Japan: Negative Interest Rate Policy Is a Bust

WSJ: Pushing a String

In Japan years of trying to spur consumers to spend rather than save through negative interest rate policy has turned out to be completely ineffective.  The Japanese apparently love to save rather than spend.  Anybody got any other good ideas?



Nobel Laureate Chris Sims on NIRP

A Nobel Prize-winning economist is back in the spotlight. Christopher Sims is challenging a widely accepted claim. It was the speech he made at the Jackson Hole meeting last summer where central bankers from around the world gathered which caught attention. He argued that in times of low or negative interest rates, monetary easing alone may not be enough to spur inflation. And his theory is inspiring policymakers around the world, especially here in Japan.



Searching for Yield: Investors Pile into the Dollar for Higher Yielding Investments

History will probably show that central banks’ monetary policies were akin to bloodletting– long discredited as an effective form of medical treatment for the sick and dying.  As easy cheap money floods a particular banking system, the currency becomes less desirable on a relative basis; investors convert into other currencies with higher yielding investment returns (even if negative).

As the Fed has held the line against moving to a negative interest rate policy,  the Trump rally has locked in the expectation of higher growth and higher yields for U.S. investment. Investors rush in to buy the higher yield dollar causing significant appreciation relative to other currencies. Dislocations will occur and some people will make a lot of money and others will be on the other side of the trade.

How Does Negative Interest Rate Affect Currency Prices

Central Bankers’ Chimera: the ‘Natural Rate’ ?

Is the natural rate nothing more than a Chimera: a mythological fire-breathing monster with a lion’s head, a goat’s body, and a serpent’s tail that are fun and a bit scary to think about… doesn’t actually exist? Like a nasty unicorn on steroids facing a down round?

WSJ: http://www.wsj.com/articles/central-bankers-zeal-for-the-natural-rate-draws-skeptics-1481476667

Chimera: a mythological fire-breathing monster with a lion’s head, a goat’s body, and a serpent’s tail.

It’s Just Math: Negative Rates Crush Investors’ Returns… and Business Models

WSJ: Era of Low Interest Rates Hammers Millions of Pensions Around World

It took long enough but the main stream media has finally caught on. Negative interest rates policy across the globe has created devastating effects on investors and savers.  Retail and institutional expectations for investment returns since the mid-nineties  have ranged from 6-10%.

Treasuries in non-U.S. economies are at zero and below with the U.S. 10-year benchmark bouncing around in the 1.5-2% range.  Pension funds will not meet their actuarial assumptions.  As a package, negative rates will create potentially disastrous dislocations in the financial markets-equity, bond and currency alike.  The world’s largest and most knowledgeable bond players such as Larry Fink and Bill Gross have been sounding the alarm for some time to no avail  But now it sounds like folks are starting to get the message.  Check out this article from the Wall St. Journal…


NIRP Collateral Damage: ECB Can’t Get No Satisfaction; Marking to Market When BB’s go from T+800 to No Bid

Euro Designer Prof. Otmar Issing issues warning

[Editor’s Note: Is one of the unintended consequences of NIRP that the ECB is about to run out of eligible collateral to support their global carpet remnant purchases of junk bonds and other detritus? This is what happens when the system is flooded with too much liquidity.  Even central banks can drown. ]

From The Telegraph:  Euro ‘house of cards’ to collapse, warns ECB prophet

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

 “One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency.





Ken Rogoff: In Support of Negative Interest Rates

From Ken Rogoff’s October 11, Financial Times Op-Ed



“It would be wrong to abandon the policy of negative rates The alternatives are deeply unattractive” writes Kenneth Rogoff.  But here’s the real rub.

The mixed results from experiments with negative interest rate policy in Europe and Japan have led many to conclude that the idea is ill begotten and should be abandoned. To do so would be a serious mistake.

The word “experiment”  and “central banking” never belongs in the same thought or sentence. Ever.

Here’s his Op-Ed


How Is This Still a Thing? The Generalized Autoregressive Conditional Heteroskedasticity (GARCH) Model

Like daylight savings and Columbus Day some things exist just because they do.John Oliver’s

John Oliver’s Last Week’s News Tonight  features a segment called How is this still a thing? The Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model is used for estimating stochastic volatility and optionality.


The real question is: How was this ever a thing? If one CEO could pronounce it, there might be a ray of hope the global financial system isn’t doomed.


An Anomaly Here, An Anomaly There: Cracks in the Model When It Comes to Constant Elastic of Variance (CEV)

The math is a little beyond introductory algebra,but what is clear is that some of our most important pricing models are not designed to accommodate negative interest rates. What’s a regulator to do?

Now that interest rates have become very low or even negative it is no longer reasonable or even possible to use Black’s model since it does not allow negative rates. Of the four models only the Bachelier model allows rates to become negative. In the other three cases when rates may become negative it is necessary to modify the model by adding a shift, ss, to the forward rate. For example, the shifted or displaced version of Black’s model obeys 


Are Low Rates the Cause Not the Cure of Our Economic Malaise?


From: This Week in Asia

“For years, central bankers in the developed world have been trying to battle poor economic growth and weak demand with ultra-low, and even negative, interest rates. It’s not working.”