Friday, February 20, 2015

Understanding low interest in the risk adverse "free market"

Alrighty, in the meantime while I debate with myself what to do with this blog I do have more stuff to say about things. Last night I accidently published this post in an incomplete state and it was picked up by progressivebloggers before I could delete it. Oddly just my summary garnered two votes (as the link to the post itself is now dead) so I must be on the right track! We've been talking a lot about C51 (or what we shall dub 'the Orwell act') but plenty has been happening in the global ponziconomy too (which is why Canada is now moving so rapidly to get these "anti-terror" freedom killing laws in place).

The spectre of negative interest rates in Europe really is something isn't it? It occurred to me when the Swiss announced their further rate cut (though now that rates are negative maybe "rate increase" is more accurate in the new normal) to -0.75% that really in this bizarre risk adverse world makes perfect sense. Behind all of the jargon, the supposed intent, is a declaration: the omnipotence of the central bank and it's printing press, destroyer of risk.

Of course the idea of total risk banishment is quite insane, which provides the logical basis for why economists believed negative rates were impossible. No one in their right mind in a sound economy would pay to hold risk and yet somehow, they are. This indicates that either the basic logic surrounding risk has been flawed all along or that the global economy is far from sound. My bet is on the latter.

It's been awhile since we've gotten deep into banking so I will rehash some of the more important relevant points needed to fully understand what negative rates (or for those nations that haven't crossed the 0% barrier yet, continually decreasing rates) anywhere in the world now represent. The starting point for this story of utter insanity is your bank account.

You earn interest on your "deposits" in your bank account at a floating rate loosely based on the overnight lending rate. I say loosely as because with all other commercial rates banks don't actually have to follow the central banks overnight rate at all with their prime rate but largely do follow the trends as their competitors likely will follow them thus making their loans more attractive (collusion of the banks on rates such as in the LIBOR scandal is obviously implied but outside the scope of this write-up). To not match the rate change especially when the rate is lowered amounts to the commercial bank quite obviously pocketing the difference as they are now borrowing cheaper than they are lending themselves.

The reason you earn interest on your deposits is because you are assuming risk, you are not a depositor, in fact you've deposited nothing into "your" bank account but rather what you have done is loaned the bank your "deposit" so that they can take it and loan it to someone else and earn interest on it to boot. They keep a small portion of your "deposit" on reserve and the rest is out the door being loaned at interest as soon as possible.

Interest rates and monetary policy, or at least the people's perception of these things, is extremely important today; the fact you see central bankers making headline news is a testament to that. If the global economy were truly even remotely healthy they wouldn't need to be out nearly everyday reassuring markets and providing forward guidance. Prior to 2008 most people barely knew what a central bank even was. Yet despite all the talk about interest rates, and all the talk about growing inequality and the generational gap, very few seem to talk about growing inequality and the interest rate policy together at the same time.

With prolonged low interest rates, along with the ever increasing introduction of "bank fees" which shouldn't exist at all or "ATM fees" (which shouldn't exist either as banks introduced ATMs to reduce their direct labour cost in tellers) multiple generations now have had to live with savings accounts that earn literally less than nothing. At the end of the day we have already been paying banks for the risk we assume in their lending as over time the concept of "savings and loan" has been distorted.

The global economy hasn't been sound for a long time and the spectacle of low and negative interest rates is simply the next phase in it's long deterioration. With low interest rates the only way you can get a return on your savings is to "invest" it and that is the direct intent of the central bankers: to force you to play the investment game and feed the market and ponziconomy. Of course to invest in the market you have to have some significant amount of capital actually available to invest, if you don't and are living cheque to cheque you currently have no avenue to earn a return on your income and keep up with the rate of inflation, you are losing money simply by holding on to it and the concept of "saving" is nearly impossible.

Explains a little bit why despite the constant broken promises of "recovery", uncertain "growth" prospects, and a continually worsening geopolitical situation, world markets just continue hitting new highs without a care in the world, doesn't it? Which the political class then uses as evidence of the illusive recovery narrative we hear so much about yet don't see in daily life.

There is an investment side to this story as well, aside from forcing citizens into the rigged market interest rates are also being used to make sovereign bonds and their perceived "safe haven" status less appealing by artificially increasing demand for the bonds. The goal here is to push investors and people looking for a safe place to retain the value of their income back out into the risk laden market which in fact proves the logical fallacy of sovereign bonds being a safe haven.

Sovereign bonds are perceived to be safe because they are backed by the government, which is in turn backed by "the people" (or more accurately the people's labour). As I've pointed out before you are in fact nothing more than a human resource. Your S.I.N. or Social Insurance Number represents you as collateral on the public debt.

So what do negative interest rates say? They say that no matter what the people's labour that is backing these bonds will in any circumstance and with no chance of failure absolutely will be able to produce enough wealth to pay back the bonds. This concept seems fine and dandy until you remember that the way people produce the wealth that is to service this debt is by working for the companies whose future is so uncertain that central banks are having to artificially lower interest rates to drive investment dollars into (which the companies are themselves taking and instead of expanding are simply engaging in stock "buybacks").

We've now come full circle, and as Greece's situation shows the people will only tolerate having their labour used as collateral on the debts so long as they're getting something out of it. The "Troika" has been forcing Greece to hand over not only their public assets but the spoils of Greece's human labour itself as previous government's, like all government's, have put their citizens lives up for collateral on the debt with absolutely no guarantee it can actually be paid back. It is the citizens who suffer while those in the oligarchy use the public debt for their private gain and stick the people with the tab.

There is one final piece to how low interest rates, or negative interest rates, are being used to kick the economic can down the road and that is by making consumption in the post-peak-oil world seemingly more affordable especially when it comes to the housing bubble, student loans and auto loans, and most importantly cheap loans for expensive energy production in an effort to make the projects seem temporarily viable.

The importance of low interest rates for the banks, and their vested interest in extreme energy producers can not be understated. Often I talk about the fact that contrary to popular belief amongst Canadians big oil doesn't sit on top, the banks do and big oil operates at the behest of the banks. There is no intrinsic interest in oil for the oligarchy beyond the fact that oil (cheap conventional oil, to be exact) is the only energy source that can support infinite exponential growth.

The energy companies own all of the patents to "alternative energy" (in reality derivative energy), the resistance to begin the long process of switching to other energy sources is not rooted in some ideological dislike for "Green energy", it is rooted in the fact that switching to Green energy will collapse the ponziconomy. Not the people's economy, the oligarchs credit ponziconomy where more and more loans must occur to service existing debt, where more and more consumption must occur and saving must not, where more and more must be produced quicker, sold faster, and made cheaper.

The ponziconomy requires an ever growing energy surplus to support infinite exponential growth while the green economy inherently represents a contraction in the energy surplus (doing more with less) and would require a sustainable balance between the environment and the resources we depend on and economic growth. Under this scenario the borrowing binge the western world has been on with no proof the debts can ever be repaid would be impossible as the risk and uncertainty around future wealth would be much more apparent and interest rates that account for this risk would likely follow. It is the historical observation of the results of an economy running on cheap conventional oil which provides for our (always wrong) future outlooks today.

The reason economist theories and predictions on growth and the effects of interest rates, currency pair valuations, and the like are not working out is because the fundamental structure of the economy has changed. Forecasts are no longer being made based on proof of potential future production, they are being made on the hope of it.

The migration from oil would also mark the migration of the status-quo towards something more honest, balanced, and which wouldn't revolve around "growth" as a measure of success because growth itself inherently is not wealth we've just been fooled into thinking it is. Concepts like "planned obsolescence" provide a glimpse into how quickly consumables must be turned over these days to keep "growth" humming, which represents the waste of wealth not the accumulation of it. GDP today in a world that has peaked it's natural growth potential is now a measure of energy inefficiency and nothing more.

Depending on the actions Greece takes the confidence in central bank omnipotence itself may be in danger (hopefully in danger, as every day the world continues under this false reality adds to the impact the resulting monetary collapse is going to have when these bond bubbles finally pop).

The great deflation

The majority of the world economy is now supported by near zero, zero, or negative interest rates. Seven years on from the peak-oil induced "great recession" central banks are finally out of ammo. Inevitably this situation can not last forever and with the Saudi's pushing the collapse in oil price the stage has been set, and in fact the play is already in the first act, for deflationary spiral the world has never seen the likes of before because the world has never seen a fiat asset bubble of this size before.
The expected benefit economists are expecting from lower oil and gas prices are not going to materialize as the middle class which is the primary driver of this trend has been crushed by unaffordable consumption and debt accumulation. The easiest path for this excess wealth to take is towards paying down debt which in itself is inherently deflationary and will only contribute further to the deflationary spiral we've entered.

The artificial deflation of oil is having a direct effect on the outlook for oil related employment and income which both Canada and the U.S. have been completely reliant on for wealth generation. The entire myth of the current "U.S. recovery" which Canadian economists are banking on is essentially based on the economic performance of the shale oil industry prior to the collapse in price (you'll remember the latest U.S. recovery narrative was originally about the boom of shale oil) which is no longer valid. Without the high incomes oil related jobs provide the unaffordable asset bubbles become completely unbalanced. This is why the Bank of Canada is citing mitigating the effect of low oil prices (lower inflation) as the reason for lowering interest rates while effectively ignoring the increase in inflation high oil prices represent. They are selectively interpreting the situation to service their own needs of maintaining the credit markets.

No amount of low interest or free currency can ever hope to make up for the loss in energy bounty as a result of peak oil and the focus on low EROI energy production though as currency is not wealth itself but the representation of wealth, it has an end of life and this is where C51 becomes very important for the status-quo.

I'm very happy to see Canadians quickly becoming wise to the obvious implications for those fighting the environmental fight in Canada though unfortunately I believe it is also leading to another false narrative in regards to it. While the critical infrastructure portion of the bill is important what is most important is that "economic and financial stability" is mentioned.

When you consider the great deflation of the credit markets, the asset markets, and then throw in the newish "bailin" regime and insufficient funds held by the CDIC to insure Canadian deposits the picture of inherent danger of C51 becomes a lot more clear. The broad reaching implications of this bill did not happen by accident.

You can be certain that when the deflationary pressure hits Canada in full force the government will become even more aggressive in it's "economic action plan" likely at your expense. Why is the government pushing pipelines? Why did the government reduce rail safety standards? For the economy, and as the real affordability of economic consumption declines more and more shortcuts will be taken to make up for it.

The further along we go down this rabbit hole the more obvious it will become that western governments have gone rogue and are sacrificing the livelihood of the people in the name of economic growth to service the private banks. They will sacrifice your livelihood by reducing your safety in the name of economic growth and they will sacrifice your livelihood by offering your deposits to the alter of debt as enshrined in their "bail-in" regime in the name of economic stability. The illusion of "voting for change" will disintegrate the moment people realize every single party stands for the same thing: growth at any cost. The people of course will be covering that cost.

Eventually the inevitable conclusion will be reached (as it almost was with the Occupy movement before it was co-opted) that only a direct revolt by the people and a rejection of the infinite growth model will offer any significant change and it is for that eventuality that C51 exists.


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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

1 comment:

  1. As rates of return drop, even risk-averse investors might have to assume more risk. For instance, a certificate of deposit paying 1.5% interest might not be enough for savers if inflation is higher than the rate of return on the CD. Many savers look elsewhere to earn enough return, often assuming more risk than they otherwise would have or just apply for extra cash in a form of fast loans online.

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