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):


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Publicus's picture

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

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...

Jethro's picture

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

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.

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.

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.

tonyw's picture

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

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.

max2205's picture

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

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.

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!?

yogy999's picture

Boris know lots. Boris very smart guy,

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.

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.

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.

alphamentalist's picture

the tylers are always so negative about everything

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.

logicalman's picture

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

Winston Churchill's picture

Never been disappointed in human behavior lowering my worst expectations.

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.

Pure Evil's picture

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

DirkDiggler11's picture

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

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

BlindMonkey's picture

You exemplify a pessimist perfectly. Thank you!

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.

PT's picture

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

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."

Bro of the Sorrowful Figure's picture

the tylers are always so realistic about everything



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.

Jannn's picture

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

Personality Disorder's picture

The lights are on, but no one is home.

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.

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.

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.

Pure Evil's picture

Why would they ever want to leave the Stasi USSA?

angel_of_joy's picture

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

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!

orangegeek's picture

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



BurningFuld's picture

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

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 ..."

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?

waldo simon's picture

@Publicus, Isn't that exactly the problem?

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.

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.

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."



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

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.

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.

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 ?