If You Have a Bank Deposit, You Will Be Charged to Save Money
AIKEN, South Carolina – The Dow had a good day on Monday. Up 229 points… or about 1.5% [ed note: it didn’t last]. The significance of that is uncertain. Is the market staging a comeback from this year’s losses? Or is it just lollygagging around as usual? TBD.
We are still aghast and agog over the spread of NIRP – negative-interest-rate policy. In Japan, for example… where almost two-thirds of government debt carries a negative yield… savers pay a bankrupt government for the privilege of lending it fictitious money.
JGB yield, weekly – this one is truly from the “you couldn’t make this up” department.
It is a trifecta of absurdity: First, the money is phony. Second, the borrower is insolvent. Third, the interest rate is less than nothing.
And yet, this is not just some strange fluke or financial skullduggery. Central banks in Sweden, Denmark, Switzerland, the euro zone, and Japan – all of them presumably run by sober adults – have pushed their key lending rates into negative territory, too.
They’re doing this to drive bank lending rates into negative territory. Not only will bondholders pay to lend money to governments but also anyone with a bank deposit will be charged to save money. And now, the Fed is considering following suit… and pushing its key rate into negative territory.
When asked whether the Fed would consider taking its rates negative, during her recent grilling on Capitol Hill, Janet Yellen left the door wide open:
“In light of the experience of European countries and others that have gone to negative rates,” she said, “we’re taking a look at them again.”
The fixers …
Cartoon by B. Rich
Yesterday, after spending the night near Charlottesville, Virginia, we drove down to South Carolina, puzzling over NIRP on the long drive. It is a real head buster… It only makes sense if you don’t try to make sense of it.
The logic, as we reminded readers yesterday, is that everything in the world of money is relative. If the economy is backing up, you think you are making progress just by standing still.
The interest rate you have to pay on borrowed funds is also known as the “hurdle rate.” You have to be able to earn more than the interest rate – the hurdle rate – or it doesn’t pay to borrow money. But what if the interest rate is below zero?
Suddenly, even a dead man, stretched out on the ground like a fallen post, can clear the hurdle. When interest rates are backing up, in other words, even a corpse will appear to be moving forward. But wait. He isn’t really moving forward, is he?
A little bit lower, and the dead can jump them too….
Photo via nordicskiracer.com
Monetary scholars Milton Friedman and Anna Schwartz had a theory about the Great Depression. They said the authorities, who failed to keep the quantity of money topped up, were to blame. This is what is known as “monetarism” – the idea that maintaining the right supply of money in the economy is what keeps it on an even keel.
Today, credit is money. When borrowers stop borrowing, credit goes down. And if credit goes down, a recession… or depression… is almost unavoidable. Negative interest rates are a desperate move. Central bankers believe it will keep the money supply from contracting by encouraging people to borrow.
But what a crazy system: People must go further and further into debt (get poorer), or it melts down!
Anna Schwartz and Milton Friedman – their well-meant, but completely erroneous interpretation of the Fed’s failings during the Great Depression has done incalculable harm ever since. Note: it is simply untrue that the Fed didn’t attempt to print its way out of the depression. Between the fall of 2919 and early 1933, its balance sheet expanded by more than 400%! The money supply did contract – but for reasons that were at the time outside of the Fed’s control.
Photo credit: Teresa Zabala / The New York Times,
South… Then West
Our drive took us south and then west. We followed the Jerry Falwell Highway to the Seminole Trail… from the hilltop mansions of the Piedmont region of Virginia through the hollows and hardscrabble farms farther south… past the sleek edifices of Charlotte, North Carolina, and down through the scrub pines of the Carolinas.
Jiffy Lube… Burger-in-a-Hurry… River of Life Church… Chick-fil-A… tumbledown shacks… brick ramblers… Jeff’s Tire… Joe’s Tire… Adult Superstore… Calvary Baptist… Liberty University… Church of the Redeemer… Lothian Lutheran (and not a single liquor store for 100 miles)… Prince of Peace Congregationalist… Grace’s Palm Readings… angus cattle in a field… red tractors… yellow tractors… green tractors… hundreds of RVs… barbed-wire fences… red dirt… mills… plants… warehouses… Jerry’s TV repair (abandoned)… a pile of sawdust as big as one of the Alps… Martha’s Café… Fat Boy Subs… rusty plows… fallen down barns…
“Eat More. Pay Less,” advertised a buffet restaurant.
There are many ways to meet Jesus …
Photo via oddee.com
“Who was Jesus?” asks a billboard (helpfully offering a phone number: 1-888-THE-TRUTH).
“Accident? Get a lawyer FIRST,” suggests another.
In Columbia, we passed the South Carolina Center for Mental Health. Beneath it, a prankster had scrawled a message. We passed too quickly to read it carefully, but we thought it said:
“Half-wits,” with an arrow pointing to the left.
“Full retards,” with an arrow pointing to the right.
“Central bankers… straight ahead.”
There’s one of them!
Photo credit: Toru Hanai / Reuters
Chart by: Investing.com
Chart and image captions by PT
The above article originally appeared as “If You Have a Bank Deposit, You Will Be Charged to Save Money” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “Trifecta of Absurdity”
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...