Wednesday, September 25, 2019

A Primer on Negative Interest Rates (Part 1)

Click here to read the original Cautious Optimism Facebook post with comments

5 MIN READ - Given CO’s recent spate of posts on negative interest rates, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff takes a brief diversion away from his series on Healthcare in America to address the recent unorthodox monetary policy.

Recently we’ve read a lot about negative interest rates in the news. Statistics abound about $15+ trillion in worldwide sovereign debt trading at negative yields. Alan Greenspan predicts negative interest rates on U.S. Treasuries are a fait-accompli. Other articles focus more closely on global central bank negative interest rate policy and predictions swirl that commercial banks will soon start paying borrowers to take out loans.

The purpose of this article is to define clearly what negative interest rate policy is, how it works, and to differentiate explicit negative rate policy from central banks from its spinoff effects, such as falling yields on government debt which are more an aftereffect than direct policy itself.


First of all, where does the explicit policy originate from? The answer is simple: central banks.

In the fallout of the 2008 global financial crisis and global recession, many developed economies in Europe plus Japan have spent a decade crawling out of the slump plagued by extremely slow economic growth and subpar recoveries. While governments argued over fiscal policy—some calling for deficit spending, some for austerity, most spending and taxing more and calling it “austerity”—central banks have tried to pick up the perceived slack with monetary policy.

For the first several years of the tepid recovery, central banks the world over engaged in quantitative easing (massive securities purchases paid for with freshly printed reserves to load banks up with loanable funds) and zero interest rate targeting in the hope that businesses would be lured into borrowing on the cheap and banks would lend more generously. The belief was that the newly manufactured credit would stimulate recovery.

Central banks have also been obsessed with reaching inflation targets (usually somewhere around 2%) in the belief that inflation is necessary to stimulate credit and spending (both consumer and business) since someone who believes his money will be worth less tomorrow is more likely to spend, invest it, or borrow more today.

Central banks also want to jumpstart inflation to dilute the real value of their government's debts, although they will never publicly say so.

However if banks aren’t in a generous lending mood, all those QE reserves will do little to spur inflation since the broader money supply grows only when banks lend and increase their customers’ demand deposit balances.

Now the Economics Correspondent believes the entire premise of stimulating credit and 2% inflation targets is fallacious from the start—which may explain why the more countries have pushed interest rates down and used more and more radical means to stimulate lending the more disappointed they’ve been with the lethargic results. However the debate over how effective stimulative monetary policy and inflation are towards promoting growth can wait for another time. The purpose here is to explain the official justification behind and mechanism of negative rates.

So after years of zero rates and loading banks up with reserves—trillions of dollars more than they are legally required to hold to back up their deposit liabilities—some central banks decided to pursue more radical policies and experimented with negative interest rates.

What does that mean? Well it doesn’t mean (at least not for the foreseeable future) “banks pay retail borrowers to take out loans.” It also very rarely means “banks charge you negative interest on your deposit balances” although European banks may be reluctantly inching closer to that paradigm.

No, the first and most important salvo of negative interest rate policy was for central banks to begin charging their member commercial banks negative rates on idle reserves in excess of those they are required to hold (ie. so-called “excess reserves”).

Banks take deposits from customers (or obtain reserves from the central bank) and, in the United States, are only required to hold approximately 10% of those deposits in reserve while loaning the other 90% out. However if they cautiously choose to lend less and hold more in reserve, any balance above and beyond the 10% reserve requirement is considered “excess reserves” by the central bank.

During the Fed’s QE1, QE2, and QE3 the excess reserve balances of U.S. banks went through the roof: from virtually zero to a peak of $2.5 trillion in late 2014. The crisis-management policy goal at the time was to load banks up with reserves and telegraph a message to nervous depositors that their bank was in no danger of failing due to a bank run since they were holding vast quantities of reserves that could be converted to cash at any time. The huge excess reserve balances also served as an oasis of loanable funds that the Fed would urge or discourage commercial banks to lend or not lend whenever it wanted to stimulate the economy or hit the brakes.

So in light of world central banks becoming frustrated that commercial banks weren’t lending their own excess reserves aggressively enough, monetary policymakers in Europe and Japan began charging negative rates on excess reserve balances: starting at -0.1%.

To a commercial bank, this was a shot across the bow. A bank with, say, $100 billion in excess reserves sitting idle at the ECB knew that a year later it would only have $99.9 billion left, a loss of $100 million which is more than it sounds like when comparing it to the bank’s thinner profit margins. Thus an incentive was produced for the bank to lend more of that $100 billion out at a better interest rate than -0.1%.

After a year or so central banks became more aggressive. The rate on excess reserves was lowered further: to -0.25%, -0.4%, -0.5% and so on. Today the European Central Bank's (ECB) rate on excess reserves is -0.5%. Now the hypothetical bank's $100 billion excess reserve balance loses $500 million a year. The Bank of Japan’s rate on excess reserves is only -0.1%.

(see link for policy analysis of "pain" inflicted on European banks)

The Swedish Riksbank’s so-called deposit rate is a deeper -1.0% and has been negative since 2009 (uncoincidentally Sweden has inflated a new housing bubble). The Swiss National Bank’s so-called “sight deposit” rate is -0.75%. Denmark is also employing negative interest rate policy. Switzerland, Sweden, and Denmark all use their own currencies and don’t operate in the Eurozone common currency area.

Incidentally some news articles have reported that negative rate policy is designed to compel consumers and businesses to spend more. That’s mostly incorrect. The objective of negative rate policy is overwhelmingly to compel member commercial banks to lend more. While zero or near zero interest rates on savings and deposit accounts might motivate consumers and businesses to spend a little more, effectively positive rates won’t boost spending much and hardly to the levels that would result from charging retail and business bank customers a negative rate—something we haven’t commonly seen for reasons we’ll cover in Part 2.


The results of negative rate policy are mixed, but generally pretty poor. Policymakers in Europe in particular are having an increasingly difficult time justifying the procedure—especially in Germany, a nation of savers with a longstanding distrust of inflationary monetary policies.

One of the pitfalls of negative rate policy is that commercial banks might make riskier loans than they otherwise would—which increases the chance of defaults and possibly even crisis later. Ironically, should such a crisis occur politicians will automatically blame banks for lowering their lending standards.

The opposite risk is that banks may be reluctant to lend at superlow rates to what they perceive as risky borrowers and will elect instead to eat the negative rate—ie. make fewer loans or not lend at all since they can't charge a premium to compensate for the added risk. Monetary policy observers believe this calculus is already in play.

Banks may also choose to use their reserves to buy existing debt instruments instead—a form of lending only that it’s not new lending—and the newly injected money will simply spill over into asset markets, as it has in Sweden which is now experiencing a new housing bubble and the entire globe which is witnessing the makings of a sovereign debt bubble.

Austrian and classical economists have complained for a century that central banks forcing interest rates down artificially, unbacked by real public savings (ie. actual deferral of consumption), distorts economic calculation and misleads entrepreneurs into embarking on long-term debt-fueled business ventures for which inadequate saved resources actually exist. Negative interest rates, they argue, only distort coordination of saving and investment further.

Central bank governors the world over have complained that growth isn’t really picking up in their countries and vowed to do “whatever it takes” to stimulate more lending. Hence negative rates on excess reserves have gone lower and lower. Yet they are pushing further into uncharted territory and have no historical guide to properly assess the risks they’re creating with such radical policies.


In the United States, the Federal Reserve has not implemented negative rates and it’s still very far away from doing so. Just last week the Fed cut its interbank lending rate to 1.75%—still very positive—and even the IOER (interest on excess reserves) rate only recently fell to +1.8%.

However the Fed does reserve the right to implement negative rates if it feels necessary. Most experts believe that would be in the aftermath of another deep recession like 2008-09. In fact Janet Yellen addressed the subject near the end of her term as Fed Chairperson before Congress, testifying that the Fed had no intention of enacting negative rate policy anytime soon but might consider it in a future slump if the governors felt all other policies were proving ineffective (see link for more info).

In Part 2 we’ll discuss what negative interest rate policy means for commercial bank customers (retail and business) and government debt markets.

Tuesday, September 3, 2019

The Economics of Healthcare in America #2: Another Myth that Won’t Die: “U.S. Infant Mortality Rates are Among the Worst in the Developed World”

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ – The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is continuing his overseas holiday... which won't stop him from continuing the CO series on healthcare economics and disparaging the legend of America's allegedly subpar infant mortality rate.

CBS laments that "U.S. infant mortality rate
 worse than other countries"

In Part 1 of this Economics of Healthcare in America series we discussed why allegations that average lifespans in America rank among the lowest of industrialized nations are fictitious, and why in fact the USA is the best country in on earth for anyone interested in living as long as possible.

In Part 2 we examine another common false indictment of the American medical system’s allegedly poor outcomes: U.S. infant mortality rates are the worst among industrialized nations.

Here are a few typical headlines that propagate what is in effect a myth, most dispatched with socialized medicine or at minimum more government control of healthcare as the prescribed solution:

“Among 20 wealthy nations, US child mortality ranks worst, study finds”

-CNN, 2018

“America's Infant Mortality Rate Higher Than Other Rich Countries”

-Time, 2018

“Our infant mortality rate is a national embarrassment”

-Washington Post, 2014

“Why Infants May Be More Likely to Die in America Than Cuba”

-New York Times, 2019

“Newborn survival rates in US only slightly better than in Sri Lanka” (The Guardian—UK, 2018)

As is the case with average lifespans, the conclusion is derived from another example of ripe apples vs rotting oranges statistical comparisons, the gap between the apples and oranges being so expansive that it’s mindboggling anyone would use such statistics to draw infant mortality disparities at all. For example, the U.S. counts all infant deaths whereas other developed nations exclude many of their frailest births. Thus when overseas infants expire their deaths aren’t counted in what would otherwise be a subsequently raised mortality rate.

Most of the key differences in statistical collection methods can be found in three sources (links below):

-The Washington Times

-Science Daily citing research from Texas A&M University’s Medical and Public Health schools

-Occupational Medicine and Family practice Physician and health policy writer Dr. Walt Larimore

And although the COCEA enjoys authoring his own annotations for CO Nation readers, this column is an occasion where citations from those articles/studies will illustrate the vast differences in measurement methods between nations more capably than the COCEA’s own prose.

So as you read on, note that the gap between American statistical approaches and those of other advanced economies becomes so great that citing “the developed world's worst infant mortality rate” devolves into a proverbial farce. Anyone who invokes that rallying cry simply lacks even a cursory understanding of other nations’ lax measurement standards.

We begin with...

I. Establishing the definition of infant mortality:

“First, let’s start with the definition. The World Health Organization (WHO) defines a country’s infant mortality rate as the number of infants who die between birth and age one, per 1,000 live births...

“WHO says a live birth is when a baby shows any signs of life, even if, say, a low birth weight baby takes one, single breath, or has one heartbeat. While the U.S. uses this definition, other countries don’t and so don’t count premature or severely ill babies as live births or deaths.”

-Dr. Walt Larimore

II. “The CDC ranks the United States 27th of the 34 developed nations, with 6.1 infants of every 1,000 live births dying within their first year of life… [but] there’s a statistical explanation for America’s standing in the CDC rankings. It may be that Americans put a higher value on human life among the least fortunate among us. In most developed nations, premature births are recorded in the statistics as miscarriages or stillbirths. The lives that doctors in those places don’t attempt to save are never recorded as ‘live births.’”

-Washington Times

III. American doctors’ attempts to save premature babies yield higher official mortality rates that don’t burden countries that simply let their infants die:

“Many countries don’t try to save infants born prematurely or with severe birth defects. U.S. doctors go to extraordinary lengths to give these infants a chance at life. Such best efforts often fail, and the death becomes a misleading statistic…

“When the CDC excluded births before 24 weeks of gestation, the American infant-mortality rate fell from 6.1 infant deaths per 1,000 live births to 4.2, a number comparable to the rest of the developed world’s figures.”

-Washington Times

IV. Other countries exclude births under a certain weight or length while the U.S. does not:

“What counts as a birth varies from country to country. In Austria and Germany, fetal weight must be at least 500 grams (1 pound) before these countries count these infants as live births, [former NIH Director and former President and CEO of the American Red Cross Bernadine] Healy notes.”

-Washington Times

“In other parts of Europe, such as Switzerland, the fetus must be at least 30 centimeters (12 inches) long, [Bernadine] Healy notes. In Belgium and France, births at less than 26 weeks of pregnancy are registered as lifeless, and are not counted…”

-Dr. Walt Larimore

V. The U.S. counts babies that die within their first 24 hours of life while other countries do not:

“…Some countries don’t reliably register babies who die within the first 24 hours of birth…”

-Dr. Walt Larimore

VI. Excluding underweight babies from the statistics makes at least one of the “leading” nations’ mortality rates appear more favorable:

“Norway, which has one of the lowest infant mortality rates, shows no better infant survival than the United States when you factor in Norway’s underweight infants that are not now counted [source: Nicholas Eberstadt, American Enterprise Institute].”

-Washington Times

VII. Higher availability of fertility drugs in the U.S.—itself an indication of a more obliging system—skews infant mortality statistics:

“And the US has more mothers taking fertility treatments, which keeps the rate of pregnancy high due to multiple-birth pregnancies [which have lower survival rates].”

-Dr. Walt Larimore

VIII. Bad health habits of pregnant teens and expectant mothers drive infant morality rates up, but have nothing to do with the quality of American medical care:

“Plus, the U.S. has a high rate of teen pregnancies, teens who smoke, who take drugs, who are obese and uneducated, all factors which cause higher infant mortality rates.”

-Dr. Walt Larimore

IX. Once again comparing ethnic apples to apples produces more valid correlations than monitoring national averages since countries like Sweden, Japan, and Iceland don’t have large African or Native American populations that are more prone to SIDS:

“There are racial and ethnic differences in infant mortality that might help explain the differences between the United States and Europe. For example, African American and American Indian/Alaska Native babies are at higher risk of SIDS than Caucasian, Hispanic or Asian American babies. As most other developed countries have a comparatively small population with African heritage (and very few people of American Indian descent) these statistics might also help explain the numbers.”

-Science Daily

X. American ethnic diversity goes beyond just SIDS when counting infant deaths:

“The ranking doesn’t take into account that the U.S. has a diverse, heterogeneous population… …unlike, say, in Iceland, which tracks all infant deaths regardless of factor, but has a population under 300,000 that is 94% homogenous. Likewise, Finland and Japan do not have the ethnic and cultural diversity of the U.S.’s 300 million-plus citizens.”

-Dr. Walt Larimore

XI. The OECD warns that it’s misleading to compare countries with such widely differing methods for tabulating infant mortality metrics, but that doesn’t stop American socialized medicine proponents from doing it anyway:

“Even the Organization for Economic Cooperation and Development, which collects the European numbers, cautions against using comparisons country-by-country. ‘Some of the international variation in infant and neonatal mortality rates may be due to variations among countries in registering practices of premature infants (whether they are reported as live births or not),’ the OECD says.”

-Dr. Walt Larimore

XII. And finally more American infants die in car accidents per-capita than other developed nations:

The U.S. has a much higher rate of per-capita infant deaths in car accidents since car ownership and usage rates in the U.S. far surpass that of other industrialized nations. While infant deaths in accidents are a tragedy, they have nothing to do with the quality of America’s medical system.

-COCEA’s note

So when summing up all the ways in which other developed countries exclude infant deaths to pad their statistics, it’s plainly obvious that allegations the United States ranks near worst in infant mortality rates among developed nations are simply false.

When adjusting for such statistical differences, America’s much lower infant mortality rate reflects even more favorably when factoring out higher uses of infertility drugs (more readily available in the U.S. than in the allegedly superior medical systems of other countries) and high teen pregnancy rates and pregnant teen drug usage. Nevertheless the USA’s supposedly abysmal infant death rate endures as a perennial myth—dispatched from the lips of the establishment media to the ears of progressive readers/viewers who recycle it uncritically and repetitively.

And of course those statistical padding/differences between countries are never mentioned in those same news stories in an another example of FDR Secretary of State Cordell Hull’s famous quip that “A lie will gallop halfway round the world before the truth has time to pull its breeches on."

For more detailed reading on the art of statistically compiling infant mortality rates, go to:“the-us-has-one-of-the-highest-infant-mortality-rates-in-the-developed-world”/

ps. The COCEA chanced upon the infant mortality myth once again while reading “The Myths of Modern Medicine: The Alarming Truth about American Health Care” by healthcare consultant John Leifer. His insert credits include consultant to healthcare firms and founding a newsletter that featured contributions from Bill Clinton and Newt Gingrich. In his first chapter Leifer slams the U.S. healthcare system for its inferiority to countries with socialized medicine.

His proof?

You guessed it, a few paragraphs on America’s poor life expectancy and atrocious infant mortality rates. Nowhere was there any mention of America’s #1 ranking for life expectancy when comparing like ethnicities across developed countries (not even an attempt to dispel the counterargument, he just didn’t bring it up) or the widely different methods for calculating infant mortality in statistically stringent America versus laughably lax other countries. Instead Leifer simply writes “our national ranking of twenty-fifth in life expectancy” which places us “behind all the other rich countries and a few poor ones” and “our infant mortality rate, as measured against other wealthy nations, is the highest in the world.”

As a supposed “authority” on healthcare, one would expect Mr. Leifer to know better than simply peddling recycled one-liner myths without diving just a little deeper into the numbers. So what kind of expert is this author? Or does he really know better but prefers concealment and dishonesty?