Europe just announced “NIRP,” negative interest rate policy. In what world could this make any sense at all? Yes I know, we are already living in a world where most everything financial just doesn’t “add up” but this is ridiculous. Presumably the ECB is giving NIRP a try to weaken the euro versus the dollar and other currencies to make their trade more attractive and thus boost their economy. In all of history, no country has ever prospered in the long run by ruining their currency.
Looking at the forest from a distance, they may get their wish, the euro may decline and they may also get more inflation (maybe far more than they bargain for) and thus “cheapen” debt making it easier to pay off. The problem as I see it will be that depositors in banks and money markets will also now be charged on their deposits and decide to RUN. This is “policy?” DUMB! DUMB! DUMB! I say this because zero interest rates was bad enough, depositors were getting no interest on their savings deposits before, now they will have to pay for the “privilege” of the bank holding their money.
If I may, let me put this in perspective for you. Depositors now will have to pay interest to a bank that is more than likely insolvent to hold their money. This, while Europe has already “bailed in” (confiscated) deposit balances in Cyprus and said that this is the new “template” for other troubled banks. As I see it, the rate cuts will impact the banking system negatively as they will not generate the (small) cash flow or profits that they were previously. Putting this together, the banking system itself will now be weakened from an already weak position … and depositors will be required to pay interest on their deposits to hold a currency that is only an “idea” or experiment. What incentive is there at all to hold a bank account?
Why wouldn’t someone take that money and buy a work of art, an antique car or for that matter silver or gold? Why would anyone “risk” owning a currency that is not even backed by a sovereign nation? The European Union could dissolve tomorrow …what would that do to the value of the Euro? Why would anyone sit in a bank that could blow up at any time? And be bailed in which means part of their account balance confiscated (stolen)? Why would anyone PAY for these “privileges?”
I get it; the ECB needs to create inflation. They need to get people to start “moving” their money because velocity is comatose. I get it. But the risk is that their “plan” actually works! If they do get flight from the banks and the currency to start dropping in value this could easily snowball into a system wide “bank run” that cannot be stopped.
We are living in times where the decisions made at the top by policymakers are not thought through. Lies must be covered by bigger lies and fixes must be followed by bigger fixes because of the unintended consequences that have occurred and continue to occur with each erroneous move. Yes, negative interest rates…that ought to work …because zero percent interest rates have not. Why didn’t I think of this?
Did the world leaders get together and make a decision to force a financial collapse? Why do this now while in the middle of a BAFIN investigation, the breaking news of re-hypothecated metal at a Chinese port, Ukraine up in smoke, civil unrest increasing and weakening economic data the world over. How many direct torpedo hits can the world economy take before the ship sinks once and for all?
“force” a financial collapse? Do you think that “force” is necessary? How about just pulling back the curtain? That’d do fine all by itself.
Dear Mr Holter,
I think you got something wrong:
The banks have to pay .1 % interest on their funds at the ECB.
As of yet, depositors DON’T need to pay interest for the privilege having money at the banks.
Alfred from Austria
no, depositors don’t have to pay interest YET but let me ask you this question. If the banks must pay to have their funds held at the ECB do you not believe that this cost will passed on to customers? It is only a matter of time my friend.
Banks will reduce their funds at the ECB. If banks were to charge interest on deposits, why should anybody leave money at the banks? People would either withdraw their money and hold cash under the matress or invest in stocks, bonds and other assets.
that was my point Alfred.
In a recent interview with Silver Doctors, Jim Willie claimed that Russia and China have accumulated 40,000 tons of gold. Do you think that’s possible?
I heard the same report and although I think it is possible I have to wonder how they could have pulled this off. 40k tons of Gold is the equivalent of around $1.6 Trillion today. Now China certainly has the money but wouldn’t their official currency reserves have been depleted by that amount and yet it continues to grow (although less rapidly). Also I question if there really was that much Gold readily available. Unless this was the greatest criminal heist in history, I can’t imagine that the owners of all that Gold willingly and knowingly departed with their Gold holdings.
Responding to AK and Tim, 40,000 tons? Russia? No way as they sold “Czar” gold in 1990 so they tapped out completely. China? Maybe but not from recent purchases, it is possible that over the last 2,000 years they accumulated gold in large amounts and would be referred to as “legacy gold”. I do believe that they have legacy gold but not 40,000 tons, it is possible but improbable.
As usual you are spot on, but you are giving depositors far too much credit to assume that they will pull their money out in a NIRP environment. My mother banks with DB in Germany (yeah I know – I have desperately tried to get her to switch) and when I alerted her to the potential of negative interest her reaction was that she would still rather know her money is “safe” in a bank than to stuff it under her mattress. That kind of thinking is wrong on so many levels yet I am powerless to convince her otherwise.
A stubborn German? I can understand that as I am one also. I believe that DB is the number 2 derivatives monster in the world.
Political leaders of the human race are in all countries totally corrupt. we should’nt do what they say if they are evil, should we? In fact if a democrat or a republican or any politician says a thing we should do the opposite. We need more men like Braveheart william wallace. ZIRP is another scam. the system sucks. their policies reflect corruption. We should not do as they say..Delink from their evil FIAT freak show. But our worthless brothers are bribed and sell out and they need fiat for taxes and medical system(the sewer system)….DELINK from theses evil parasites. All over the world our leaders are corrupt. Human beings are showing their colors worldwide with these policies. I am ashamed to be part of the human race with policies like this. They couldnt care if i got run over by a truck tomorrow….. why should we honor our leaders double talking scam policies…?
“it’s MY island!”