Thursday, June 5, 2014

BREAKING: European Central Bank Institutes Negative Interest Rate

The European Central Bank has just reduced interest rates and installed a negative rate on bank deposits for the first time in its history.

The bank cut its main lending rate to 0.15%, a new low, from the 0.25% rate held since November, and lowered its rate on emergency overnight loans by 35 basis points to 0.40%.

The ECB also dropped the rate on bank deposits parked overnight with the central bank to minus 0.1%, thereby charging commercial banks for keeping their money at the ECB. That will sure get the banks from letting cash pile up. I consider it one of the most aggressive moves towards accelerating price inflation in the last 50 plus years.

This is an extremely dangerous move, putting the eurozone on a major inflation path. Though it should be noted that the balances held by Eurozone banks at the ECB are just over 29 billion euros, while trillions of dollars sit at the Fed. If the Fed ever went negative that would be fireworks on steroids. -RW


  1. This isn't going to end well. The question in my mind, how long will it take for it to not end well?

    I'm really interested in Japan's huge debt to GDP, because, well...I wonder how long the US, Euro, etc. can hang on with currency debasement in trying to hold the wheels on the proverbial cart.

    Sure, Japan has high suicide rates & poor demographics in terms of working age adults(probably driven by economic misery for twenty years plus), but the fact Japan's government has put them itself into debt around 225% of GDP and somehow has avoided hyperinflation is amazing to me.

    I know on the surface I've always read that Japan's forced savings and generally high savings rate among its populace keeps things in check to some degree...I guess it's similar to the desire to hold cash balances here in the US and the infamous TBTF bank "reserves".

    Anyway, my whole point is how long can the charade be kept up? If 225% debt to GDP can be sustained by Japan without a reserve currency status can the US keep the economic misery going up or beyond that?

    I hope not.....but this Euro situation is not good from the perspective of not having a reserve status and the populace doesn't have the cultural(and gov't forced) savings that Japan has....

    "Desire to hold cash balances" as RW puts's all very complex to me at times but I keep going back to the simple notion that currency debasement as policy makes my investing decisions very easy when it comes to things like precious metals.

  2. Wasn't this negative interest rate policy proposed a while back by some Harvard economist?

    1. There's another serious omission about this period in Geithner's career: his time as a Treasury lobbyist. As documents unearthed by financial analyst Josh Rosner show, in the late 1990s, Geithner, Summers, and Rubin lobbied for World Trade Organization rules forcing the liberalization of financial services across borders, at the behest of large bank CEOs. This matters because the entire book is about Geithner's reflections on financial crises, and one of the central causes of these crises was 'hot money.' “Globalization had unleashed enormous sums of ‘hot money’ that could instantaneously flow across borders,” he warns, “while the aspects of human psychology that had helped produce financial booms and crises for centuries remained unchanged."

      By presenting globalization as an inherent natural force, and not mentioning his role in crafting the policies that led to hot money flows, he misleads by omission. In other words, Geithner wasn't just a firefighter, but an arsonist. You wouldn’t know this, because Geithner in the book laments free capital flows. But he wasn't lamenting them when it mattered (and the position of the US government's trade representative today is still that hot money is good).

    2. As a firefighter, he had an obligation to be the arsonist. How else could he be on top of the situation?

  3. This move further encourages lenders to lend, but will it encourage bowers to seek loans? Lower the cost a bit and a few more marginal borrowers will get loans to be sure. This is more fuel for the fire, but will it be the spark? If it is not the spark, it will accelerate the problem when the spark comes.

  4. --"European Central Bank Institutes Negative Interest Rate"--

    Oh, boy! That's great! It means people will be paid to borrow! Thank you, European Central Bank!

  5. Reading Huerta de Soto's 'Money, Bank Credit, and Economic Cycles', and this is the first time I have had fear as the primary factor compelling me to read something.

  6. Has this ever been tried before in history? No? Oh how terribly exciting...

    1. Now We Have an Answer

      So the question now is how much, how big and how quickly does this scandal in China become uncovered. Make no mistake, there will be executions in China over this unlike the “the Corzinization of America” because they actually still do have a rule of law. Even though “we” (Americans) have become almost completely numb with scandal after scandal, this one has the potential to shake the entire globe so that we cannot ignore it. This is all about the credit structure coming down. “Collateral” has been lent against many times over and in some cases never existed or has been stolen. This is about “trust” and will quickly become about liquidity and the lack of. This is initially a highly deflationary event and as most everything is run on credit…everything will feel the shockwaves.

      Even without the paper contracts that must be unwound on the buy side for gold, the fact that confidence will have been totally broken will in my opinion push gold to much higher levels on its own. I also want to mention that as “history rhymes” we may be seeing this again soon. The deflationary events of the 1930′s gave way to a revaluation higher of gold; this will be done again in my opinion only this time by China as they are now the biggest owner. They will have the ability to do this and also the need to. We will find out truly “who has the gold and who doesn’t.” Those who do not will need to spend much much more of their fiat currency to secure gold and or live in hyperinflation. This is the “perfect storm” for America and the greatest setup of all time for a revaluation of gold. The dollar will be sold like a hot potato at the same time revelations of leased, lost and otherwise stolen gold come out in public. Picking a higher number for gold correctly will be a crapshoot and could even become an infinite number under the worst circumstances.

  7. In a related story, the European Central Bank has decided to require it's vendors to pay the bank for the services they supply. Spokesman Lars Frickendorky in an interview with OMFG News stated, "Once we looked at the whole system, we realized we could save a frickin' fortune just on the booze, drugs and hookers..."

  8. The June 5, 2014 Mario Draghi ECB Announcement of NIRP and Targeted LTROs, produced a stunning moral hazard based prosperity in fiat money, and produced the zenith of liberalism, defined as freedom from the state, as investors drove World Stocks, VT, Nation Investment, EFA, Global Financials, IXG, and Dividends Excluding Financials, DTN, to produce peak Equity Wealth, while Peak Currency Wealth, DBV, and CEW, was achieved in the third week of May 2014, and Peak Credit Wealth, AGG, was achieved the week ending May 30, 2014.

    The age of currencies and the era of credit came to an end the week ending June 6, 2014, as stock investors drove Equity Investments to their grand finale finish, manifesting as three long white candlesticks in the weekly chart of the S&P 500, SPY, at a time when the bond vigilantes, called the Interest Rate on the US Ten Year Note, ^TNX, higher to 2.59%.

    Peak Equity Wealth is seen in the chart of World Stocks, VT, relative to Aggregate Credit, AGG, that is VT:AGG, rising parabolically, and then peaking in value in the week ending June 6, 2014.

    The Mario Draghi ECB announcement of NIRP and targeted LTROs produced a blow off stock market top on Friday June 6, 2014, and at the same time has birthed the Beast Regime, to replace the Creature from Jekyll Island, which ruled in liberal policies of investment choice and in schemes of credit. Soon out of the waves of Club Med sovereign, banking, and corporate insolvency, it will rise to rule the world in authoritarianism, specifically in policies of diktat in every one of the world’s ten regions, and in schemes of totalitarian collectivism in all of mankind’s seven institutions.

    The age of diktat and the era of debt servitude commenced on the June 5, 2014, with the mandate of Mario Draghi for a 0.1% surcharge on money held overnight at the ECB. His word, will and way, will compel the debt serf, to experience economic life in regional fascist leader’s policies of regional economic governance, which establish regional security, stability and sustainability.

    Thus the Mario Draghi announcement of NIRP and targeted LTROs was both a climax event, one of peak wealth. and also a genesis event, one of the beginning of a new economic age of authoritarianism.