ECB: The Pandora's joke with negative interests

   Why is the joke invented unless to say the truth using it… There is such a saw in my country. So 2 years ago I joked with the idea of “negative interests”. Today it is no more a joke. It is a reality. The zombie politicians passed the “red line” established by centuries of economic history and by strong mind. Yes – the European Central Bank decided to cut its deposit rate below zero.

   This looks like a ban for depositing money. Obviously no bank will hold money on deposit at ECB, as this will mean losing a share of it. It is logical banks will prefer to keep cash in vaults instead of depositing it. But how this will stimulate the economy? Money in vaults is the same as money in central bank. Neither of this means money is in business and consumers.
   Even up to now there were no money obstacles in front of financing the business. The record low interests were around for years. But no one wanted to borrow. So how exactly banks will press the business to borrow?
   The problem is not with money. All monetary experiments since 2008 showed that the problem is somewhere else. In fact it is in crushed real economy outsourced jobs and in the cut of the connection between being a worker and being a consumer. Now the West countries are only consumers that are producing nothing. The overall economic circulation is destroyed and the only that still keeps the system is money printing in West and accepting and accumulating this money in China. It is not clear till when China will be able to continue this. But it is clear that when the moment of truth comes, all the money-print will vanish in a hyperinflation fire.
   But let’s not deviate from the topic. As the problem is not with the money so continuation of money-attempts for stimulating the economy is a stupid move. Manipulating the money leads only to new and different combinations with the money itself and not to a life-giving impulse for the economy. Once this started, despite looking absurd, we are not too away from the time not only deposit rates, but even lending rates to become negative. In this situation we will have the perfect money-from-nothing financial scheme. You take 1 million at minus 5% rate. You use the negative rate to auto-repay the debt for 20 years. And then just spend the cash. Perfect. But why be so complex. Why just not print money and give it as a gift to people J
   Yes, all this is a joke. But wasn’t it a joke the negative interest rate?
   But let’s be some more serious. The interest is the food for the banks. They are profiting of it. If banks have nowhere to invest the money they will lower their own interest rates. If fact for some customers interests will become negative due to different bank fees. So for the people it will become more convenient to keep the money in cash. This way the bank system will become useless. It will shrink to the function of a payment service like Western Union or Paypal. And as people will not completely lose the aptitude to save, they will just look for and find alternative ways for saving – property, gold, etc. But all this will mean a crash of the money itself. A crash of the illusion that a piece of paper do holds any value. The interest is a basic component of the money. It is one of the main factors for keeping the value of the money. In a no-interest or negative-interest world, the money is becoming something very simple – nothing...

Dobri
June-5th-2014


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