Are central bankers nuts?
It’s kind of a zany question, and I hadn’t entertained it until recently. But the fact is, recent actions by the world’s central bankers – as well as some ideas that are still being contemplated – seem completely crazy.
It all stems from the fact that quantitative easing (QE) and zero interest rate policy (ZIRP) have largely failed. Economies around the globe, from emerging markets to developed nations, are stalling out. The risk of a global recession is now very real.
And that’s lead central bankers to think not just outside of the box, but out of this world entirely.
Going From ZIRP to NIRP
The first item coming from central bankers is negative interest rate policy, or NIRP. As pointed out by my colleague, Alan Gula, the Federal Reserve has recently hinted at the possibility of NIRP.
This wouldn’t really be surprising. Some countries in Europe, such as Sweden and Switzerland, already have negative interest rates.
The stated goal of NIRP is to encourage banks to put their money to use, rather than parking it at the Fed. Essentially, a negative interest rate would penalize banks for stashing too much cash.
NIRP could also mean the end of the dollar’s strong run. That, in turn, could lift emerging markets, which have been getting drubbed. In a roundabout way, that helps the Treasury market, as emerging markets that have been sellers of Uncle Sam’s debt will once again become buyers.
But the real effect will be on everyday people.
As if earning nothing on savings held at a bank or in Treasuries wasn’t bad enough – the latest three-month T-Bill was auctioned with a 0% yield – now, dear reader, central bankers want you to pay the banks for the privilege of holding your hard-earned savings.
Meanwhile, negative interest rates are bad news for pension funds and insurance companies in need of a conservative investment that earns interest.
Take the case of a Swiss pension fund manager, as reported by Zero Hedge. The manager realized he could save his fund money by just withdrawing the idle funds and placing the cash into a nice, safe Swiss bank vault. A smart exercise of his fiduciary responsibility, right?
Wrong! In a scene reminiscent of Seinfeld’s “Soup Nazi,” he was told by the bank, “No cash for you!”
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Hoarding cash, as it turns out, interferes with the central bank’s policy. Thus, the fund’s money isn’t really theirs. It belongs to the bank. However, the fund manager was told that he could get the money in an electronic transfer or check, which leads me to the next zany idea…
Welcome to the War on Cash
Central bankers are looking to eliminate cash altogether.
Already, JPMorgan has sent a few letters stating that cash can’t be placed into safety deposit boxes. Both Citibank’s Chief Economist Willem Buiter and the Bank of England’s Chief Economist Andy Haldane believe that eliminating cash will solve many of our economic problems.
In reality, it would remove the option that the Swiss pension fund manager tried to use: grabbing your cash and hiding it under the mattress if rates turn negative. Ultimately, central bankers want to encourage more spending (more debt?) to get the global economy out of its funk.
My thought is that any introduction of digital government money would place a very real premium on any cash out there, as well as on those “barbarous relics,” gold and silver. After all, I don’t think people in the underground economy, like drug dealers, will be too keen on using easily traceable digital money for their “transactions.”
Bailouts? How About Bail-Ins?
Of course, having people’s money trapped in banks will make it easy when the next bailout of the “too big to fail” (TBTF) banks happens.
This time, though, it will be a bail-in, with depositors “contributing” part of their savings to keep the banking system afloat. An International Monetary Fund paper states that TBTF banks are to be immediately re-capitalized with their “unsecured debt,” which happens to include deposits.
In fact, this already happened when banks went bust in Cyprus. Meanwhile, strong rumors persist that similar rules will be implemented in Greece in 2016. Plus, the European Commission drafted rules after the 2008 financial crisis forcing shareholders and creditors to “contribute” via the bail-in process.
And don’t think it might not happen in the United States. In his very first speech as Federal Reserve Vice Chairman, Stanley Fischer said the United States was “preparing” a proposal on bank bail-ins.
So there you have it: The wacky world of central bankers and economists – coming soon to a bank near you.