Realist, not conformist analysis of the latest financial, business and political news

Central Bankers May Blow, But They Suck At It

AESOP wrote in the 6th century BC about the North Wind and the Sun competing to remove a traveller’s cloak from his back.

The more the North Wind blew, the tighter the traveller wrapped his cloak around him.

But when the Sun beamed, he removed it of his own accord.

Central bankers have clearly forgotten their AESOP – they have spend years trying to remove our savings from our bank accounts by blowing their chilly North Wind of ZIRP on them, and are even talking about a hurricane of NIRP, but yet what do we see?

More savings.

And why?

Well, because when you are told that your nest egg is yielding less income than you had planned, you don’t give up and start spending it. You save more, to increase its size.

Turns out that grandpa wanted $2000 a month with which to play golf and at 5% knew he needed a $500K nest egg. Now he is getting 2.5%, the nest egg needs to be……

So he is desperately tucking away more.

So much for the windy egghead central bankers, who were sure that less interest would mean more spending.

The Sun is higher rates – allow the market to deliver returns to investors and they will spend of their own volition. But of course highly indebted governments can’t afford that, as who would buy bonds at 1% when they can get low-risk 6% elsewhere? Ergo, governments have forced bond yields down and…………..debt stack collapse.

I guess we are about to see whether negative interest rates will do the trick – will retirees take their money out of the bank if charged interest to keep it there?

Yes, probably.

Will they spend it? Who knows? I doubt it.

Of course if NIRP is going to cause bank runs, we might see capital controls. Probably best to ban cash first.

Can’t have those old people taking their money out at the same time, can we, unless we want to see the ghost of George Bailey again.

It turns out that the central bankers are just like the North Wind. They blow, but they suck too.

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3 years ago

Thanks Alex! As so many things in economics it seems to work the other way around to the textbooks… most economically savvy people start with a goal and say “how do I get there”, rather than looking at what they have and saying “what can I do with this”. Until policy makers appreciate that’s how the main tax contributors work, they’re doomed to Einstein’s insanity.

3 years ago
Reply to  Grendel

Indeed, interesting article. I also note that every time I hear a pollie burble “more flexible labour market” as part of a ploy to supposedly improve a weakening economy I note people spend less. Job security matters to the proles but seems to escape the brilliant minds in national Treasuries.

3 years ago

I do finance for a living and a back of the envelope calculation using standard finance formulae suggest that, with a negative interest rate, you will end up with a higher discount rate on investments than with a positive one. It’s all down to expectations. Econ 101 tells us that interest is the reward for deferring consumption. Ergo, a negative interest rate must mean deflation. In Japan, when they moved to negative interest rates, inflation expectations backed out of goverrnment bonds fell and has struggled to reignite since. Talk about pushing on string and Aesop’s story is a really great… Read more »

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