I don't think you appreciate the impact high government debt has on currency value and international trade. Then there is the cost of paying the interest payments on the government debt, which will rocket if the interest rate increases. Even if the interest rate is below 1% for the next few years it will still cost a fortune with 100% + of government debt. In the United Kingdom macroeconomics over the last decade has been about finding ways of making public and private debt repayments manageable, it is serious if the level of government debt increases to this magnitude and it needs to be paid off or at least reduced to minimise government interest payments if nothing else.
Unforntuantely I can't read Barrons. They want me to subscribe, and there is zero chance of that. I gave up reading barrons tears ago, and never regretted it. My favorite Barrons article was touting GM Stock in the headlines while GM was on a down hill slide to certain bankruptcy. Nice help for their friends caught long who wanted to get short at higher prices. I always thought banks made their money from the spread and falling rates were good for them, but rates that rose too fast were a bit tricky. Banks don't loan at negative rates, that's the wholesale price of money that goes negative. If you have time, can you explain your thinking? or perhaps briefly summarize the main points of the Barrons article.
“In Europe, about 60% of the banking industry’s revenue comes from net interest income—the difference between banks’ borrowing and lending rates—so low or negative rates automatically dent the lenders’ profitability. Bankers didn’t complain at the beginning of what the central bank calls its “unconventional” policy—with good reason. The initial impact of lower interest rates was a boost in the value of the bonds that banks hold on their balance sheets. The second impact of the initial rate cut was a boost to bank profitability that came from them borrowing at shorter terms and cheaper rates for lending to customers at higher rates over longer terms. Bank profits eventually started getting hit because the central bank’s policy also aims to bring down long-term rates, notably through an asset-buying program known as quantitative easing. And long-term rates are now at historical lows thanks to the more than 2 trillion euros of government bonds that the ECB has purchased through QE. The governments of Germany, the Netherlands, France, and Belgium now get paid by investors for simply borrowing from them over 10 years. And European banks’ troubles haven’t gone unnoticed by investors. Since the ECB first took its key rate negative five years ago, the EuroStoxx bank index is down 50%. Most of the region’s major lenders trade at a fraction of their book value. Intesa Sanpaolo, Italy’s largest lender, trades at 75% of book value, but the norm for other banks stands at 30% to 40%. The worst-hit are banks that rely on deposits for most of their funding, which include the euro zone’s largest groups, from BNP Paribas in France to Banco Santander in Spain. For commercial or sometimes legal reasons, euro-zone lenders haven’t passed on negative rates to their retail customers—which would mean slapping deposits with a fee. Some have tried to soften the blow on the bottom line by hitting their largest corporate clients with negative rates on their cash deposits. “On the whole, it is true that the price of the ECB’s rates policy has been paid by the banking sector,“ says Gilles Moec, the chief economist of AXA, the insurance group. Markets have adjusted to the long-term prospects of banks’ declining profits. That is especially true after the ECB last month made its policies open-ended. Without indicating an end date to negative rates and bond buying, the ECB says only that the policy will reverse once inflation in the euro zone is “robustly” climbing back up to its official target—“below but close to 2%” annual inflation. And this could take years. According to the ECB’s own current projections, inflation would rise only to 1.5% in 2021. It has declined over the recent months to an annual 0.9%, according to August figures. ECB President Mario Draghi has long conceded that there are “side effects” to the negative-rate policy. But bankers, he has argued, have benefited from the recovery. They have been able to shore up their capital base, the amount of nonperforming loans on their balance sheet has shrunk, and demand for credit has gone up. And it’s worth noting that not all bankers have been strident against the ECB’s policies. Jean-Pierre Mustier, the CEO of Italy’s Unicredit , who currently presides over the European Banking Federation trade body, recently said in an interview with the Financial Times that negative rates should be measured against the recovery enabled by the central bank’s actions, which means that banks have been able to shrink the provisions for bad loans on their balance sheet. Rather than ranting against the ECB, Draghi and his defenders say, banks should look at their cost structure, which is much too high in Europe compared with international peers. Negative rates aren’t the banks’ main problem, ECB executive board member Benoit Coeuré told the French Parliament in May, noting that they have cost the euro-zone banking sector only €8 billion a year. That’s to be compared with the €119 billion of post-tax profit booked by Europe’s 50 largest banks last year. Clemens Fuest, president of the Germany-based Ifo Institute for Economic Research, points out that there are reasons beyond central-bank policy for the low interest rates that are prevailing in Europe and the rest of the world. Specifically, he says, the global savings glut and the Western world’s aging population mean that interest rates are likely to remain low for a while, no matter what central banks do with interest rates. Fuest agrees that the ECB may have a point, and that banks have benefited from its loose policy: “It could very well be that things would be much worse with higher rates and lower growth,” he says. But he also points out that the central bank may be caught in a negative feedback loop that would make it difficult to change tack. “There is a serious risk,” he says, “that the ECB might become haunted by negative interest rates.”
debt at 100% of GDP is high but not exceptionally so. Modern nations using fiat currency can run deficits indefinitely so long as productivity permits it. The debt will never be paid off, nor need it be, nor can it be. Paying of the debt would cause a calamity. Nations without trade surpluses can not run regular surpluses in their budgets without great damage to their economies. The best they can do is balance the budget, and that's not sustainable if population and productivity are rising. The concerns for a country such as the U.S. are the reserve status of the currency and the exchange rate. Deficits are of concern only in respect to how they impact inflation which in turn impacts exchange rates. Nations don't manage their finances the same way you manage your piggy bank.
I disagree of course. The devil is in the details, and by the time you put in all those cut-outs you no longer have a simple tax, which is supposedly the main appeal. A progressive tax, taxes, progressively, each dollar earned in the order earned, at exactly the same rate for everyone so it is inherently fair. Where unfairness enters are all the special interest provisions that have been inserted. If we wanted to simplify the tax code this would be the place to start. What the proposers of a "flat tax" are proposing is a taxation method that would accelerate the redistribution of wealth upward. A VERY bad thing. I do understand, however, why it is so popular among the ultra wealthy.
This is what I need clarification on. I had always assumed that the spread would be maintained. I never understood why low wholesale price of money would necessarily imply a reduction in the spread. I also thought the cause of bank troubles in Europe was lower demand due to recession and unemployment coupled with rising numbers of loans in default because of the recession. Am I wrong? Although I understand QE mechanism well and Draghi's approach at the ECB -- he had to work around the lack of a Euro bond --, I admit I haven't paid any attention to what is going on at the commercial banks, other then the continuous scandals at Deutsche bank, that have been in the news, it seems almost constantly..
When one leg of the spread is in negative territory, it offsets the value of the other (positive) leg. So, for long term loans, it squeezes the lender.
When government debt gets above 100% of GDP it usually causes a problem with the repayment of interest. This is what has been managed in the United Kingdom over the last ten years. Instead of increasing the interest rate, which would cause the government debt to rocket just pension prime to increase pension saving. This has saved the British government billions of pounds every year it has been used and is proven to be effective at maintaining low levels of inflation. I still think carrying high government debt is dangerous even with the pension saving economic control mechanism. Just having 100% of GDP in government debt makes a nation's economy more vulnerable and it also deters investments from abroad due to the high tax that follows it. It is likely it will discourage foreign investment and weaken the currency.
I don't see that as correct. Let me think about it. I'm getting spread = (higher rate) - (lower rate) when lower rate is negative I come out with a greater spread the more negative the rate goes. I am still puzzled by your arithmetic. I would think if the bank operates at a 3% spread for a certain type of loan they would simply maintain it at 3 % even though their wholesale cost goes negative. A negative wholesale rate is simply a subsidy to banks as I see it. The ECB has agreed to help the banks maintain their spread despite very low retail lending rates. That's the way I'm looking at this ??? The ECB can do it. It's fiat money!