The Mindless Stupidity Of Negative Interest Rates

Tyler Durden's picture

Submitted by Lee Adler via The Wall Street Examiner,

Here we are in the midst of The Great Stagnation Middle Class Elimination and some central bankers and mainstream economists are promoting negative interest rates. One economist was quoted in a Marketwatch piece by Greg Robb as saying,

“…pushing rates into negative territory works in many ways just like a regular decline in interest rates that we’re all used to.”

OK. That’s false. We know exactly what negative interest rates do since Europe has made a fine case study of it. They don’t work just like a “regular decline in interest rates.” I mean not that a “regular decline in interest rates,” does what economists think it does, but that’s another story. The issue here is how negative interest rates work.

Negative interest rate proponents ignore the basic tenets of double entry accounting.

Because there are two sides to a bank balance sheet, negative interest rates are the mirror image of positive rates. The move to negative rates imposes new costs on the banks, unlike low positive rates or ZIRP which reduce bank costs.

The greater the negative interest rate, the higher the cost imposed, which is the same as a central bank raising interest rates when they are positive. When the Fed lowers a positive interest rate, it lowers the bank’s cost. But when there are trillions in excess reserves held by the banks as deposits at the Fed and the Fed lowers the interest rate to below zero, that becomes a cost to the banking system which it cannot avoid, except by using those cash assets to pay down debt.

So the banks in Europe did exactly what I said they would do in mid 2014 when the ECB announced negative deposit rates. It’s exactly what any person with common sense would do, and therefore knew the banks would do. Those with the ability to do so pay off loans, which extinguishes deposits, thereby getting rid of the added cost. As opposed to stimulating growth, the European banking system shrinks. As opposed to encouraging borrowing and spending and economic growth, the policy encouraged deleveraging.

We know that it is categorically false the negative rates are working in Europe. But facts have a way of eluding mainstream economists and central bankers.

I wrote about this and also did a video on it in mid 2014 when the ECB went to the negative deposit rate. I showed that it would result in shrinkage of the ECB balance sheet because it would be an incentive for the banks to pay off their existing loans from the ECB in order to extinguish the offsetting reserve deposit. That is exactly what happened, both when the policy was first known immediately before it took effect, and ever since.

So the ECB was forced to institute outright QE to reverse that shrinkage. I then predicted that the banks would use part of the QE not to stimulate lending, but to continue to pay off outstanding ECB credit. That is exactly what has occurred. This is not rocket science. It’s just common sense and paying attention to facts instead of ridiculous economic myths.

The European banks have been steadily paying down LTRO credit and MRO credit, month in and month out. That cancels out a portion of the growth that would otherwise accrue to the ECB balance sheet from QE. Not that that QE does an iota of good for the European economy—but that’s tangential.

So what has happened to European bank deposits since the ECB instituted negative rates? They have shrunken. Has one single mainstream economist or proponent of negative rates mentioned that, ever? I suspect not. Because they either don’t know, don’t want to know, or do not understand that if you raise the costs of holding deposits then the deposit holders will get rid of them. And the only way the system as a whole accomplishes that is to pay off loans, using the existing deposits to do so. Sooner or later the hot potato of the negative interest bearing deposit lands in the lap of someone who will do just that–use a deposit to pay off a loan and extinguish the deposit.

But would it work differently in the US where the banking system cannot escape paying that cost because the Fed issued permanent reserves? Much of the ECB’s balance sheet was in the form of loans that could be voluntarily repaid. Not so with the Fed. It bought assets with newly issued money that instantly became cash assets of the banks, held as reserve accounts at the Fed. The amount of cash in the system is fixed until the Fed decides it isn’t. The cash can move from the reserve account of one bank to that of another. But the Fed’s balance sheet is like the Hotel California. You can never leave.

The banks can unload their cash on other banks by buying long term assets from them. That gets rid of their reserve deposit at the Fed, but the cash just ends up in the reserve account of the bank that sold the asset. So maybe this starts a buying frenzy that pushes long term rates to zero because the banks will all want to exchange cash assets (reserves) for long term assets. That’s apparently what happened in Europe as the system there shrank. But in the US some banks always end up holding the hot potato–the reserve deposit on which they must pay the cost.

Then what? Then you, Mr. or Ms. Banker try to recoup the cost. So you charge your depositors to hold deposits. What do they do? Rather than pay the interest on deposits, some pay off loans, extinguishing their deposits. They pay off their credit cards, their auto loans, even their mortgages, because there’s an incentive not to hold deposits. The banks start to shrink, just like today in Europe. As their balance sheets shrink, their cash assets grow as a percentage of assets and the cost of the negative deposit rate on reserves at the Fed grows as a drag on earnings.

How can anything positive come from this?

Seriously, has anyone thought this through?

Can anyone show a clear example connecting the dots to show where negative interest rates have stimulated an economy? Can anyone clearly explain how charging an institution or business to hold deposits is in any way stimulative… not net stimulative, but stimulative AT ALL?

It defies common sense.

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JustObserving's picture

Interest rates are already negative if you use accurate inflation data.  But apparently, big banks are not making enough money raping the diminishing middle class in the land of the free.  So interest rates must be made more negative.

Besides, Dimon and Blankfein need their second billion

847328_3527's picture

Annihilation of America's middle class -- another one of Barry's Legacies.

knukles's picture

He's going to be a Hero for Many Things

BuddyEffed's picture

It's rather obvious in using general terminology that your fathers experience with banking and positive interest on savings that was stable for decades has now become structurally challenged to the point where that old business model has been made somewhat invalid.

philipat's picture

Common sense? That's a bit like fundamentals. In this dystopian system, it is what they say it is. And a bit like truth, common sense is terrorism in a world of lies.

Macchendra's picture

Don't they realize that if they deflate the currency that my debt will just get bigger???

Squid-puppets a-go-go's picture

negative interest rates = the direct destruction of capital. period.

o r c k's picture

And seriously, just what is left after that?

SSRI Junkie's picture

"Annihilation of America's white middle class -- another one of Barry's Legacies."....fixed it...the white middle class (and family) was the major stumbling block to bankster control...the black middle class and family structure was decimated long ago...

two hoots's picture

Congress has the duty to regulate the Value of money, not the Federal Reserve.  The Fed should not be able to effect the taking of your money/assets/whatever, by making the value of $1 less than 1$.

US Constitution:

Article 1, Sec 8,  5: "To coin Money, regulate the Value thereof..

If the Fed goes to NIRP then they have failed and members should be expelled.

What would stop them from take all of it instead of just a little?  They have no limits concerning your money.

Why don' the fed just steal my bicycle so I would be forced to buy another and stimulate bicylce sales?  What is the difference?

CheapBastard's picture

"Destruction you can beleive in!"

two hoots's picture

Can't believe Americans will let this stand.  It must be challenged in court.  No one has the right to take your money without your permission/agreement. 


bonin006's picture

If they stole your bicycle everyone would understand it was theft, so they manipulate the currency and interest rates to do the stealing, which 98% of the people don't understand (and 1% benefit)

itchy166's picture

Hmm, that ads up to 99%.  I guess I am the 1% who knows what is happenning but am not connected enough to benefit..

glenlloyd's picture

The real question is whether Congress has the authority to delegate power to the Fed not delegated to the Congress?

The Federal Reserve Act can legally have no power greater than that granted to the Congress, but I would challenge anyone to find in the Constitution where it granted Congress the power to do many of the things the Fed has done over the course of their existence.

Big_Hitman's picture
Big_Hitman (not verified) JustObserving Oct 11, 2015 7:19 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

PAWNMAN's picture

Common sense has nothing to do with it. The continued destruction of what's left of the middle class, and transfer of wealth is the only goal.

ebworthen's picture

Negative rates are intentional; they punish responsible savers, retirees, pensioners, and the working middle-class while rewarding the elites, the money-changers, and the banks/corporations/insurers who are the immoral Kleptoligarchy of the twin Devil Domes of Wall Street and Washington D.C.

Muppet's picture

"the policy encouraged deleveraging".     Race to the bottom.   Let it happen.

Jorgen's picture

In the meantime, in Western sanctions stricken Russia:


Spiritof42's picture
Spiritof42 (not verified) Oct 11, 2015 6:59 PM

Seriously, has anyone thought this through?

I'm convinced that most humans are unable to think beyond the sentient level. We all do. True. But these people are incapable of self-reflection.

Look at the bright side. Negative rates on savings encourage paying off debt which carries positive interest rates.

o r c k's picture

As Sarah Palin would say, "You debt'cha !".

Muppet's picture

Thats exactly what I tried to say above.   Bring it.

two hoots's picture

How would interest on bank Reserves be paid/not paid?  Would the banks pay the Fed on their reserve holdings?

MrPalladium's picture

They subtract the money from what remains of your deposit each month!

new game's picture

doubtfull, as they r in da club de fiat ...

Benign's picture

The Fed would probably continue to pay 25bp on excess reserves and just cause fees on consumer and business deposits to go up, inducing a negative interest rate to "stimulate spending." It will most certainly stimulate a movement of deposits out of the banking system. But the impact on bank profits would be positive under this scenario.

nostromo17's picture

Get on with it...

Not investing or lending because rates have no risk reward means business halts and shrinks to scarcity level of production, which leads to a deflation, is deflationary. All done under the cover of bald faced lies about inflation control, the bs mantra of disinformation based on not one fact. Otherwise known as the Thatcher Reagan Disinformation Strategy.

Killing the Consumers, who are left to rot as indebted debt holders of last resort kills the economy outright because no without disposable income in the system nothing spent, means no business and is far worse than nothing gained.

Printing/selling government bonds to banks which bonds are exchanged with Fed for electronic money redeposited at Fed as fed reserve deposits used as collateral for credit for banks to buy up  stocks  which returns from stock sales money is not invested to produce anything, is sterile. Sterilization, or three ledger float, adds no significant disposable income to anyone, its no a helicopter lie, its not an easing lie, its a dry hump pointless action and pointless destructive lie.

The economic disinformation is only  lies fools make with no logic but rape and pillage by a few for no one esle, fools who we allow to continue lying in our faces. To enter a discussion with a liar is to be pawned. Keynesian critique is a lie, the lie any money was 'printed'/ The truth is that no liquidity was privided to the economy, And they the FED has known that all along and destroyed the economy serving the FED shadow government and destroying everything else which ironically what had made their existence possible. The truth is nothing keynesian happened. Stop the chatter,the discussion never started and its over. Start hanging the fascist and fascist fool tools. Doing anything they are not doing is better that letting the incompetent criminal fuck ups continue destroying the world and the world economy.

There is no discussion, no true/false, no right/wrong to discuss anymore. The liar criminsl fools need to be rounded up, put in stocks for publicly display and punished. Its time to take back what they have stolen and prevent them from destroying our economy our country and the world ever again.

Get on with it...



MEFOBILLS's picture

Question and answer:

Can anyone show a clear example connecting the dots to show where negative interest rates have stimulated an economy? Can anyone clearly explain how charging an institution or business to hold deposits is in any way stimulative… not net stimulative, but stimulative AT ALL?

When banks extend loans through hypothecation, they create a debt instrument and credit as money simultaneously.

The credit is marked to an account, and can then become a deposit.  This is on-account money, which is credit and hence is under velocity pressure to return to ledger for destruction.

This bank credit also comes with a time vector, which in turn is a function of the original debt instrument.

In effect, the usury on credit is a tax.  Demurrage on money is also a tax.  Demurrage is the taxing of money so it will be spent rather than hoarded.

In other words, when one takes out a loan at a bank, then the usury paid is for credit creation e.g. keyboard entries, and the signing of a debt instrument.  Signature authority of debtor is the real agent for creation of credit.

However, other types of money did exist in the past.  This type of money was floating and did not have a debt instrument on the other side.  It was not banker credit.  Examples of this type of money are Lincoln’s greenbacks, Treasury coins… and physical bills in some countries, gold that came out of earth and was stamped, and also some scrip money.

A famous example of stamp script money was in town of Worgl.  This would be floating money that had no debt instrument on the other side, and was taxed (negative rates) to force it into velocity; hence it served as an exchange medium:

So, the short answer is that it is wrong to have negative rates on bank credit.  Bank credit is already taxed at its birth – the hypothecation event.  To put negative rates on bank credit is a double tax.   The money in the past was created at a positive rate, which pays usury to banker, and the negative rates on savings, is usury paid to banker.  This then drains the exchange medium and leaves the debt instrument intact.  Of course bankers would be for this, especially as they are now paid interest on excess reserves.

Permanent floating money is another animal altogether, and there are circumstances when it is appropriate to apply demurrage (only on this money type), as the worgl experiment shows.

However, since the world is run by MAD (money as debt); and people think that debt equals money, then the idea - or notion of low cost efficient floating money does not enter into their conscious.

Demurrage in Worgl on stamp script money was extremely stimulative as velocity went up markedly.  Demurrage (negative rates) on bank credit is a double tax.

MEFOBILLS's picture

Notice how in Worgl experiment above (see link), that Say’s law is operative?

The butcher pays the baker, who pays the candlestick maker.  The exchange medium has circular flow. 

Government taxes are re-spent into the commons,  (bridges, roads, etc.) thus creating yet more efficiencies.

In todays financialized credit MAD world, Say’s law is not operative. 

Example:   40% of a household budget is allowed to go toward home mortgage.  This is disappearing credit as money.  15% goes toward social security and other payroll taxes.  Another 10% or so may go toward a car loan/student loan.  Then there are income and sales taxes. 

Let’s say then that 70% of wallet money is not discretionary, it is already earmarked for destruction, or it vectors away.  People then are only using 30% of their wallet money to buy their outputs from each other.

This is the crux of world’s shitstorm.   A bank credit as money world is very inefficient, and this vectoring away toward finance is parasitical.  The parasite makes people think it is good for them, when it instead it drains life energy.  The money supply is better modeled as two loops, where a large portion is diverted away to an upper loop of parasites, and does not circulate as Say’s law predicts.

Sovereign money is like stamp script.  It is permanent treasury money, something like Lincoln’s greenback. 

In this sort of system, when you go to the bank to take out a loan you are borrowing somebody else’s savings…the banker only earns fees for being an intermediary.  

Debt instruments then are held by Creditor/Savers and money type is permanent efficient floating money.  Banker’s hate this notion, as they lose their money power and easy rental life.  Banks are denied the ability to create new credit, and they also will not be holding debts on citizens.


  If government needs money they have to tax it away, and hence negotiate with the population.  During Greenback era, Treasury never created more money than was authorized by law.  Can one say that about private credit emission?

Arthur Schopenhauer's picture

It is not mindless or stupid. It is the logical next step of the plan.

nidaar's picture

If interest rate is negative, why would I pay off my loan. I'd keep it to pay itself. And I would withdraw all my money from my bank account to buy assets (i.e. Gold) to prevent the bank charging negative interest disguised as fees. In fact, due to the increased demand by this simple logic, the price of my asset (gold) goes up, hence the stimulation (and inflation) CBs are after.

kedi's picture

Considering the major masses of money stashed away in off shore accounts, that are specifically designed to escape the central banks and taxes of many countries. How will NIRP do anything about that money? The off shore institutes will just keep their rates competitive. Probably making a lot more money, while still saving their depositors from losing as much, if their accounts were on shore. NIRP will hurt the vast majority of the little guys who can't hide their meager bank accounts from it.

The big money will just flow to the least punitive places.

Economic policies continue to be shaped by the few with the most. It is not for the overall benefit of the economy. If NIRP happens in your country, you can be sure that the big money is insulated and or benefiting from it. The overall economy will likey be screwed by it.

wiesenda's picture

The author is right. However, one of the few cases where negative interest rates work is Switzerland because the effects of NIRP described in the article correspond to the explicit and implicit objectives of the Swiss National Bank: discourage capital inflows into the CHF and encourage investment abroad, respectively; reduction of deposits; slowing of domestic credit, especially mortgages in a hot real-estate market.  

Last of the Middle Class's picture

NIRP will do nothing but hasten apple's entry into the bill pay market. Nuf said.

GlobalCtzn's picture

Always observe things through the lense of "Destruction of the current system IS the plan" and you will see things far more clearly. It all starts to make almost perfect sense.........