(The Rising Negative Rate at Zero Marginal Cost)
Does the Fed act to cause a trend, or does the determination of a trend cause the Fed to act?
Banking is a free enterprise. Fed-member banks are not controlled by the Fed. The central bank has lowered rates close to zero to incentivize banks to use money for economic expansion and job creation, which would then yield the Fed’s inflation target.
Low interest rates indicate a deflationary trend. This has reversed the way financial institutions, like insurance companies, use bonds to hedge the risk. It raises the rent on the riskless return (sovereign debt), forcing their interest into equity markets, which accounts for concentration risk (rising rents) in equity markets.
(Remember that the interest rate reflects future expectations at current value. Expecting the riskless rate of return to fall to zero, financials reverse the expectation of what taking risk really is.
For most people, negative rates don’t make sense, but for the Fed it makes sense to go negative if it means preventing a financial collapse in the future, based on the way it looks now.
So, what happens if there is another collapse? There will surely be a bailout because SIFIs are by definition TBTF now. Capital reserves would be liquidated to resolve the problem, but that means the Fed is stuck with worthless bank notes it bought from the banks to build up the reserve system, which is intended to not fail. Financials then work in reverse; assets are liabilities and liabilities are assets. Cause and effect are easily reversed so that it is not clear whether the central bank actually has the authority to resolve the problem or not, which fits the model of a free-enterprise system in which the return is never actually free of risk, determined on demand.
If it isn’t a free enterprise, then it is a command model, and its purpose–its distributive value–can be easily changed on command, and back again, which means it is inherently unstable, always free to return to its default condition.)
The price to be paid to hold a bond is rising and the way bond traders now make money has been reversed. Fixers, as they are known, now trade the price spread and not the rate. That indicates there is no intention to abide the Fed’s financial incentive to create jobs and hit its inflation target, which resists the rising rate of interest in economic growth, which the Fed says is preceded by rising productivity.
The fix is in, and who is to blame?
The Fed is more a scapegoat, acting as a regulatory authority. It is a counter-identity game that tends to reverse financial fortunes by advancing technical devices that intend to reverse a trend indirectly.
The Fed does not direct how banks use their money (that would be communism, right?) except in the form of capital reserves, which it provided the banks in TBTF amounts, buying their toxic debt (indirectly raising your rent). It is not bad debt because it is producing financial gain (raising the rent) in the form of high productivity, using sovereign debt (bonds owned by the Chinese government, for example), in emerging markets at disinflated wage rates.
At the same time, TBTF corporate conglomerates have been borrowing money from the Fed at deflated, near-zero rates to merge industry and markets. The effect, then, is to disinflate wages and salaries using market forces on demand and, at the same time, support prices to resist the declining rate of profit measured at the deflated rate of interest.
Disinflationary gains (due to market forces) are not being distributed to American consumers, having a deflationary effect. Americans are working more for less, if they can get a job, and about half have stopped looking (doing “gigs”). The effect (Rifkin’s “Zero-Marginal-Cost Society”) reflects the interest to invest in productivity (economic growth and creating American jobs) at the risk-adjusted rate.
TBTF banks are determined to deflate America’s wages and salaries. For 99% of Americans, even at a rising minimum wage, it means a significant, emergent, financial reversal, which will also affect emerging markets, making the risk go gamma at higher rate of interest, being indicated, indirectly, in the futures, with the rise of the negative rate.