This is officially an all-out revolution of the financial system where banks are now actively rebelling against the central bank. In a stunningly real rebuttal of Europe's negative interest rate policy, German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH.
Mario Draghi better put up or shut up at the next ECB meeting as the market is more-than-pricing-in a very significant deposit rate cut (deeper into NIRP). In fact, at -56bps, 2Y German bond yields are the most "priced in" since 2011(and bear in mind he disappointed in December).
Today's deflationary report, the worst since the start of Europe's QE, virtually assures another substantial round of policy easing from the European Central Bank on March 10. The question is what the ECB will reveal. Here are the options.
If, and when, a run on physical cash begins, there will be roughly $1 dollar in physical to satisfy $10 dollars in savers' claims, a ratio which drops to 20 cents of "deliverable" cash if the $100 bill is taken out of circulation.
"If central banks do not achieve their medium-term inflation targets through NIRP, they may have to adopt other policy measures: looser fiscal policy and even helicopter money are possible in scenarios beyond QE and negative rates.
The real pity is that the busts and crackups could all have been avoided if central bankers recognized that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesians believe. Nevertheless, expect more central banks to follow the early leaders — Switzerland, Sweden, Denmark, and even the European Central Bank itself — into negative interest rate territory. The crying shame is that it will not work and will cause great harm to hundreds of millions of people.
When a leading nominee for President gets something exactly right, we should applaud them for it. In this case, Donald Trump’s call to audit the Federal Reserve is dead on correct. Most Americans don’t realize this, but the Federal Reserve has far more power over the economy than anyone else does – including Barack Obama. The funny thing is that the Federal Reserve is not even part of the federal government. It is an independent private central bank that was designed by very powerful Wall Street interests a little over 100 years ago. It is at the heart of the debt-based financial system which is eating away at America like cancer, and it has no direct accountability to the American people whatsoever.
Italy is big enough to matter (it is the eight largest economy on the planet), but so uneventful that most does not pay any attention to what is going on there. We contend that Italy will, during the next year or two, be on everyone’s radar screen as it has the potential to derail the European project for real.
The bear will soon be arriving in earnest, marauding through the canyons of Wall Street while red in tooth and claw. Our monetary central planners, of course, will once again - for the third time this century - be utterly shocked and unprepared. That’s because they have spent the better part of two decades deforming, distorting, denuding and destroying what were once serviceably free financial markets. Yet they remain as clueless as ever about the financial time bombs this inexorably fosters.
The same Fed which for 7 years provide generous funding to offshore commercial banks, is now granting foreign central banks the same arbitrage privilege, one which worst of all, is almost entirely shrouded in secrecy.
In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.
What negative interest rates are really projecting are low-to-no growth and zero-profit environments for the entire global economy sometime in the future, where businesses simply cannot make money. The implication of this is that all businesses will come to the government seeking subsidies. We already see it in agriculture. Education. Health care. Housing. Whether it is loan programs for customers or outright grants. There will be more. This is why capitalism cannot survive no growth. Economies would naturally revert to some form of subsistence, where the need to trade is reduced greatly.
As with Japan, Western economies that pursue a long-term policy of low or negative interest rates can expect decades of low growth unless these “unorthodox” monetary policies are rapidly abandoned. Recessions are not a problem of insufficient demand. They are a problem of supply being misaligned with demand.
Feel. The. Bern. "I have long been concerned that you see your major function and your position as the need to represent the wealthy and I must tell you that your testimony today only confirms all of my suspicions."
In response to questions that took issue with the Fed paying banks on excess reserves The Chair seemed not only defensive, but rather perplexed, as to why they were even questioning it to begin with. This line of questioning in my view opened up, and brought to light, the Pandora’s box of Keynesian insight and thought processes now emanating from the Fed. In fact, we're quite sure Ms. Yellen herself didn’t realize just how far she threw the lid open.