This page has been archived and commenting is disabled.

Alasdair Macleod: All You Need To Know About Negative Interest Rates

Tyler Durden's picture


Submitted by Adam Taggart via Peak Prosperity,

Last Thursday, the European Central Bank (ECB) took the historically unprecedented step of lowering certain of its interest rates below 0%. In a report to our premium subscribers immediately following the announcement, Chris likened the move to the policy equivalent of dropping a neutron bomb.

In the days following, despite the ECB attempting to clarify its stance further, many questions still linger; most notably: What exactly will the implications of this negative interest rate (NIRP) policy be?

We've asked our European correspondent, Alasdair Macleod, to lay things out in black as white as much as is possible. In this detailed podcast with Chris, he explains exactly what steps the ECB is undertaking, what the most probable ramifications will be, and where the highest degrees of risk now lie: 

The reason we have got into this silly situation  is you have got a two-way pull. On the one hand, you have got the central banks saying we need to get this economy going; which basically means that banks have got to lend to non-financial corporations in the EU in order to get these economies going. This is the sort of standard central bank mantra.


But the banks on the other hand in Europe are horrendously over-geared. When you look at a large bank like Deutsche Bank, you see its balance sheet is something like 55 times geared. I mean, it is enormous. The European banks have on the whole not managed to repair their balance sheets since the Lehman crisis in the way in which U.S. banks have. This leaves the EU banking system fundamentally weak and vulnerable. The banks know it. They would rather hold sovereign debt guaranteed by the ECB. They would rather put money on deposit with the ECB in order to lessen the systemic risk. Because otherwise they will lend it out to their peers and through the interbank market. They are now being told: Look, we will charge you for the facility.


Again, what the ECB is trying to do is they are trying to encourage banks to lend to the non-financial sector.


Now, there is another aspect of this. That is that they are making money available under something called the Targeted Long-Term Refinancing Operations (TLTRO). Now, under this, a bank can borrow from the ECB the equivalent of a bank's loans to the non-financial sector, excluding mortgage lending, at 10 basis points above the ECB's base rate of 0.15%. In other words, if you are a bank, a Eurozone bank, you can borrow from the ECB at a 0.25% for four years until September, 2018. Now the initial sizes of this facility is 400 billion Euros, but there will be further charges available in September and December.


You can see that here we have the ECB on the one hand and the banks on the other. The banks in the system have got the problem that some of the biggies are horrendously over-geared. But unless the ECB can get the economy going, the whole thing is going to fall over. Don't worry about the gearing lads, we'll make the money available. Just go out and lend it!


You can see that this is a very serious development. Just to give you a sort of a little bit of a flavor for the problem from the ECB's point of view. Inflation in the European monetary union has fallen to roughly 0.5%. This is against the target of 2% (bear in mind that the next set of bank balance sheet stress tests assumes the most extreme adverse scenario is an inflation rate of 1% percent...)


So, we are already at 0.5%. From the ECB's point of view, they are looking at something which is terrifying them: that's deflation. If you get deflation, then sovereign debt ratios are likely to spiral yet higher despite any austerity packages that countries like Spain or Italy might bring in. To illustrate this point, I think I am right in saying that today the Italy, Holland, and the Portuguese economies actually contracted in the first quarter of 2014. France, which was a biggie had zero growth. Now, you can see that if you have got declining and sort of falling prices in this environment. How and if you look at prices relative to the mountain of debt that these countries how, you can see that suddenly all sorts of ratios start looking very nasty. It is that, I think that the ECB is absolutely desperate to stop.


The reason they have announced NIRP the way they have is they want to drive the Euro lower. I think they feel that if they can have a lower Euro, then that will stop prices falling and indeed hopefully perk them up a little bit. But this whole idea is killing savings. I mean, central banks have been trying to do this ever since they have bought into the Keynesian theories. It has got us into a cycle of just worse and worse credit defaults. They are giving the medicine which historically has been proven to kill us. They are just doubling the doses.


This is not going to succeed, I fear. I'm not sure that the very short-term benefits that you sometimes see when they ease a currency are likely to follow through, because the whole point about driving a currency lower is that you persuade people against all reason that things are looking better. Businesses will employ people because they see that their margins are improving. They can start selling things again. That is the sort of basically the Keynesian mean.


At this point, I think this has been tried so many times that industry in the Eurozone and indeed elsewhere is no longer persuaded by this argument. I think everybody is now sitting on their hands and saying well, we actually do not really want to do very much. Because we just see risk, risk, risk. I don't think that the ECB can actually get around that fundamental problem with these latest measures. Everybody still sees risk. It may drive the Euro lower which may rescue the inflation rate from falling below 0.5%, but I really don't see that it is going to be more effective than that.


You see, Mario Draghi (the head of the ECB) is dealing with is a post Keynesian-world where our problem of Too Much Debt cannot be admitted. His objective as an appointed head of a central bank is to keep the show on the road at all costs; that's really what we are talking about. The level of debt and the amount of mal-investment in the whole system is immense. At the same time, they're killing all of the savers.


Here again, instead of doing what is the sensible thing to do -- that is, for us to save rather than spend -- they are doing the reverse. That they are effectively eliminating savings from the system and replacing it with newly-printed fiat money and bank credit. That's the attempt, and I have to say that I think it's bound to fail.


The ECB now finds itself on the cusp of this failure. Remember, there are some very big banks with gearing over 40-50 times. All you need is a fall in prices of 1%, 2%, or 3% for a few companies to go bust, and then those banks are no longer solvent. It is a nightmare scenario. It really is.

Click the play button below to listen to Chris' interview with Alasdair (55m:48s):



- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 06/10/2014 - 18:34 | 4842216 Publicus
Publicus's picture

In a free market maybe. They'll just print to bail them out.

Tue, 06/10/2014 - 18:42 | 4842247 DoChenRollingBearing
DoChenRollingBearing's picture



1) Banks give you (maybe) 0.1% for checking / money-market accounts.

2) Bank of Sealy gives you 0.0%, but probably at lower risk (out of the system).

3) Gold gives you 0.0%, but safer still (out of the system as well).

4) Bitcoin gives you a nice speculation, risky, but nice (out of the system too).

Option No. 1 does not look so good...

Tue, 06/10/2014 - 18:53 | 4842273 Jethro
Jethro's picture

Tangible assets with intrinsic value trump fiat any day. Knowledge and useful skills trump tangible assets.

Tue, 06/10/2014 - 19:27 | 4842284 Pure Evil
Pure Evil's picture

Ha, Ha, DoChen, Bank of Sealy.

Imagine if you Google Bank of Sealy you can actually find one in Sealy, TX.

Tue, 06/10/2014 - 19:33 | 4842392 kaiserhoff
kaiserhoff's picture

Great Piece.  Cuts to the heart of Europe's dillema.

If you've lived there, you understand the infinite waste and outragious cost of labor that is the essence of most of these countries.  Of course, globalization will crush that and cause deflation.  We are living in interesting times.

Wed, 06/11/2014 - 04:43 | 4843654 Boris Alatovkrap
Boris Alatovkrap's picture

In all of Boris pathetic life, is never hear complaint of deflation from non-bankster. Stand in line for two hour or more and pay less than last time... happy joyous... no is complain. Bankster and economist is heart of problem for Europe and other Central Bank control nation.

Wed, 06/11/2014 - 07:59 | 4843839 tonyw
tonyw's picture

just look at how much you would have to pay the banksters for a loan.

Wed, 06/11/2014 - 08:13 | 4843843 PT
PT's picture

Pure Evil:
I thought you would have seen this before:

I'm also surprised that no-one else put up the link before me.  Oh well ... Enjoy!


EDIT:  Not so sure it would give a comfortable night's sleep.

Tue, 06/10/2014 - 19:14 | 4842330 max2205
max2205's picture

It's worse, they have not be solvent for 8 years

Tue, 06/10/2014 - 21:31 | 4842861 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

They also treat you like shit and charge you every opportunity they get.  It is fucking absurd.

The ATM fees alone are the worst sort of usury.  The Check Cashing place in the ghetto has nothing on the big banks in terms of slime-factor.

Wed, 06/11/2014 - 04:57 | 4843660 Boris Alatovkrap
Boris Alatovkrap's picture

By definition, fractional reserve lending is insolvency. Think of gold factor, he is print more gold redemption certificate than is holding of gold because he is smart like prostitute, know that at one time, not every citizen is redeem gold. So is print more and more and is only careful to keep balance sheet secret like whore hiding evidence of venereal disease. Then one day john is all worrisome and demanding, because other counterparty is now manifest evidence of venereal disease. Day of reckoning is when rate of gold redemption is outpacing of rate of deposit (saving is outpace by spending) and only then, when is last nugget of gold is redeem and gold factor is leave town in dark of night. Just watch and waiting!

... but what is Boris know!?

Wed, 06/11/2014 - 11:54 | 4844909 yogy999
yogy999's picture

Boris know lots. Boris very smart guy,

Tue, 06/10/2014 - 19:36 | 4842373 BrosephStiglitz
BrosephStiglitz's picture

Keep in mind the following downsides with Bitcoin:
- The market is immensely volatile and many banks have been accumulating sizeable positions via hijacking exchanges (bitcoin based transaction fees).
- Bitcoin to cash will pretty much 100% require use of the banking system.  Physical does not suffer from this issue.
- Regulations are becoming increasingly difficult at exchanges.  It is likely you will need ~7-14 days to set everything up and get verified.
- Exchanges have been known to fail (see: MtGox).
- There are many "coin" derivatives (litecoin, namecoin, dogecoin, nextcoin, darkcoin and more).  To my knowledge all use bitcoin source code except "Nextcoin" which has a different structure.
- Bitcoin is currently moving sideways right now.  It might rally again, or fall.  Anyone's guess.
- It has immense regulatory risk.  And will likely face retroactive taxation at some point (at best.)
- Needs the internet as a vehicle of exchange.  In civil unrest nations can and will choke bandwidth.
- Could go the way of Netscape Navigator, Yahoo, Myspace etc. if a better technology comes along.
- May face serious data issues with a growing blockchain without some kind of change. Current download size is >40GB.

The upsides:
- More liquid than physical.  Less manipulated than this current market farce.
- Easily exchangeable (currently) for any currency.  With a dollar collapse, or bank collapse this might change.
- Has a limited supply but is divisible.
- Has real (energy) costs associated with its creation.
- Solves the Double-Spending Problem. (Good underlying technology.)
- Lowers transaction fees.  (Good underlying technology.)

- First mover advantage in terms of crypto.  Better publicity.  Better brand.  Better resources.  Better adoption.
- Can be used to day trade based on high volatility.  Some exchanges even offer the ability to short sell on margin.
- Might still be between-exchange arbitrage opportunities for a clever coder.

Wed, 06/11/2014 - 02:36 | 4843567 aminorex
aminorex's picture

Bitcoin is transparent liquidity.  You only use it when you want your finances published for all to see.  I'm gradually converting my bitcoin holdings into Monero, which is the best privacy-oriented currency technology:  Transactions and balances are known only to the people who need to know in order to recognize the transaction.  Extortionists, kidnappers, and various other thugs not included.

Wed, 06/11/2014 - 07:51 | 4843832 PT
PT's picture

After fees, savings accounts pay negative interest.


When will I be able to borrow at negative interest rates?
That actually would give consumption a good kick in the guts.

Tue, 06/10/2014 - 18:37 | 4842227 alphamentalist
alphamentalist's picture

the tylers are always so negative about everything

Tue, 06/10/2014 - 18:47 | 4842258 Goldilocks
Goldilocks's picture

Sunshine lollipops and rainbows (1:37)

Tue, 06/10/2014 - 18:56 | 4842264 Pure Evil
Pure Evil's picture

They're so negative they've come to the point where they're so positive.

You know, sorta like magnetic flux.


Alphamentalist is just a twitter bot trying to invade the ZH realm with the hopes of gathering followers by spreading its effluence around.

Tue, 06/10/2014 - 18:49 | 4842265 logicalman
logicalman's picture

Pessimists are a lot less likely to be disappointed by the world than optimists. 

Tue, 06/10/2014 - 19:04 | 4842300 Winston Churchill
Winston Churchill's picture

Never been disappointed in human behavior lowering my worst expectations.

Tue, 06/10/2014 - 19:13 | 4842325 Zoomorph
Zoomorph's picture

Optimists aren't disappointed - by definition. Pessimists would find a reason to be disappointed even if the rest of civilization were unanimously celebrating.

Tue, 06/10/2014 - 19:28 | 4842375 Pure Evil
Pure Evil's picture

A pessimist would be disappointed with a pre-paid prostitute and a bottle of Wild Turkey for his birthday.

Tue, 06/10/2014 - 19:50 | 4842435 DirkDiggler11
DirkDiggler11's picture

Keep the Ho, just give me the bottle of Kickin' Chicken.

"I drink alone, yea just me and myself."

Tue, 06/10/2014 - 20:01 | 4842469 BlindMonkey
BlindMonkey's picture

You exemplify a pessimist perfectly. Thank you!

Wed, 06/11/2014 - 08:23 | 4843895 PT
PT's picture


Yeah, that would be because while the rest of the world is celebrating, the pessimist would be stuck out the back washing all their dishes.  Alone.

Wed, 06/11/2014 - 07:35 | 4843812 PT
PT's picture

Pessimism has such an excellent track record.  If optimism wants followers then optimism has to start being reliable.

Tue, 06/10/2014 - 23:24 | 4843311 Kirk2NCC1701
Kirk2NCC1701's picture

They're not "negative".  They are "pessimistic" about the state and trend of things, IMO.

Note that "A Pessimist is just a former Optimist, who's had repetitive bouts of Reality beat into him, till he sees things as they ARE, not as he wants them to be."

Wed, 06/11/2014 - 01:21 | 4843507 Bro of the Sorr...
Bro of the Sorrowful Figure's picture

the tylers are always so realistic about everything



Wed, 06/11/2014 - 02:15 | 4843549 zhandax
zhandax's picture

The Tylers can't help that the world is fucked up and there are a thousand different places you can go if you want some media clown to blow smoke up your ass.  What they can do is point it out if you have the balls to read it.

Tue, 06/10/2014 - 18:37 | 4842229 Jannn
Jannn's picture

Chinese Gold Demand Stable (823 MT YTD), Shanghai Silver Scarce

Tue, 06/10/2014 - 18:42 | 4842249 Personality Disorder
Personality Disorder's picture

The lights are on, but no one is home.

Tue, 06/10/2014 - 18:44 | 4842253 NOTaREALmerican
NOTaREALmerican's picture

I think this calls for the "Keynesian" Prayer:

We must borrow more money,
To stimulate demand,
So that jobs are created,
And prosperity ensues,
Then we pay off our loans (unless we don't have enough prosperity, in which case, repeat).

In his holy bearded name, Amen.

Tue, 06/10/2014 - 18:52 | 4842270 Pure Evil
Pure Evil's picture

It might actually work if they knew what jobs to create.

After shipping most jobs to Asia the only thing left is to create more government jobs.

Krugmans wet dreams cum true.

Tue, 06/10/2014 - 19:31 | 4842387 AynRandFan
AynRandFan's picture

According to Brit Hume, the world can just ship their children here to the good ol' USA.  No problem-0!  No more hungry mouths to feed, they can study in their native languages, and when they are done with all their medical treatments and education they can take their dual citizenship back to Ghana or Spain or whatever other hell hole they came from and live like kings.

Tue, 06/10/2014 - 19:35 | 4842396 Pure Evil
Pure Evil's picture

Why would they ever want to leave the Stasi USSA?

Tue, 06/10/2014 - 20:00 | 4842466 angel_of_joy
angel_of_joy's picture

They can stay all.
However, I'll leave in due time...

Wed, 06/11/2014 - 01:46 | 4843498 ThroxxOfVron
ThroxxOfVron's picture

"According to Brit Hume, the world can just ship their children here to the good ol' USA.  No problem-0!  No more hungry mouths to feed, they can study in their native languages, and when they are done with all their medical treatments and education they can take their dual citizenship back to Ghana or Spain or whatever other hell hole they came from and live like kings." -AynRandFan

IF this is the same ARF that used to regularly defile Ticker Forum:

I am The Throxx Of Vron and I very much want to speak to You.

Please respond & I will provide a contact avenue.

Hope You are well and kicking ass my friend!

Tue, 06/10/2014 - 22:19 | 4843076 fourZero
fourZero's picture


Tue, 06/10/2014 - 18:54 | 4842275 orangegeek
orangegeek's picture

negative interest is just another tax - tax on income, tax on purchases, and on savings



Tue, 06/10/2014 - 19:20 | 4842350 BurningFuld
BurningFuld's picture

Negative interest: I borrow 100K from you then you pay me interest. I like it!!!

Wed, 06/11/2014 - 08:33 | 4843934 PT
PT's picture

In order to be "socialist", the money has to be distributed to the many.  If the bulk is horded by the thieves, it is more accurately described as "theft", and the few scraps disbursed to the many is a "diversion".  Sorry to be so nit-pickin', but after a while I get compelled to respond.


Socialists, however, would be offended from the start.  "Don't you come here calling 'socialist' after your capitalists buy the gummint and reprogram the propaganda machine ..."

Wed, 06/11/2014 - 09:00 | 4844041 PT
PT's picture

If ever any of you get bored, please have a close look at some of the "socialist" programs provided by your gummint.

In my country, the dole is actually good insurance.  The base rate costs perhaps 3% of my tax, but somehow, amongst extra bennies and admin, the cost balloons to obscene proportions.  We have programs that "help poor people to buy a house", but if this was truly socialist then one day the poor person would own the house outright.  What actually happens is that the poor person only ends up "owning" a fraction of "their" house (and the gummint or the bank owns the rest) and / or the poor person still has to make payments forever i.e. they're not really doing much more than a fancy form of renting.

When the "carbon tax" was introduced, we were told that some of the revenue would be used to fund "green technologies".  Hand-out?  No.  The money was a loan and had to be paid back.  Why would the gummint allow you to keep your own money when instead they can take it from you and then lend it back to your with interest?  Who would give them that idea?

Please do not hide theft and usury behind words like "socialism" and "communism".  All you do is create some bullshit nonsense ideological battle that distracts from what is really happening.  "Socialism", "communism" and "capitalism" is just the propaganda.  TPTB use whatever they want whenever they want and then invent a story to justify it.  If enough people believe, they'll return to proclaiming "Divine Intervention".  ("I must be right, otherwise God would stop me!!!  I am king!  Therefore God wants me to be king ...")

Whoops, I've drifted off track again.  My original point was that a lot of the programs that supposedly give bennies to the poor actually contain strings that keep the poor without assets and heavily in debt.  That is why it is so hard for a worker to claim bennies to the same extent to those who fully "take advantage" of the system - the long term unemployed.

Back to my original question:  Has anyone studied and quantified how much of bennies are real bennies, how much is only available to "special groups" (mums, 'other' races), how much is not really noticeable to the recipient (eg, rent subsidies really just allow land lords to charge higher rents) and how much is debt creation?

Tue, 06/10/2014 - 18:56 | 4842278 waldo simon
waldo simon's picture

@Publicus, Isn't that exactly the problem?

Tue, 06/10/2014 - 19:03 | 4842292 i_call_you_my_base
i_call_you_my_base's picture

No, this is a form of printing, by forcing banks to lend fractionally. The argument in the article is that the banks won't be coerced or will eat the losses. That means deflation and defaults.

They could outright print, but that's not easy to do in the EZ given the Euro's set up. It's possible, but it would take the agreement of the northern countries, who have been against it.

The scenario could be, inflate, fail to inflate, banking failures (catalyst), ECB print to bail out banks.

Tue, 06/10/2014 - 22:23 | 4843099 gcjohns1971
gcjohns1971's picture

No. No.

The structure of the Euro does not make it harder to print.  They print the same way as the Fed.

The structure of the Euro makes it hard to GET PERMISSION to print.

And, really, that is not at all the same thing. 

Anyone who was a "Denis the Menace" type of boy could tell you.

So, they will do a disguised QE.  The savvy will wink and look the other way including  Merkel and her government.

The only measure of any substance is the degree to which the QE can be adequately obscured from the view of mainstreet.

Wed, 06/11/2014 - 11:27 | 4844764 LostPolarBear
LostPolarBear's picture

"So, they will do a disguised QE.  The savvy will wink and look the other way including  Merkel and her government.

The only measure of any substance is the degree to which the QE can be adequately obscured from the view of mainstreet."



Tue, 06/10/2014 - 19:02 | 4842290 Omen IV
Omen IV's picture

the risk is too high because disposable income keeps falling -- purchasing power is still being eliminated under austerity policies - at the same time they want to keep up asset values of the banks by lending more - will never work - the problem loans are too big - banks cant earn their way out

if they let the banks go BK originally - write the loans down for the people - and put the new money into the respective economies - they would have been out of the problem by now

ireland had no debt of significance - all debt was bank debt assumed from fraudulent bank practices - which then had to be paid back from higher taxes and austerty policies - housing is still underwater and the people have to pay the banks - the people have no cash flow

its all set up - for no one to clean up the fraud - indefinitely

Tue, 06/10/2014 - 21:07 | 4842750 moneybots
moneybots's picture

"if they let the banks go BK originally - write the loans down for the people - and put the new money into the respective economies - they would have been out of the problem by now."

The only day that exists is today.    When it was today, in the recession of 2008, that was unacceptable to the people running the show.

When it was today, in 1998, Greenspan wouldn't let a recession occur, which then blew the top off the Nasdaq in 1999.  When it was today, in 2001, Greenspan wouldn't allow the deep recession needed to correct the excesses of the extended economic expansion that blew the top off the nasdaq.  The same when it was today, in 2008.

The excesses keep expanding, with now 100 trillion dollars in global debt.  The hole gets ever deeper, nearing the point of caving in, burying everyone in it.

Wed, 06/11/2014 - 01:36 | 4843510 ThroxxOfVron
ThroxxOfVron's picture

No shit: it's Jubilee time.  

The debt-based fiat system was mathematically destined to blow up.  

Defaults are a feature not a bug.  The 'business cycle' cannot be eradicated without re-engineering the whole basis of the entire globally interlocked debt-based fiat currency system.  

The money producing loans that birth 'money' never generate the required interest to allow debts to be fully repaid.  

The principal copmponent to be paid is created with the loan; but, the interest component is not created with the loan -and is not created anywhere by any means later!  The interest does not exist within the system!

Every penny paid in interest leaves a penny of principal unpayable.

Think about that.  Think about the interest payments made on the 'national debt'...

Every cent in payment of interest on the national debt means that there is a mathematical certainty that principal on a loan somewhere else in the system simply cannot be paid!

The balance sheets are full of debt assets are carrying some significant and compounding/growing amount of mathematically unpayable debt that mathematically must be destroyed in defaults if the system is to be sustained...

The national debt being endlessly rolled into new bonds is a place for unpayable debt to hide in plain sight while the oligarchy pays itself for managing the farce.


It's Jubilee time.  way past Jubilee time actually....

But the 'Rich' won't be nearly as rich if the accrued debt/their wealth is written off: so NO.  

Bail-ins, Bail-outs, confiscations, devaluations, printing; ANYTHING but write it off/default: Jubilee....

We will have to shoot the bastards in order to remove the opposition to Jubilee.

The debt that mathematically cannot be paid cannot be paid and must be destroyed in defaults: Jubilee.

It's that fucking simple.

Wed, 06/11/2014 - 03:44 | 4843631 crazytechnician
crazytechnician's picture

The way to see it like this:

So a city knows it has 100k cars owned by the inhabitants. So it only provides 95k of parking spaces. It knows that 5% of the cars will have no place to park legally , they can then collect that 5% in parking fines. System continues to run. Of course with a financial system and compounding interest then that is technically and mathematically a Ponzi Debt Pyramid. At some point the Ponzi will have to collapse , it's a mathematical certainty. They know this and they are trying to allow it to fold in an orderly fashion where it will not cause too much disruption. Question is what system will it fold into ? Bitcoin ?

Wed, 06/11/2014 - 12:05 | 4844971 yogy999
yogy999's picture

Brilliantly written!!

Tue, 06/10/2014 - 19:02 | 4842291 Omen IV
Omen IV's picture

the risk is too high because disposable income keeps falling -- purchasing power is still being eliminated under austerity policies - at the same time they want to keep up asset values of the banks by lending more - will never work - the problem loans are too big - banks cant earn their way out

if they let the banks go BK originally - write the loans down for the people - and put the new money into the respective economies - they would have been out of the problem by now

ireland had no debt of significance - all debt was bank debt assumed from fraudulent bank practices - which then had to be paid back from higher taxes and austerty policies - housing is still underwater and the people have to pay the banks - the people have no cash flow

its all set up - for no one to clean up the fraud - indefinitely

Tue, 06/10/2014 - 19:17 | 4842339 SmittyinLA
SmittyinLA's picture

I wonder did all those banks really trade their "trillions in real assets" (FNM FRE paper secured by real estate) in exchange for treasuries secured by promises? Or did they just appear to trade assets and really only "pledge" assets as collateral?

I bet when the music stops the banks will have all the chairs or assets to sit on and the American people will have a bunch of bad paper debt. 




Tue, 06/10/2014 - 19:19 | 4842340 Cthonic
Cthonic's picture

Is this really that big a deal given that only 34 billion euro are held under the deposit facility program?  34 million in annual interest expenses, tax deductible, looks like a rounding error compared to how much their derivatives portfolios must bounce around each day.

Tue, 06/10/2014 - 19:28 | 4842364 AynRandFan
AynRandFan's picture

I'm surprised any prediction of a "nightmare", or even the suggestion of gloom isn't met with haughty laughter and derision.  After all, this is the age of moral hazard brought forth to a religious level.  Nothing bad can happen, unless it's racism of course, and nothing bad will ever happen in the financial world because we have the good and all-powerful Federal Reserve who can leap insurmountable debt in a single bound.  Ha ha ha!  Simply extend credit to the friendless banks of Europe, merely promise an LTRO to the poor unfortunate Spaniards and POOF! interest rates become meaninglessly small.  Money for everybody!

Tue, 06/10/2014 - 19:31 | 4842386 Pure Evil
Pure Evil's picture

And chicks for free.

Tue, 06/10/2014 - 19:31 | 4842385 BrosephStiglitz
BrosephStiglitz's picture

Good video link Tyler.  Thanks.

I live in Europe and people should be terrified by this as Macleod states.  Hardly anyone outside the financial sector is even aware that this has happened, and even if they do they do not understand its ramifications.

Tue, 06/10/2014 - 19:33 | 4842391 Pure Evil
Pure Evil's picture

You're not alone.

99.97% of the 99.99% in the US have no inkling on what's going on either.

Just free Obamaphones, SNAP cards, and X Factor.

Tue, 06/10/2014 - 19:37 | 4842400 thestarl
thestarl's picture

Crazy times getting crazier

Tue, 06/10/2014 - 19:39 | 4842408 firstdivision
firstdivision's picture

Welp, Europe just beat us to Japanification, but we are going to beat them to fornicating all citizens.

Tue, 06/10/2014 - 19:55 | 4842444 new game
new game's picture

endless money games while we are bound by the currency most everybody trusts and uses...

no way out. come to the conclusion that this goes on for a long long time. eventually a loaf of bread will be 20 then 25.

cars will be 40 grand for an econo box. all while the serfs have less and less standard of living...

new normal, get fucking used to it...

or start a bank and become a banker.

Tue, 06/10/2014 - 19:55 | 4842446 delivered
delivered's picture

It still amazes me that the world's CBs haven't figured out the "demand" side of the equation. They think by pushing interest rates lower and now negative, that out of nowhere and all of a sudden, demand from qualified borrowers will appear. As noted in the article, the ECB is trying to force the banks to lend to non-financial businesses (such as manufacturers, retailers, distributors, tech, professional services, etc., etc., etc.) which is pointless for three reasons as follows:

- First, loan demand from "qualified" borrowers is at best flat and most likely falling. With a very weak economy across Europe and outright recessions in a number of countries, there is no need to finance growth with debt. Further, balance sheets tend to compress/contract during recessions which actually can produce an increase in cash as A/R and inventory are liquidated at a higher rate than A/P and accrued liabilities are paid down. Thus, cash balances and liquidity can actually increase for the best/strongest (and most credit worthy) customers. 

- Second, the number of qualified borrowers continue to contract. Sure, there are plenty of poor/weak borrowers but given the underwriting criteria used by banks these days, 90%+ of the borrowing requests will get kicked out of the system as a result of poor/no collateral, excessive leverage/losses, etc. 

- Third, the entire socialist mentality that consumes a large part of Europe does not bode well for new business formation that eventually leads to credit demand. Rather and for the past 30+ years, the SOP in France, Italy, Spain, and other countries is to work until you're 55, take plenty of vacation days, and then let the sytem take care of you for the balance of your life. What concern's me is that Europe's culture and infrastructure is buried in socialist ideas which you simply can't change overnight. Why take risks, start a company, build the business, etc. when the system can be leveraged to live a good life and take limited risks. 

The ECB can push all it wants and attempt to devalue the Euro in hopes of reviving inflation but this is a pointless exercise (especially when every other major country in the world is going to devalue their currencies as well). What the world's CBs miss over and over and over again is that the combing an enormous debt load with falling real demand and generally very poor demographics in a number of countries, there really is no way out of this clusterfuck. The real demand side of the equation (not artificial) is simply failing with fewer and fewer qualified borrowers available.

BTW, this situation is present in the US as well. I can't tell you how many times I've spoken with bankers/lenders in the Southern California region that complain over and over about the lack of quality lending deals. They contact me frequently looking for deals but once one box is checked outside of their comfort zone (as remember, business lending in the US is basically nationalized), they have to pass on the deal but when it is ready, by all means contact us first. This of course is a joke as once the company is ready and strong enough, they don't need debt based financing. So in the meantime, all of these banks stumble over one another to land what few A+ deals are available at ridiculos pricing and terms (thus compressing their net interest margins further). They have no ability to being to even understand and price a B or C quality deal as the regulators simply won't allow these deals to get booked.

And you wonder why the hard money lending industry is the only game in town as for smaller, younger, and struggling businesses, they have basically nowhere to turn but to Vito Corleone down the street and take on debt that has implicit interest rates north of 50%. Hell, even the tech company Square is getting into this game and attempting to actually (if you can believe it) promote these deals not as loans but as some bullshit hybrid that doesn't even reference an interest rate. Rather, Square's logic is simple. Take an advance of $20k and repay us at $2k per week for 11 weeks. So you repaid $22k for a $20k loan, hell that's only $2k or 10% on the original loan balance. But when annualized on an average outstanding basis, the implicit interest rate is well north of 50%. Buyer beware, absolutely, but the extremes these hard money lenders are going to in today's environment to mask the true cost of borrowing is now boarding fraudulent. But they've learned from the best as Wall Street has certainly shown them the light on how to extract wealth without investing in any productive asset but rather devising new ways to transfer wealth from the many to the few as quickly as possible.



Wed, 06/11/2014 - 01:41 | 4843513 ThroxxOfVron
ThroxxOfVron's picture

People don't want/need moar debt.

People DO want/need moar wages.

The productivity has been siponed off by the debt-based nature of the present monetary system in conjunction with government schemes to inflate assets for taxation purposes...

Usury ate the productivity.  Taxation to pay politically expediant debt stole the overtime.

The Nation has been mortgaged; but, the money to pay the interest on the loan doesn't exist so the productivty gains were stolen to make up the difference.   The monetary system either requires reformation or defaults to clear the system.

..Or complete reformation: abandonment of the debt-based system and that system's inherent mathematical instability.


Wed, 06/11/2014 - 03:49 | 4843635 LostandFound
LostandFound's picture

But, but the Federal Reserve tells us they have the necessary tools in addition to the bond buying programme to get the demand side going?

I am confident they will get us out of this problem, Yellen looks like my cuddly grandma.


Wed, 06/11/2014 - 09:46 | 4844226 Atticus Finch
Atticus Finch's picture

Great comments.

There are some variances. For example, Norway, which I think continues in surplus has extensive social programs. I think there has to be an intent on the Government's part to make them work.

This is certainly missing in the US where any surplus goes into violating international law and obliterating other societies abroad, rather than meeting the needs of the US population.

Also, there is the issue of the looting by Governments of supposedly social trust funds, which has been going on for at least 50 years.

Tue, 06/10/2014 - 19:58 | 4842453 teslaberry
teslaberry's picture

banks imploding is not a nightmare.

ghengis kahn is a nightmare.

the west makes enough mistakes and implodes, they will one way or another self destruct leaving the coountry opening up to the wrath of a khan.

a russian khan, chinese khan, some khan , some day. the western empire i going upon 500 years now of world domination. how much longer?

Tue, 06/10/2014 - 21:09 | 4842581 moneybots
moneybots's picture
"When you look at a large bank like Deutsche Bank, you see its balance sheet is something like 55 times geared. I mean, it is enormous." The Federal Reserve is geared over 50 to 1. "The ECB now finds itself on the cusp of this failure. Remember, there are some very big banks with gearing over 40-50 times. All you need is a fall in prices of 1%, 2%, or 3% for a few companies to go bust, and then those banks are no longer solvent. It is a nightmare scenario. It really is." All financial roads lead to the FED.  The FED has set up the nightmare scenario.
Tue, 06/10/2014 - 20:58 | 4842700 kellycriterion
kellycriterion's picture

How do they know this isn't the nightmare scenario? Prices drop, a few companies are in danger or even go bankrupt, just confiscate more. The unwashed masses will just have to make do with less. Stagnation and gradual decay on and on and hope.

Tue, 06/10/2014 - 21:13 | 4842774 JR
JR's picture

The level of debt and the amount of mal-investment in the whole system is immense. At the same time, they're killing all of the savers. –Alasdair Macleod

Hunter Lewis in Where Keynes Went Wrong says “let us hope that we do not have to wait too long for Keynes to join Mao and Marx and other faded utopians.”

As of December 16, 2008, the most recent change the FOMC has made to the funds target rate is a 75 to 100 basis point cut from 1.0% to a range of zero to 0.25%.

This means that a self-employed pensioner who put away, say, $1,000,000 over his working lifetime and retired after the year 2000 is receiving only 1% or $10,000 in interest on his full $1 million IRA savings account, or, if that principal has been halved because of the necessity of basic living to dip deeply into a principal sans interest, that money over a short period would now be earning only $5000 annually.  Compare this to Seattle’s new minimum wage of $15 an hour, or $31,200 annually and determine what is happening to America’s retirees.

These pensioners and retirees on Social Security are the people no longer visible in America’s current economy, and once more, this trend awaits everyone at his retirement. And the long-term effect of this wealth erosion is to wipe out any inheritances Gen X can expect from its baby boomer parents or grandparents.

And it is not accidental that the Fed has a policy of targeting savers; otherwise banks would base their IRA or CD rates on an average of banker interest income rather than solely on the Fed's artificially-low mortgage rates. Banks’ other interest schedules are considerably higher.

As for savings and investment, Lewis says Keynes confuses which comes first:

Writes Lewis, Keynes “makes the paradoxical claim that the level of investment determines the level of savings, the opposite of the commonsense observation that saving must precede investment. This is part of Keynes’s more encompassing paradoxical claim that spending in general determines the level of saving, and that spending, not saving, makes us wealthy.

“It is true that consumer and business spending determine income. But it does not follow that we grow rich by spending. The so-called classical economists dismissed by Keynes were quite correct that the circular flows of the economy begin with hard work, production, and saving.

“These in turn lead to spending which flows back to the producers as income. To start one’s analysis quite arbitrarily and misleadingly in the middle of the flow, and then to present this as an important new insight or discovery is merely to play semantical games.

“In thinking about this, we must also keep in mind that Keynes saw private savings as only one element of society’s ‘savings.’ He also considered newly printed money injected into the economy through the banking system as ‘savings.’”

As for Keynes’s confusion about hoarding, Lewis writes:

“Keynes is so eager to find examples of uninvested savings that are lying idle and (thus interrupting the financial flows of the economy) that he falls into a surprising number of factual or logical errors. For example, Keynes says that individuals or companies in effect built up cash hoards so they can repair buildings or replace plants. But, as Henry Hazlitt has pointed out, these are almost never true cash hoards. Either they are an accounting convention (depreciation allowance) with no effect on cash holdings or they are reserves, and if reserves are usually invested.

“Even more puzzling is Keynes’s assertion that buying shares of an existing company on the stock market does not put savings to work…”

What kind of controllers of central bank monetary systems intentionally wipe out the nations' young, middle class, and their old?

Macleod, in this ground breaking analysis, makes the central bank policy makers not only look like fools but fools on purpose by taking a losing strategy that keeps proving itself to be a failure and doubling down on ithe doses until, finally, it "will kill us"

Tue, 06/10/2014 - 22:23 | 4843096 novictim
novictim's picture

The oligarchs are desperate to do anything but boost inflation. ZIRP or NIRP is the last trick in the deck.


ZH, low inflation is the core of our problem.

But you are all too stupid to see that. {or greedy)

Wed, 06/11/2014 - 03:24 | 4843620 Victor999
Victor999's picture

The core of our problem is an international banking system that draws enormous wealth from the population, distributes it to a privileged few and replaces it with national debt loads that can't be paid off.  The answer is relatively simple, but no one has the courage to do it - destroy the current banking system and place the right to create money back into the hands of the national governments where it belongs.   This would leave commercial banks to do what they do best - support their depositors and serve only commercial interests.  In this scenario the Roghtechild's of the world would be highly constrained.  But that is never going to happen.

Fri, 06/13/2014 - 02:06 | 4851703 novictim
novictim's picture

It is so strange that you folks never learned about the macroeconomic significance of inflation.  You take your "wisdom" from talk radio is my guess.

But I agree that international bankers are manipulating the global finances.  Bub, that is why they are keeping inflation LOW.  Inflation is low...get that through your think heads.

And don't confuse asset inflation with this.  Its a seperate matter. Basic staples like bread, milk, peanut butter sho low inflation.  Homes and stocks are SEPERATE MATTERS and are high because the wealthy class have too much of YOUR money. 

I feel like trying to explain this to ZH is a hopeless task. 

Wed, 06/11/2014 - 03:14 | 4843611 Global Observer
Global Observer's picture

The ECB can pay interest or charge interest only on the excess reserves not the mandatory reserves dictated by CRR. If ECB wants to charge member banks for excess reserves parked with it, the banks can either increase their lending to private parties several times the excess reserves so that they no longer have any excess reserves or lend to sovereigns to the exact amount of the excess reserves. If the banks had so many creditworthy borrowers waiting to borrow, they wouldn't have excess reserves in the first place. So they will choose the option of lending to the sovereigns. Effectively, sovereign borrowing costs across the eurozone will come down, which appears to be the intent of the policy.

Wed, 06/11/2014 - 05:35 | 4843677 Dre4dwolf
Dre4dwolf's picture

Reaed between the lines, they know the banks are going to collapse, so they want as many people to slowly pull CASH out of the bank as orderly as possible.

Negative interest rates = "Take your money out or I will take it".


They are blatantly telling you GET CASH NOW WHILE YOU CAN, they don't want a complete breakdown of commerce when it happens.


They will start negative, and then ratchet it more and more taking more and more till people just take their $ out.

Orderly collapse.

Do NOT follow this link or you will be banned from the site!