Charles Biderman: Negative interest rates are a total disaster

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Charles Biderman interview has been published on the website of Finanz und Wirtschaft, Switzerland’s leading business newspaper. Below are excerpts (re-posted with permission) – The full interview between Finanz und Wirtschaft editor Christoph Gisiger and Herro can be found here ->

And what’s going on when you look at the fundamentals?
Real-time tax data indicates that US economic growth has not accelerated this spring. That’s why I predict that within twelve months we will see rates for long term US mortgages under 2% and under 1% for ten year treasuries. Despite the economy keeps slowing most economists still think it’s going to grow. But these guys are the best contrary indicator ever. They have been predicting rising interest rates for 30 years now and they have been wrong all the way. Yet, people still keep listening to them. How many Wall Street morons still say that we are going into a bond bear market? Really? If they had bet on that trade with their own money they would have been broke a long time ago.

Also, it also looks like the job market is cooling down as the most recent numbers from the Bureau of Labor Statistics suggest.
Those numbers are basically random generated. They are based on a small survey. So we’re just getting the small statistical sample they use to come up with the monthly job market report. They poll around 100’000 employers each month and the highest percentage of respondents are public sector enterprises and big companies. Small companies don’t really participate in this survey. So there is no reliability. In addition to that they seasonally adjust the numbers. Because of that, the monthly numbers can be off by 100 000 jobs either way. So what’s the value of those numbers, other than they give traders something to trade against?

What’s really going on in the job market?
You have to consider that in the US every month 5 million jobs are lost and around the same amount of jobs is newly created. On the balance, for the ninth consecutive month now net employment growth was below 200’000 jobs in May, according to estimates based on real-time income tax withholdings. Also, it appears that the old jobs people are losing pay more than the new jobs that are being created. So in essence, we’re having more jobs but no income growth. That makes sense because how do companies make more money in a no-growth world? They pay their workers less.

This summer, it will be seven years since the Great Recession officially has been declared to be over. Why is the economy still stumbling?
The economy is growing slower than people have been expecting because of what I call the politics of fairness. With politics of fairness I mean basically that people think they should be entitled to get free education, free healthcare, not to lose their jobs because that’s only fair. Since President Obama has taken office he has increased food stamps, increased free loans to college kids and increased phony disability claims. Also, he has introduced all these add-on regulations that help his consistency. More people are on the doll than ever before and economic growth is as slow as it has ever been – and that’s related.

The politics of fairness have created the economics of hopelessness. We’re following the European model which is to maintain the status quo: Don’t let competition damage or disrupt existing businesses. The politics of fairness create anti competitiveness because if you are guaranteeing workers a job for a lifetime you want to make sure the company they work for doesn’t go out of business. Therefore, you can’t allow new competition to come in. So you install tests, regulations, rules and barriers to block market entry.

So what should be done to revive the economy?
What we really need is the politics of hope: Let’s figure out how to make it easier to start a business. Let’s remove anti-competitive rules and restrictions. Let’s have communities get together and look at how can we help this economy. Unless we do that, the economy is going down the toilette. I’m not advocating sweatshops. I say: make it easier for people to start something new. Growth occurs only when more new happens than existing shuts down. Right now it’s the opposite. There are more businesses shutting down than starting up in the western world. For example, 80% of Greek businesses say they wish that they could leave Greece.

In the meantime, the central banks keep printing money. What are the consequences of these super easy monetary policies?
Cutting interest rates and printing money won’t solve our problems. What the central banks are supposed to do is basically to provide a stable money supply and not to try to be the engine of growth for the world.  It’s not working. Free money is the fairness method of handling economic problems created by the politics of fairness. Because if you have below market interest rates you’re giving money away – and you create asset bubbles. But asset bubbles don’t create real growth. That’s the one thing central banks can’t do. They can create assets bubbles, they can slow the economy, they can prick asset bubbles, but they can’t grow the economy. Zero interest rates only raise the market value of financial assets. But they don’t raise incomes. So it’s basically welfare for rich people.

And what about negative interest rates?
Negative interest rates are a total disaster. They don’t prompt people to spend more, they prompt people to save more because they’re fearful about the future. People can’t earn anything, they lose money on their savings. And if you push negative rates far enough down what happens is that people just hoard physical currency. You can see that already to some extent in Japan: People buy safes and they put currency away. Ultimately, if you push interest rates far enough into negative territory, people take money out of the banking system and the banking system could collapse. So far, negative rates are not very negative but if you start having negative interest rates of one, two or three percent, that’s when the banking system really gets exposed.

Full article here



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