So that's where we are at currently.Nicole Foss wrote: Mechanisms for spreading risk to the point of ‘dilution to nothingness’, such as securitization, seen as effective and reliable during monetary expansions, cease to be seen as such as expansion morphs into contraction. The securitized instruments previously created then cease to be perceived as holding value, leading to them being repriced at pennies on the dollar once price discovery occurs, and the destruction of that value is highly deflationary. The continued existence of risk becomes increasingly evident, and the realisation that that risk could be catastrophic begins to dawn.
Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road. Negative interest rates and the war on cash are symptoms of such a limit being reached. As confidence evaporates, so does liquidity. This is where we find ourselves at the moment — on the cusp of phase two of the credit crunch, sliding into the same unavoidable constellation of conditions we saw in 2008, but on a much larger scale
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Also discussed is the problem of physical cash in a Negative Interest Rate environment:
There's plenty to chew over in this in which Nicole starts her conclusions thus:Nicole Foss wrote:
The experience of the global financial crisis taught us that the type of shocks which can drive policy interest rates to the lower bound are also shocks which produce severe impairments to the monetary policy transmission mechanism. Suppose, for example, that the interbank market freezes and prevents a smooth transmission of the policy interest rate throughout the banking sector and financial markets at large. In this case, any cut in the policy rate may be almost completely ineffective in terms of influencing the macroeconomy and prices.
This is exactly what we saw in 2008, when interbank lending seized up due to the collapse of confidence in the banking sector. We have not seen this happen again yet, but it inevitably will as crisis conditions resume, and when it does it will illustrate vividly the limits of central bank power to control financial parameters. At that point, interest rates are very likely to spike in practice, with banks not trusting each other to repay even very short term loans, since they know what toxic debt is on their own books and rationally assume their potential counterparties are no better. Widening credit spreads would also lead to much higher rates on any debt perceived to be risky, which, increasingly, would be all debt with the exception of government bonds in the jurisdictions perceived to be safest. Low rates on high grade debt would not translate into low rates economy-wide. Given the extent of private debt, and the consequent vulnerability to higher interest rates across the developed world, an interest rate spike following the NIRP period would be financially devastating.
TAE: Negative Interest Rates and the War on CashNicole Foss wrote: The advent of negative interest rates indicates that the endgame for the global economy is underway. In places at the peak of the bubble, negative rates drive further asset bubbles and create ever greater vulnerability to the inevitable interest rate spike and asset price collapse to come. In Japan, at the other end of the debt deflation cycle, negative rates force people into ever more cash hoarding. Neither one of these outcomes is going to lead to recovery. Both indicate economies at breaking point. We cannot assume that current financial, economic and social structures will continue in their present form, and we need to prepare for a period of acute upheaval.
Using cash wherever possible, rather than succumbing to the convenience of electronic payments, becomes an almost revolutionary act. So other forms of radical decentralisation, which amount to opting out as much as possible from the path the powers-that-be would have us follow. It is likely to become increasingly difficult to defend our freedom and independence, but if enough people stand their ground, establishing full totalitarian control should not be possible.
To some extent, the way the war on cash plays out will depend on the timing of the coming financial implosion. The elimination of cash would take time, and only in some countries has there been enough progress away from cash that eliminating it would be at all realistic. If only a few countries tried to do so, people in those countries would be likely to use foreign currency that was still legal tender.
