What’s this about the Bank of Japan (BoJ) offering negative rates on loans to commercial lenders? Rumours are swirling that the BoJ will do exactly that when it meets later this week to announce the latest in its war on insufficient demand for credit (deflationary depression). This is yet another sign that the war on cash is really just one front in a wider global war on your financial freedom.
Think I’m exaggerating? Think again. You know that the BoJ, like the European Central Bank (ECB), has imposed negative interest rates on excess reserves held on deposit at the central bank. The goal is to get commercial banks to loan. Negative rates on BoJ loans have the same objective.
It’s all part of the BoJ’s Stimulating Bank Lending Facility. Yes. That’s a real thing. How would negative rates on BoJ loans accomplish the goal? Well they probably wouldn’t. But in theory, banks would be paid to borrow by the BoJ. It could then loan the funds out at interest and pocket the difference – a nice boost to its net interest margin.
All of this assumes there is real demand out there for new credit
In the orthodox Keynesian playbook, it’s all about boosting aggregate demand by any means necessary. Increase the supply enough (by lowering the cost of borrowing) and eventually you should increase demand. Only they’ve been trying various versions of that in Japan for twenty years with no evident success.
Negative interest rates are a “horror” and “the stupidest idea I have ever experienced” according to DoubleLine Capital’s Jeff Gundlach. He told a Swiss newspaper that, “The next major event (for financial markets) will be the moment when central banks in Japan and in Europe give up and cancel the experiment.”
Credit junkies should shudder if he’s right. The cancellation of the negative rate experiment would, in the long run, be good. But in the short turn, markets would tank. But Gundlach may a bit early. It could be that the US Federal Reserve and the Bank of England (BoE) join the negative rate fray – before the BoJ and ECB give up on them.
Don’t rule out negative rates in the UK, according to Gertjan Vlieghe. Don’t recognise the name? He’s on the Monetary Policy Committee for the BoE. He’s one of the men who sets interest rates in the UK and could move them negative.
According to the Evening Standard, Vlieghe said that if inflation and growth stay below par in the UK, the BoE would have to think about negative rates “very carefully.” That means it’s already thinking about it, of course. It has been for some time.
But it’s not blind
The BoE would be well aware of Sweden’s foray into negative rates. It actually increases cash hoarding. Vlieghe conceded that if rates are too negative – probably somewhere between -0.5% and -0.75% – they become counter-productive. They undermine the “bank funding model” because they cause depositors to get their money out of banks, where they are no longer earning interest but paying it.
What an absolute mess. An attack on savers. An attack on prudence. An assault on planning for the future. Just a reminder: when you experiment with monetary values you undermine the fabric of civil society. That’s exactly where we’re at with this monetary experiment. And it’s why we’ve argued here before that the logical step in a systemic crisis is Financial Martial Law.
Category: Central Banks