ECB to discover the "beauty" of negative interests
The Central Bank engineers finally have started to discover the genius of… negative interests. Just as expected and commented in some articles in this blog, it was a question only of time someone to decide to pass the absolute forbidden border of zero and discover the Universe of negative numbers. It is a logical and a natural evolution of the madness of money-print.
The European Central bank is planning to establish negative interests on deposits of banks in it. This is the first step and means for banks will be better to keep the money in cash in their vaults than to deposit it in Central bank. Although it is up only to deposits now, there is no reason the same policy not to be extended to loans from Central bank too. The arguments will be the same – to motivate the banks to lend credits, and not to keep cash.
But the problem is not with the money, but with the economy. There is no working economy and no enough confidence to take loans and invest. Even now the interest rates are at record low, but no one applies for a loan. He has nothing to do with this money. The markets are slumping, jobs are being lost, and social unrest is on the streets. There is even the opposite trend – many businesses are closing with owners preferring to cash their assets and put the money on deposit.
Even the banks have no interest of lending. And the reason of this is… the low interests level. With a troubled economy the risk is going up. The market compensation of the risk is the interest rate. I.e. the rate must be higher, so the bank to cover the risk of not getting its money back. But with a constant policy of major Central banks to press the interests down, this simply makes giving loans too risky for the bank. It can not calculate the risk premium, because this way the interest will exceed the artificial “market” levels reached via the money print.
When the politicians try the money print and reach failure, they usually search the problem in not enough money print. So decide to print more and more in an attempt to cure the illness by injecting more viruses. The negative interests are just a consequence of the general money print strategy. They do not address the real problems, do not restructure the economy, and do not solve the problems of the government debt, budget deficits and excessive pubic costs. So the result of this series of financial engineering will be the same as with the previous. Nothing positive - just an extra inflating the paper money bubble.
May 9th 2013