastrous and will only get worse the longer we’re in total denial as to corporate globalization’s strategic race to the bottom.

  14. Chauncey Gardiner

    Interesting that the ECB increased its loans to “euro area credit institutions related to monetary policy operations” of 39.7 billion euros , during the week ended May 30, 2014, ahead of Draghi’s announcement. Cursory review of prior periods suggests this is a significant policy pivot. Why and Why Now? (Here’s looking atcha Fed and BoJ).

  15. chris

    ECB negative interests… so people will probably run from cash. How do you think this will effect investing in share and fund etc,.

  16. Roland

    So a wage-earner actually manages to put a bit of money in the bank, and now some of it gets confiscated. Great way to tax the sort of people who already cannot afford to speculate. Make no mistake, the burden of this will fall upon proletarians. The 1% won’t lose from negative interest rates.

    The people who were sort-of getting by, now are the target of coercion by the central authorities. After all, how dare anybody save something out of their wages. People with the least capital are forced to try to save the whole economy, even as they own less and less of that economy. If many proles are unemployed, then put the blame on the proles who are breaking even. Confiscate prolesavings, subsidize finance capital! Go Team Bourgeois!

    Savers are now forced to buy the crap financial assets generated by a bunch of proven kleptocrats. More management fees for all these “investment funds,” which means extra bonus points. Self-licking ice cream cone, as the saying goes on this site.

    I guess it’ll be cheaper for workers to borrow more heavily against whatever remains of their home equity.

    Meanwhile, the speculators get an easier ride than ever. Moar bubble.

    Hedonics is a garbage idea altogether, excuse-making for inflation, a lie to the people. Why don’t hedonic prices get adjusted upward for all the new houses with shoddy building envelopes that cost thousands more in lifetime maintenance costs, and for the GMO food we get to eat.

    Has there ever been a documented case of an upward hedonic adjustment? Is there any evidence that those making hedonic adjustments have any intellectual honesty?

    Outside of infotech, hedonics are irrelevant. Even then, bear in mind that it’s impossible to keep your old computer in frontline service the way you can keep an old automobile on the road. Twice I’ve been forced to replace hardware before the end of its service life. Forcing mechanism works thus: employer changes interface I need for work, which means I need software upgrade, which means I need new OS, which means I need new hardware. Then somebody comes up to me and extols the wonders of hedonics.

    So bring on the barbarous relics! Another investment I’m forced to buy, thanks to the barbaric conduct of our technocrats. Stupid, of course, but what else can you do when your system is run by fools and thieves?

  17. theyenguy

    You ask, what is next?

    Authoritarianism is next.

    The June 5, 2014 Mario Draghi ECB Announcement of NIRP and Targeted LTROs, produced a stunning moral hazard based prosperity in fiat money, and produced the zenith of liberalism, defined as freedom from the state, as investors drove World Stocks, VT, Nation Investment, EFA, Global Financials, IXG, and Dividends Excluding Financials, DTN, to produce peak Equity Wealth, while Peak Currency Wealth, DBV, and CEW, was achieved in the third week of May 2014, and Peak Credit Wealth, AGG, was achieved the week ending May 30, 2014.

    The age of currencies and the era of credit came to an end the week ending June 6, 2014, as stock investors drove Equity Investments to their grand finale finish, manifesting as three long white candlesticks in the weekly chart of the S&P 500, SPY, at a time when the bond vigilantes, called the Interest Rate on the US Ten Year Note, ^TNX, higher to 2.59%.

    Peak Equity Wealth is seen in the chart of World Stocks, VT, relative to Aggregate Credit, AGG, that is VT:AGG, rising parabolically, and then peaking in value in the week ending June 6, 2014.

    The Mario Draghi ECB announcement of NIRP and targeted LTROs produced a blow off stock market top on Friday June 6, 2014, and at the same time has birthed the Beast Regime, to replace the Creature from Jekyll Island, which ruled in liberal policies of investment choice and in schemes of credit. Soon out of the waves of Club Med sovereign, banking, and corporate insolvency, it will rise to rule the world in authoritarianism, specifically in policies of diktat in every one of the world’s ten regions, and in schemes of totalitarian collectivism in all of mankind’s seven institutions.

    The age of diktat and the era of debt servitude commenced on the June 5, 2014, with the mandate of Mario Draghi for a 0.1% surcharge on money held overnight at the ECB. His word, will and way, will compel the debt serf, to experience economic life in regional fascist leader’s policies of regional economic governance, which establish regional security, stability and sustainability.

    Thus the Mario Draghi announcement of NIRP and targeted LTROs was both a climax event, one of peak wealth. and also a genesis event, one of the beginning of a new economic age of authoritarianism.

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