Previously, I wrote that the war on cash is over. We’ve lost. You are powerless to prevent the assault on using physical cash for everyday transactions.
But the battle for your wealth goes on. It’s now a life and death struggle to protect the value of your savings and your retirement.
There is dissension in the ranks! The new financial world order of centralised monetary policy has an opponent: the commercial banks themselves.
That’s right!
A fight has broken out between central banks and commercial banks. I’m calling it the Banker’s Civil War. It’s not exactly the Battle of Bosworth; no Houses of York and Lancaster at war for the throne. At least not yet.
But commercial banks, asset managers, and even some politicians are taking aim at central banks for the destruction being wrought on our economy and political order by negative rates. Negative rates hurt consumption and GDP growth precisely because they lead to increased saving, according to BlackRock’s Larry Fink. Savers save more to make up for low interest rates. Fink writes:
There has been plenty of discussion about how the extended period of low interest rates has contributed to inflation in asset prices. Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future… This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending… A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.
Imagine that! A policy having the opposite result of its intention. It’s already happened in Japan, where negative rates from the Bank of Japan have actually led to a stronger yen. Fink is right.
Negative rates now damage your retirement later
Fink’s feint against negative rates was supported with a frontal assault on the European Central Bank (ECB) by German Transport Minister Alexander Dobridnt. He told a German paper: “The ECB is taking a very risky path… The disappearance of interest [on bank savings] is creating a gaping hole in citizens’ retirement provisions so the efforts many people are making to ensure their prosperity in old age could vanish into thin air.”
A discussion of the moral implications of bad monetary policy is beyond the scope of today’s letter. But you can see the point clearly enough. When you mess with monetary values, you mess with personal values. Changing the nature of money makes it harder for people to plan for the future. The whole of society is affected by short-termism and unwillingness to engage in long-term planning. What is the point?
The financial effects are bad enough. But we know from history that a debt crisis becomes an economic crisis. An economic crisis becomes a social crisis. And a social crisis becomes a political crisis.
That’s where we are now. The debt crisis of 2008 was never fully resolved. The day of reckoning was delayed. The debt has grown. And now it acts as an albatross on the whole of the world economy. Negative interest rates are designed to lower the cost of servicing massive government debts, to postpone it indefinitely.
This is where some people like to use the world financial repression. What does it mean? Financial repression is when a policy like negative rates is bad for savers but good for government. The economic interests of the people are quashed in favour of the governments that borrow money and the banks that lend it to them.
How bad money leads to violent politics
The difference between now and last year is that banks who lend to governments are revolting, or at least showing signs of opposition. Low and negative interest rates are an attack on their profitability. The lower interest rates go, the bigger the conflict between central banks and commercial banks.
And you wonder why there is a populist political reaction to the status quo? German Finance Minister Wolfgang Schäuble doesn’t wonder. According to Reuters, Schäuble partly blamed the ECB’s negative rate policy for the rise (and success) of right-wing German political parties in regional elections.
The attack on savers has created a political backlash. According to The Wall Street Journal, Schäuble told ECB President Mario Draghi, “Be very proud: You can attribute 50 percent of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy.”
Policy wonks at the International Monetary Fund (IMF) must be a bit shell-shocked that the normally reserved Germans have fired a shot across the bow of the ECB.
Viñals talks limits
IMF analyst José Viñals tried to give negative rates some “covering fire” over the weekend. Viñals released a paper in which he concluded that:
Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. Overall, [negative rates] help deliver additional monetary stimulus and easier financial conditions, which support demand and [stable inflation].
To show he was being fair-minded he added that “There are limits on how far and for how long negative policy rates can go… The public may feel that they are being ‘taxed’ if and when deposit rates increasingly turn negative.”
The limits have already been reached. They’re political. Savers have had enough. If commercial banking deposit rates go negative, economists will worry about consumption dropping and taking GDP with it. But politicians will have to worry about something more serious: the loss of faith in the current banking system.
In the meantime, it’s a positive development that commercial banks are pushing back against central banks. Central banks are engaged in massive “mission creep”. They promise to produce growth, low inflation, a sound financial system, and fairness in the financial system. You can’t do all that by controlling the price of money. The sooner that illusion is destroyed the better off we’ll all be.
Category: Central Banks