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?