European Central Bank’s Negative Interest Rates Help The Fed Exit QE

Negative Interest Rates and European Central Banks

The ECB’s decision to institute negative interest rates will increase demand for interest bearing US Treasuries allowing the Fed to exit quantitative easing.

JM Bullion
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Podcast Summary

0:00-5:50 Introduction

European Central Bank Opts for Negative Interest Rates Helping the Fed Exit QE

5:50-10:20 Discussion of the recent move by the European Central Bank (ECB) to institute negative deposit rates. The impact of the decision will weaken the Euro and strengthen the dollar. The ECB wants a lower Euro to improve its export situation and is concerned about deflation. The U.S. needs a substitute alternative buyer for U.S. Treasury bonds as the Fed tapers and ends its quantitative easing (QE) program. By instituting negative interest rates, the ECB not only prods the European banks to lend their reserves, but also pushes them to find an alternative place to keep their excess reserves*- U.S. Treasuries that still pay interest. This helps the Fed exit from QE as it supplies replacement buyers for the Fed. A nice coordinated ploy between the ECB and the Fed. The result of central bank meddling is consumer price inflation for the middle class and asset price inflation for the wealthy.

10:20-12:20 discussion of the latest economic data including the ISM reading which was revised higher due to a software error. Predictions that the non farm payroll number will come in at or near expectations so that the Fed can claim the economy and labor market is recovering and to give the ECB justification for their recent move.

Productivity, Employment Down 3.2%

12:20-14:11 Discussion of the weak economic data- productivity down 3.2%, ADP employment down to just 179,000 jobs created, while the trade deficit widened. Bad news did not stop the economic cheerleaders from putting positive spin on the dismal numbers.

If economists like to play weathermen why not comedians too?

14:11-18:00 discussion how the media prepares their spin for economic data releases. Discussion of the struggles of the middle class and a Zero Hedge article on the topic. The average car payment is now close to $500 a month!

Housing Market

18:00-18:35 According to the MacArthur Foundation nearly two-thirds of Americans, said they are not likely to buy a home as an investment to build wealth and nearly 43% said buying a home is no longer a good long-term investment.

Inflation as a Cure for the Economy’s Ills!

18:35-19:50 discussion of this misconception.

Initial Jobless Claims

19:50-21:57 Discussion how the media spins the initial jobless claim data to make it seem as if it means the labor market is improving when there is no correlation between fewer people losing their jobs and job gains as the workforce is shrinking so there are simply few people left to fire!

@CNBCnow @CNBC and replaced them with lower paying and part time jobs. "Recovery!"

— Smaulgld(@Smaulgld) June 6, 2014

21:57-24:25 discussion of media distractions like the Bowe Bergdahl case.

24:25-27:50 discussion of David Tepper’s views on the stock market. How low interest environment will continue to push money into the stock market as engineered by the Fed and ECB. The ECB has given the Fed an exit option as they can finish their taper and end QE.

Janet Yellen and Negative interest Rates

27:50-28:15 discussion of Ms. Yellen’s views on negative interest rates (in favor!). Yellen may put off negative interest rates as the ECB will force money into US Treasuries because T-bonds offer a small amount of interest.

The Fed’s Victory Lap

28:15-30:00 Discussion of how the Fed can claim the unemployment rates is below 6.5% -they just need hit 2% CPI to declare total victory!

30:00 -31:54 Discussion of Thomas Piketty’s Marxist tract that the media is fawning over. Why aren’t free market economists so hailed?

Housing Market

31:54-34:15 discussion of the sorry state of the housing market even though interest rates are at all time lows. The housing market has died, we’re waiting on the stock market.

34:15 35:40 Discussion of Mario Draghi’s President of the ECB’s plan to stimulate the economy by requiring banks to lend to businesses. Discussion of the government lending money to businesses and how it leads to political rather than business decisions.

Bring in the Fences!

35:40-42:00 home buying tips and interest rates and discussion of the state of the real estate market. How the economy is stagnant due to lack of incentives. The economy can’t grow waiting on the rich to buy more Gucci bags, or on speculating in the housing or stock market. Discussion of lowering credit standards to help people qualify to pay for overpriced homes. Bringing in the fences does not help the economy. Government “help” in making purchases just makes things more expensive.

Comparison of the U.S. Middle Class of Forty Years Ago to Today

42:00-44:45 discussion of the relative wealth of a middle class family 40 years ago and today.

Gold, Silver and Stocks

44:45-51:00 making money from social media stocks-the dot com bubble returns. Does a rational person invest in the market if the Fed is going to continue to pump liquidity into the stock market? Discussion of the price of gold and silver in light of Fed and ECB action. Discussion how fiat currencies can hang on if there is central bank coordination.

51:00-55:30 Is change of the monetary system controlled by the ECB, the Fed and the Central Bank of Japan possible?

55:30-56:26 discussion of the Fed’s positive view on the labor market- the labor market has recovered substantially.

Food Inflation

56:26-1:01:15 discussion of food inflation(blame the weather). Discussion how stock prices are boosted by share buybacks.

Non Farm Payroll Data

Non Farm Payroll- Solid Gains!

1:01:15 The non farm payroll data came in as the show neared its end, and on queue the media went into full spin mode:

European Central Bank Helps The Fed Exit QE

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*Excess Reserves at European banks are about 45% of all reserves. Most large European banks have U.S. subsidiaries. Read more regarding non-U.S. banks holding U.S. Treasuries. The Fed pays interest on excess reserves.

Further Reading:

Foreign Banks Hold Most Excess Reserves, Report Contends

Negative European Interest Rates Means European Banks buy U.S. Treasuries

Is a Euro Dollar on the Way?

Janet Yellen and Negative Interest Rates

ECB to do QE?

Initial Jobless Claims

Obama, Freddie Mac and Fannie Mae Hit the Panic Button on Housing

How QE Encourages Share Buy Backs and Discourages Hiring

Housing Inventory Shortage Myth

Initial Jobless Claims

Largest Foreign Holders of US Treasuries

Pimco Cuts Bond Holdings

Reuters Reports on Belgium Buying of U.S. Treasuries

Millennials Not Part of the Club Yet

Initial Jobless Claims

Obama, Fannie Mae and Freddie Mac Hit the Panic Button on Housing

The Dark Side of Artificially Low Interest Rates

Royal Canadian Mint

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