By Bob Livingston
It will not be long before the spread of negative interest rates reaches the U.S., former Federal Reserve Chairman Alan Greenspan told CNBC’s “Squawk on the Street ” on Wednesday. “You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States.”
NIRP — negative interest rate policy — is the latest in a string of stupid bankster tricks to resurrect comatose economies.
In times past, the central bankers would lower interest rates when the economy got saggy. That in turn lowered the amount of interest banks paid their depositors. Savers who are making less money with their money in the bank decide to buy valuable stuff with the money instead, like cars and houses and hard asset items that get put in houses and that would stimulate the economy as the money got spread around.
But that strategy of loosening monetary policy to fix things ran into a big snag in The Great Recession of 2008. Thanks to the Greenspan era of cheap money followed by Helicopter Ben Bernanke throwing cash around with a free hand, interest rates were already near zero when the stuff hit the fan.
Since they couldn’t lower interest rates any further — or so it seemed at the time — the central planners resorted to a really bizarre experiment called quantitative easing, or QE. That didn’t work, so in their brilliance they decided the solution was to do more quantitative easing. That didn’t work, either. The global economy coughed and sneezed and spit up green stuff. The cure? Yet more QE! And it still isn’t working. And the banker elites have run out of bullets.
So they came up with the zany idea that if they make it painful to put money in the government bank (where it would usually earn interest), the commercial banks will be forced to lend out their cash to the public and — voila! — the economy will be well again. Please welcome, if you will — NIRP, the new savior of the global economy.
The European Union, Sweden, Switzerland, Denmark, and Japan have all introduced negative interest rate policy over the last five years. Where NIRP has been implemented, it only affects money held by large commercial banks at the central bank and is only charged on a bank’s “excess reserves.” That’s the funds over and above the money a bank must keep in the central bank to satisfy regulatory requirements.
At this point, NIRP does not affect retail depositors in banks. And as Adrian Ash at BullionVault notes, “imposing negative interest rates on actual savers could face legal challenges.” But it’s not out of the question that the banker elites may try to charge you and me to keep our money safe in the bank.
Never mind that, like ZIRP (zero interest rate policy) and QE (quantitative easing), NIRP isn’t doing what it was supposed to do. Not only have the commercial bankers not taken the hint and withdrawn their money to spread around in the economy, they’re actually parking even more cash in the government banks.
NIRP is costing European banks 10 times more than it did when the policy was first introduced. According to Bank of America Merrill Lynch’s European Banks Strategy research team, in 2014, the annual cost to banks was around 200 million euros, but the cost has risen tenfold to 2 billion euros and rising. The BoAML team believes the ECB’s “qualitative easing” (not quantitative easing) policy is actually creating new deposits in the banking system instead of distributing the money into the economy.
The team’s research shows that when NIRP was first introduced, there was only about 100 billion euros of assets that met the excess reserve threshold on which the negative deposit was applied. Since NIRP, though, excess deposits have ballooned sevenfold and now stand at nearly 1 trillion euros.
This is failing, dear reader. But don’t expect that to deter the bankster elites. Expect them to keep digging deeper into negative territory in what sane observers consider a desperate panic in the halls of central banks.
Now you may think we’re safe from such nonsense here in the U.S. — not because our banksters are any smarter than those in the rest of the world (they aren’t) but because according to economists and Wall Street the American economy is hale and hearty…
But if the U.S. gets dragged down into recession along with the rest of the world, The Fed and Company may seriously consider looking at negative interest rates. There are legal questions about whether the Fed even has the authority to do that under the Federal Reserve Act, and former chair Janet Yellen admitted in testimony before Congress that she wasn’t sure about the legality of such a move.
A Fed Staff Memo from Aug. 5, 2010, but released Jan. 29, 2016, said “There are several potentially substantial legal and practical constraints to implementing a negative IOER [interest on excess reserves] rate regime, some of which would be binding at any IOER rate below zero, even a rate just slightly below zero. Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.”
Translation: It’s not legal, but we’ll find a way around it. As investment adviser Arkadiusz Sieron put it, “If there is political will, and in times of crisis there is always political will, all needed changes will be made.”
What could negative interest rates do to you? Listen to Jared Dillian, editor of “Street Freak”: “In theory, if you have a disappearing bank account balance you want to take that money out and spend or invest it. But it’s not really clear that that’s what’s happening [in countries that already have negative rates]. It might cause people to become demoralized and not spend. Negative rates and getting rid of large denomination bills go hand in hand. One way to avoid negative rates is to withdraw your money and hold cash … the government’s response to that could be to make it very difficult to hold cash. This has happened before. In the FDR days, in 1932, we eliminated $500 bills and $1000 bulls for the exact same reason.
“[NIRP] has all kinds of effects. It drives people into credit and debit cards and into the banking system where transactions can be tracked … this is a scary development. You should be able to participate in the economy anonymously. I can’t think of a more bullish argument for gold. I can’t emphasize enough how bullish a development negative interest rates are for precious metals.”
Pierre Lassonde, former chairman of the World Gold Council and former president of Newmont Mining points out that in really strong gold bull markets, the yellow metal can reach a ratio of 1:1 with the Dow, meaning the total Dow is worth exactly 1 ounce of gold. He says that in 1937, the Dow was 37 and the price of gold was $36. In 1980, the Dow stood at 800 and the price of an ounce of gold was $800.
I admire Lassonde’s optimism, although $26,000 per ounce gold isn’t near enough to be seen on the horizon just yet. There are a lot more variables involved in the gold price besides government policy. Still, even if the market drops precipitously, $10,000 gold is a tempting target if we buy it while it’s in the mid-$1,500s. And that’s not including the best reason to buy gold: Protection from future disasters.
The knock on gold from the likes of Warren Buffett and other mainstream gold-bashers is that it pays no interest and incurs storage and security costs. Fair enough. But with interest rates going below the line, that knock suddenly loses its punch. And the smart money is taking note, as I have written to you recently.
And think about this: The amount of physical gold available for purchase is very limited. With all the many hundreds of billions of dollars being held by hedge funds, and retirement/corporate investment managers, if only a fraction of them started buying gold…
That’s a situation already pondered by Hard Assets Alliance. Granted, they are going to be bullish on precious metals. But they do seem reasonable when they say that if “just 2% of global financial assets under active management were to seek a new home in gold, it would mean a shift of $1.5trillion. For some context, this would represent over 12 times last year’s production, and over 9 times total demand… globally… There isn’t anywhere near this amount of gold available for investment. Not even close. Even if our assumption is off by 1,000% and just one-tenth of this dollar amount headed into gold, it would still soak up every ounce of gold mined worldwide last year.”
Is such a large number of purchases possible? Adrian Ash writes that NIRP “makes gold look remarkably attractive to large money managers. First because NIRP, like its crazy promoters and their crazier outcomes, speaks directly to the gut-level case for buying gold. Second, because it has become cheaper to vault physical bullion than to lend short-term money or to park funds in longer-term government debt.”
Also, recall that I have also written to you about various countries retrieving their gold from central bankster depositories in London and bringing it home, in addition to making large purchases.
However, as it relates to you, NIRP can indeed leach down to touch retail savers’ accounts. Negative interest rates are a stupid idea, but central bankers tend to keep doing more of stupid ideas that don’t work. So negative interest rates are probably not a short-term whim. That’s bad for the world’s monetary system, but great for gold.
The smart money is already catching on to the future of gold in a negative interest rate-infested world and is stocking up. Greenspan told MSNBC “that gold prices have been surging recently because people are looking for ‘hard’ assets they know are going to have value down the road as the population ages. Gold futures are up more than 21% in 2019 and are trading around levels not seen since 2013.”
