Negative Interest Rates And Central Bankers: MacGyver Money
The ever resourceful MacGyver had nothing on ladies who lunch.
Well-heeled women who meet for long lunches — often for a good cause, often for a nice pause – simply have more ingenuity than the late 1980s action-adventure TV star. Take a case in point from the Great Financial Crisis: Their wallets stripped unceremoniously by their husbands of their credit (cards), armies of determined women descended upon Needless Markup with something more powerful than a piece of plastic. Back in the day, unbeknownst to their hapless husbands, there was no need to carry a physical card to get the day’s shopping done. Zip, zap, charge that! And away they fled, packed with fancy furs and frocks, teetering under the weight of designer bags and baubles. The destination? But of course, the high end consignment shop that paid a premium for NWT, as in new with tags, in cold, hard cash.
These circa 2009 wives followed generations of women who had fashioned ingenious ways to maintain their lifestyles regardless of where the business cycle may have been. The secret ingredient throughout the ages has always been cash – actual currency whose circulation is now at risk. It’s safe to say that the drug lords and other money laundering sorts will have their own lobbyists strong- arming politicians to shelter the means to their ends. But it’s the Ladies the brilliant economists should fear most.
The past few months of heated debate about the efficacy of negative interests has predictably led to talk of banishing currency as we know it. Which has led to a chorus of livid Ladies’ replying: “over our dead bodies!”
A bit of history here. The origins of wives who stealthily siphon money from their spouses in one form or another is technically an unknown. What can be posited is that Romans preferred cash over credit transactions. After the fall of Rome, banking in Europe went into a 700-year long hiatus and would not enjoy a renaissance until Henry II levied a tax to raise the vast sums required to finance the crusades.
Suffice it to say the fall of Rome was a traumatic event for the average Italian housewife. Perhaps it was then that the tradition of a cash society extended to the advent of mama’s mad money. Why, the writer of this commentary herself was schooled in the fiscal fine art of establishing a cash stash by her Nona from Naples.
Spring forward in time to the aftermath of the latest financial crisis, which was not unlike the fall of Rome in terms of the still-unfolding disastrous consequences. All of that haute couture hocking by the Ladies presumably left its mark on these savvy socialites, who no doubt placed little faith in central bankers’ ability to juice the economy into overdrive. Nope, the Ladies had read that trashy novel and knew how it ended the first and second times that their husbands callously stripped them of their plastic armament. They surely weren’t going to be fooled three times regardless of the fact that the title had changed from the Dotcom Miracle to the Great Moderation. Plus, what kind of a title was Quantitative Easing away?
Nope, these liquid ladies have plenty of cash stored up for the next time the financial markets bring on forty days and forty nights of rainy misery. Plus, Needless Markup now requires actual credit cards to transact. So a higher degree of MacGyverism would be needed to make money appear out of thin air this go round.
News that the government, acting in their best interest, was set to abolish Benjamins as a store of value and means by which to luxuriously lunch would be greeted with understandable umbrage. Hiding their hoard would be all that much more challenging if they had to increase the number of bills in hand tenfold. For sympathy, they could look to their Italian counterparts who are no doubt seething following European Central Bank President Mario Draghi’s pronouncement that the 500 Euro note need go the way of the dodo bird.
But why bother? Better to fight the first fight of moving to negative interest rates which brings up the nasty need to abolish cash in the first place. That shouldn’t be too difficult for the Ladies given the fair chair of the Federal Reserve is also a woman.
The added economic benefit, which Janet Yellen would naturally be inclined to nurture, would be the preemptive salvation of grey economy jobs that would otherwise be sacrificed, yes even here in America. (Italy may not get off so easy if Draghi succeeds in doing his own people in.)
To procure even more political and moral capital, Yellen could speak for the masses of hard-working Americans who live on a pure cash existence due to the prohibitive cost of joining the banked.
Merchants would also no doubt side with her given the savings they enjoy every time a purchase rings up in cash rather than with a debit or credit card. Tis true, those three-percent transaction fees do add up.
And then there’s that lowest of low hanging fruit. Yellen would save borrowers money. Bankers wouldn’t be forced to raise interest rates on consumer loans to offset what they will never do; that is, levee a de facto tax on their depositors. Ask would-be Danish homebuyers how they feel about negative interest rates. But don’t be surprised if you get a steely stare in return.
It’s with good reason that The Lindsey Group’s Chief Market Analyst Peter Boockvar calls negative interest rates “weapons of mass confiscation.” That is the very essence of negative interest rates. And yet the brain trust that dreamed them up has deluded itself into believing they will force lending into the economy when they will do no such thing.
Yellen’s taking the path of most resistance in pushing against the colossal consensus campaigning for negative interest rates will deliver the greatest rewards to the fragile financial system by mitigating the damage inflicted by the bursting of the credit bubble. This will garner all manner of merit points as Yellen convincingly demonstrates how she has endeavored to safeguard the sanctity of the global financial system.
The alternative? According to the data on hand, negative interest rates risk transforming the current credit bubble into something more epic in scope. According to Moody’s most recent refunding, study, nearly a trillion dollars of high yield debt matures between now and 2020. Bank credit facilities comprise $580 billion of the total (think all of those energy lines of credit that banks will be closing soon). Some $367 billion are junk bonds due to mature.
If you aren’t on board with the lunching Ladies’ conclusions that lower for longer will not make the country stronger, consider the following: high yield maturities have skipped upwards by a fifth since Moody’s senior analyst Tiina Siilaberg last trudged through this exercise a year ago (alas, tallying up these enormous sums leaves Siilaberg no time to lunch.).
As is the case with all credit cycles gone wild, some heyday deals will inevitably rise to poster child status. Vying for this distinction are issuers tied to $255 billion in debt that comes due over the next five years that have leverage that exceeds six times their earnings before interest, taxes, depreciation and amortization.
What could keep these companies that are drowning in debt among the living? Since you happen to ask, negative interest rates, of course. “The risk is that negative interest rates encourage companies to continue leveraging up,” Siilaberg warns. “It’s true that negative rates will postpone the default cycle, but once it arrives it will be deeper and more widespread.”
Granted, such brave action would require Yellen, whose views channel the spirit of Keynes on steroids, to wax Austrian. Though it might feel akin to a lobotomy being married to an out of body experience, the metamorphosis will win her a remarkably favorable place in the history books.
While Yellen is diligently saving the world economy, she might also declare a moratorium on zero interest rates, designating three percent the new zero. Though this will require an inordinate amount of will and undoubtedly be accompanied by recession, doing so would eventually place the banking system on surer footing to better withstand future downturns.
The irony is that such a move would unleash a torrent of hard currency back into the banking system that fled when it stopped paying to save. Mattresses countrywide would be that much flatter for it. After all, why save as much for a rainy day if future forecasts call for less precipitation?
Maybe central bankers should follow the Ladies’ lead beginning with watching MacGyver reruns for inspiration. Then, using the central banking toolkit equivalent of a paper clip, ballpoint pen, rubber band, tweezers, nasal spray and a turkey baster, they too could accomplish the impossible without having to deploy negative interest rates. The beauty of it is central bankers have had the clever tools all along.