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As central planners the world over grapple with the effective “lower bound” that’s imposed by the existence of physical banknotes, there’s been no shortage of calls for a ban on cash.

Put simply, if you eliminate physical currency, you also eliminate the idea of a floor for depo rates.

After all, if people can’t withdraw paper money and stash it under the mattress, then interest rates can be as negative as the government wants them to be in order to “encourage” consumption. If, for instance, you’re being charged 10% for saving your money, then by God you will probably spend that money rather than see the bank collect a double-digit fee just for holding on to your paycheck.

In the absence of physical cash, there’s no way for depositors to avoid that rather unpalatable outcome unless the public starts buying hard assets like commodities with their debit cards. If you think that sounds far-fetched, just consider the fact that everyone from Citi’s Willem Buiter to economist Ken Rogoff to the German Council Of Economic Experts’ Peter Bofinger have now floated the idea.

“With today’s technical possibilities, coins and notes are in fact an anachronism,” Bofinger told Spiegel back in May.

Now, in what should be a wake up call to the world, Bank of Ireland has banned branch withdrawals of less than €700.

Seriously.

Here’s The Irish Times explaining that tellers will still assist the “elderly” if they have trouble using automated methods of obtaining cash:

Under new rules, designed to streamline in-branch services, Bank of Ireland said withdrawals of less than €700 will no longer be facilitated with the assistance of tellers.

From mid-November, customers will have to use ATMs or mobile devices for small and modest-sized withdrawals.

Lodgements of up to €3,000 and those involving less than 15 cheques will also have to use the bank’s dedicated lodgement ATMs.

…click on the above link to read the rest of the article…

Yellen Tells Congress Negative Interest Rates Are Possible

November 5, 2015

Yellen Tells Congress Negative Interest Rates Are Possible

Reuters has reported that Yellen told a House of Representatives committee when testifying before Congress: “Potentially anything – including negative interest rates – would be on the table. But we would have to study carefully how they would work here in the U.S. context.”

Yellen may have been placating Congress for negative rates would wipe out the elderly entirely. They have failed to work in Europe in the slightest.

Swiss 1000-CHF

Negative interest rates are not working in Europe. Even in Switzerland, hoarding of cashis becoming a national pass-time. This entire idea demonstrates that those who would be king, do not understand even how the economy functions.

We are back to Thomas Paine’s Common Sense that inspired the American Revolution. He explained that government was evil because it operates from a NEGATIVE perspective to always PUNISH the people. This is the only way those in government ever perceive their power – it is always to demand and punish, never to work with society to comprehend what the problem might be.

Taxes are too high and the standard of living has declined. Those in power will ONLY raise taxes because they are incapable of reform. The year 2017 will cross the Rubicon. The inflation they are desperately trying to create will arrive, but not in the form they desire.

Time to Keep Your Cash in the Microwave?

October 31, 2015

Time to Keep Your Cash in the Microwave?

The Fed’s Big Pivot

NORMANDY, France – “Now, I think I’ve seen everything” is an expression that – like “this is the end of history” and “I’ll never leave you” – usually turns out to be premature. But it is what we found ourselves saying yesterday. Not out loud. We just moved our lips in mute amazement.

micxrowave Modern cash storage method pioneered by desperate Swedes
Photo credit: SWNS.com

On Tuesday, the Italian government sold a 2-year note yielding MINUS 0.023%. We don’t know what is more preposterous: that the Italians were able to borrow money at a negative nominal interest rate or that the press reported this transaction with a straight face.

Everything is awesome: an essentially bankrupt government sells two year notes at a negative yield! Today’s make-believe world created by central bankers and regulators is probably the biggest economic powder keg yet – click to enlarge.

It should have provoked howls of laughter, withering scorn, and unvarnished derision. But here at the Diary, we will not point the finger and chuckle. We will not invoke our usual tone of sarcasm. We will not damn the whole thing to Hell with loud and blustery cussing.

Instead, we’ll take the high road; we just want to know what it means. But before we get to that, let us pick up the news. Here’s the latest, from Bloomberg:

“Federal Reserve officials pivoted toward a December interest-rate increase, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday in Washington, preparing investors for the first rate rise since 2006.”

…click on the above link to read the rest of the article…

This Is Actually Going To Happen Next Year

September 13, 2015

This Is Actually Going To Happen Next Year

The intellectual groundwork is being laid for the next stage of the Money Bubble, and it’s going to be epic. Here are excerpts from two articles that appeared over the weekend (and which should be read in their entirety). Both deal with Japan, which went all-in on debt monetization, lost badly, and now needs a new plan.

The first is from a University of Michigan economics professor:

Japan should be trying out a next-generation monetary policy

Japan is wasting its time trying to raise inflation.

Japan may succeed at bringing annual inflation up to 2%; indeed, it has made some real progress toward that goal. But suppose Japan succeeds in getting inflation up to 2%; would that be enough? The US economy has struggled mightily despite the fact that it went into the Great Recession with a 2% annual rate of core inflation. Japan could try to target an even higher rate of inflation, as Blanchard, Ball and Krugman recommend, or Japan could leave behind quantitative easing and higher inflation targets to make the leap to next-generation monetary policy.

The key to next-generation monetary policy is to cut interest rates directly instead of trying to supercharge a zero interest rate by raising inflation. Of course, cutting interest rates below zero pushes them into negative territory. But Switzerland, Denmark, Sweden and the euro zone have already shown that can be done. There is a widespread myth that cutting interest rates much deeper than -0.75% would inevitably cause people and firms to do an end run around those negative interest rates by taking their money out of the banking system as paper currency. Not so!

It is easy to neuter cash taken out of the bank as a way to defeat negative interest rates simply by removing the guarantee that the Bank of Japan will take that cash back at face value.

…click on the above link to read the rest of the article…

Cash Withdrawal Limits and “Bank Holidays” Coming

September 13, 2015

Cash Withdrawal Limits and “Bank Holidays” Coming

Concerns that next crisis may be imminent
Bail-ins, withdrawal limits and negative interest rates may be imposed
FT proposes a ban on “barbarous relic” cash
Central banks would have people “completely under their control” – Bonner
Gold in safe jurisdictions will again protect wealth

Collapsing commodities prices, erratic market turmoil and the bursting of Chinese bubbles are leading to a crisis in confidence in the economic system across the globe. The long-expected crisis to which the global financial and systemic crisis in 2008 may have been a mere prelude may be upon us.

Governments have no appetite for further bailouts. The EU states have passed legislation which will make the banks or rather unfortunate and unsuspecting depositors liable for the bank’s lending and speculative profligacy.

It is claimed that this is to “protect” the taxpayer. In reality it will likely lead to bail-ins – the confiscation of deposits. It is likely that that in a crisis within the banking system this bail-in mechanism would be imposed on an impromptu “bank holiday” followed by limits on cash withdrawals as were applied in Cyprus and more recently to depositors in Greece.

As has been pointed out by many other analysts, the unelected powers-that-be have used all their conventional weaponry to stave off the consequences of their irresponsible ultra loose monetary policies and massive buildup of debt globally – the largest ever seen in the history of the world.

The typical response to a crisis has been to slash rates from somewhere around 6% – the historic post war norm in the west – to between 0% and 1%. This has stored up an even crisis in the future – the question is not if we have another crisis but when.

…click on the above link to read the rest of the article…

Central Banks Ready To Panic — Again

July 26, 2015

Central Banks Ready To Panic — Again

Less than a decade after a housing/derivatives bubble nearly wiped out the global financial system, a new and much bigger commodities/derivatives bubble is threatening to finish the job. Raw materials are tanking as capital pours out of the most heavily-impacted countries and into anything that looks like a reasonable hiding place. So the dollar is up, Swiss and German bond yields are negative, and fine art is through the roof.

Now emerging-market turmoil is spreading to the developed world and the conventional wisdom is shifting from a future of gradual interest rate normalization amid a return to steady growth, to zero or negative rates as far as the eye can see. Here’s a representative take from Bloomberg:

Cheap Money Is Here to Stay

For decades, central banks lorded over markets. Traders quivered at the omnipotence of monetary authorities — their every move, utterance and wink a reason to scurry for safe havens or an opportunity to score huge profits. Now, though, markets are the ones doing the bullying.The Fed’s Countdown
Take New Zealand and Australia. Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.”

Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero. But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks.

…click on the above link to read the rest of the article…

Why deflation is unlikely

May 3, 2015

Why deflation is unlikely

Financial markets are becoming aware that the US economy is stalling, so investors increasingly take the view that with demand likely to stagnate or even fall, prices for goods and services will soften. This is already threatening to be the situation in a number of other advanced nations, with negative interest rates to combat it becoming commonplace. For this reason, gold and silver priced in dollars are expected by many traders to drift lower.

Putting the prices of precious metals to one side for a moment, there are some serious issues with this analysis. Let us assume for a moment that the US economy does stall; the text-books tell us supply and demand for goods and services will rebalance at lower prices. This was what effectively happened in the wake of the Lehman Crisis, when energy, metals and precious metal prices all fell sharply and large discounts for manufactured capital goods became available. This does not mean that second time round (and a sliding US economy could create the sort of financial strains that make Lehman look like a walk in the park), the same thing will happen again. Indeed, for next time the central banks already have a plan to contain the situation based on their experience in the Lehman Crisis. It involves the rapid expansion of money, which to the Federal Reserve System (“Fed”) at least has been proven on recent experience to have little or no inflationary consequences whatever.

We therefore know something we did not know in the wake of August 2008, when the imminent collapse of the global banking system drove everyone to increase their cash balances. This time we know that last time’s guarantees of $13 trillion, or whatever sum you care to think of, will yet again be provided by the Fed, backed by hard cash on demand. Forget bail-ins; they are for dealing with one-off bank insolvencies, not a wider systemic crisis.

…click on the above link to read the rest of the article…

Get Ready For Negative Interest Rates In The US

January 25, 2015

Get Ready For Negative Interest Rates In The US

With Fed mouthpiece Jon Hilsenrath warning – in no lesser status-quo narrative-deliverer than The Wall Street Journal – that The ECB’s actions (and pre-emptive collapse in the EUR) means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad, potentially slowing both U.S. growth and inflation; and Treasury Secretary Lew coming out his crypt to mention “unfair FX moves,” it appears The Fed (and powers that be) are worrying about King Dollar. This suggests, as Mises Canada’s Patrick Barron predicts, the Fed will start charging negative interest rates on bank reserve accounts as the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”. If savers won’t spend their money, the government will take it from them.

As The Wall Street Journal explains,

The European Central Bank’s launch of an aggressive program this week to buy more than €1 trillion in bonds poses important tests for the U.S. economy and the Federal Reserve.

Europe’s new program of money printing—and the resulting fall in the euro—means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad.

The stronger dollar could slow both U.S. growth and inflation, giving the Fed some incentive to hold off on its plan to raise short-term interest rates later this year from near zero.

…

A stronger dollar has three important implications for the U.S. economy, markets and policy makers. First, it tamps down inflation just as the Fed is trying to raise inflation closer to 2%. Second, it hurts exports and therefore economic growth. Lastly, the attraction of U.S. financial assets could heat up markets just as regulators keep watch for dangerous asset bubbles.

…click on the above link to read the rest of the article…

The Consequences of Imposing Negative Interest Rates |

November 23, 2014

The Consequences of Imposing Negative Interest Rates |.

Negative Interest Rates and Capital Consumption

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about.

At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road.

However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action.

…click on the above link to read the rest of the article…

It begins: German bank charging NEGATIVE interest to its customers

November 4, 2014

It begins: German bank charging NEGATIVE interest to its customers.

Don Quixote is easily one of the most entertaining books of the Renaissance, if not all-time. And almost everyone’s heard of it, even if they haven’t read it.

You know the basic plot line- Alonso Quixano becomes fixated with the idea of chivalry and sets out to single-handedly resurrect knighthood.

His wanderings take him far across the land where he gets involved in comic adventures that are terribly inconvenient for the other characters.

He famously assaults a group of windmills, believing that they are cruel giants. He attacks a group of clergy, believing that they are holding an innocent woman captive.

All of this is based on Don Quixote’s completely delusional view of the world. And everyone else pays the price for it.

…click on the above link to read the rest of the article…

The Wrath of Draghi: First German Bank Hits Savers with ‘Negative Interest Rates’ | Wolf Street

October 31, 2014

The Wrath of Draghi: First German Bank Hits Savers with ‘Negative Interest Rates’ | Wolf Street.

Deutsche Skatbank, a division of VR-Bank Altenburger Land, which was founded in 1859, is not the biggest bank in Germany, but it’s the first bank to confirm what German savers have been dreading for a while: the wrath of Draghi.

Retail and business customers with over €500,000 on deposit as of November 1 will earn a “negative interest rate” of 0.25%. In less euphemistic terms, they have to pay0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.

Inflation has had a similar effect in the zero-interest-rate environment that the ECB and other central banks have inflicted on savers, but this time it’s official, it’s open, it can’t be hidden. Instead of lending your moolah to the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you’re financially better off hiding it in the basement. Grudging respect is due the ECB and other central banks: through the perverse regime of ZIRP, they have succeeded in transmogrifying “cash in bank” from an income-producing asset to a costly liability.

“Punishment Interest” is what Germans lovingly call this. It’s the latest and most blatant step of the central-bank strategy to confiscate in bits and pieces and over time the wealth that prudent people and businesses have accumulated, and that should have re-entered the economy via the intermediation of the banks.

…click on the above link to read the rest of the article…

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