This Is The NIRP "Doom Loop" That Threatens To Wipeout Banks And The Global Economy

Tyler Durden's picture

Remember the vicious cycle that threatened the entire European banking sector in 2012?

It went something like this: over indebted sovereigns depended on domestic banks to buy their debt, but when yields on that debt spiked, the banks took a hit, inhibiting their ability to fund the sovereign, whose yields would then rise some more, further curtailing banks’ ability to help out, and so on and so forth.

Well don’t look now, but central bankers’ headlong plunge into NIRP-dom has created another “doom loop” whereby negative rates weaken banks whose profits are already crimped by the new regulatory regime, sharply lower revenue from trading, and billions in fines. Weak banks then pull back on lending, thus weakening the economy further and compelling policy makers to take rates even lower in a self-perpetuating death spiral. Meanwhile, bank stocks plunge raising questions about the entire sector's viability and that, in turn, raises the specter of yet another financial market meltdown.

Below, find the diagram that illustrates this dynamic followed by a bit of color from WSJ:

From WSJ:

In a way, the move below zero was a gamble. The theory went like this: Banks would take a hit, but negative rates would get the economy moving. A stronger economy would, in turn, help the banks recover.

 

It appears that wager isn’t working.

 

The consequences are deeply worrying. Weak banks may now drag the economy down further. And with the economy weak and deflation—a damaging spiral of falling wages and prices—looming, central banks that have gone negative will be loath to turn around and raise rates.

 

Moreover, central banks have few other levers to escape that doom loop. The ECB has instituted a bond-buying program, but President Mario Draghi last month indicated he was ready to launch additional monetary stimulus in March. Japan’s decision to implement negative rates follows three years of aggressive monetary easing, aimed at ending two decades of low inflation and stagnant growth.

 

The pushes into negative territory also amount to a sort of competitive currency war that no one seems willing to call off.

 

Major economies around the world are desperate to spur inflation; one way to do that is to cut interest rates, which typically would make their currencies less attractive. Lower currencies raise the prices of imported goods and boost the fortunes of exporters.

 

Switzerland, Sweden and Denmark have all used negative rates to help ward off inflows of foreign funds that push up their currencies. Economists said an aim of the Bank of Japan’s move to negative rates last month was to weaken the yen. It hasn’t worked: The yen shot up Thursday and is stronger than it was before the rate cut.

 

The move below zero compounds the miseries for lenders in those countries. Banks traditionally make a profit by lending at higher interest rates than the rates they pay on deposits, a difference called the net interest margin. Low rates have already squeezed that margin, and banks’ funding costs from other sources, such as bond markets, have surged this year.

 

German banks earn roughly 75% of their income from the margin between rates on savings accounts and the loans they make, according to statistics from the

 

Bundesbank, the country’s central bank. Plunging rates dragged German banks’ interest revenue down to €204 billion ($230 billion) in 2014 from €419 billion in 2007, according to the Bundesbank.

 

Negative rates cost Danish banks more than 1 billion kroner ($151 million) last year, according to a lobbying group for Denmark’s banking sector.

Consider that and then have a look at the following chart, which certainly seems to indicate that we are on step 8 in WSJ's doom loop...

Step 9 is when things really start to go south for the real economy. So buckle up. 

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new game's picture

worthy of repost!

i took the red pill!

everything is wuuuunderfull!

yellen never lies and represents our best interests, she said so in front of our honest upstanding representatives, honorable elected citizens of the greatest rebublic ever formed!

the ecb will do whatever it takes and has the europeans in their in hearts for the hope that they will prosper with growth to get back to full employment to be great again.

China has but a meer flesh wound and kyle will loose his ass, and be nickle poor!

hy credit is overstated and an overreaction to low prices, just a transitory blip that can be looked at as if in the rearview mirror, houston, texas and ND is an opportunity to prosper from this blip.

bernie and donald are an overreaction to all this negativity, we need to get our heads on straight and stump for hilary or ted, because they have our backs and represent the status quo. don't forget that the status quo made this country great, and now is not the tyme to turn  your back on these honorable forthright purveryors of truth!

last but not least, don't loose the faith and backing of the almighty dolla, because it is backed by the most omnipotent military ever know to a mankind. they are doing all the right thing to keep this great nation safe sound and never forget all the good paying jobs they create for economic growth...


Cognitive Dissonance's picture

It looks like the death spiral of a closed loop circle jerk to me. And we're the biggest jerkers of them all for allowing this to go on and on and on and on.......

<But keep on jerking anyway.>

new game's picture

cog, i think the only logical actions left are to withdraw into a state of internal happiness, fulfilled by actions, i take day by day and try to filter out this reality, the doom and gloom brought upon us by non action.

Manthong's picture

..looks like it should result in some kind of singularity.

Squid-puppets a-go-go's picture

weakened banks pull back on lending and will only lend to borrowers with a healthy deposit. Borrowers have been trying to save healthy deposits but - oh dear - their capital has been eroded by neg interest rates

fucking retards

bania's picture

Hate to say it, but that graphic is missing a mushroom cloud icon.

1000 splendid suns's picture

You're getting sleepy...verrry sleeepy...

Muh Raf's picture

Stupid analysis. -ve rates only applied to deposits NOT loans so depending on where a bank is in the credit cascade they may actually be making a bigger margin by taxing' deposits whilst maintaining credit, loan and facility rates. Who makes this crap up?

Miles Ahead's picture

Who makes this crap up?

Apparently someone with a massive printing press and a track record that is quite impressive.  Despite being owned by an asshole.

But I'm dying to see your Financial page/website/blog.  Link please... cause from where I'm sitting buying soverign debt is for all intents and purposes a "loan"... trading at negative yields.  And then there's this whole thing with how they fix interest rates... one particular bank cannot ignore the market.

Of course I only survived Economics 101...

sixsigma cygnusatratus's picture

You say doom loop, he says death spiral, I say economic black hole.  I'm sure it will just go away by itself...after it destroys everything.

Cadavre's picture

The WSJ conclusion's regarding the FED's zero rate policy:

It appears that wager isn't working

duuhhhhh!

Again, the WSJ demonstrates a fucking extraordinary mastery of the obvious! The WSJ, a bunch of rim reaming  fucking geniuses, 4 sure!

Or does it?

What if that was the plan all along? A pig in a poke, like the WSJ's well feigned surprise, reminds of two stepping to Wang Chung's Dance Hall Days, droning out the dried snot encrusted video juke box at the very famous fish bouquet-ed neighborhood LGBT disco / bath house, with a fat girl.

First step: Negative savings rates, so that the system could provide at least "some" non counterfeited USDs were passed to the primaries as a bottomeline bolster-er for VISA (et al) CC transactions, at a fat (but not too many pimples) 12% rate, to borrowers.

Second step: Steal bank customer deposits. Thanks to John Corzine's MFG (Muther Fucking Gonads), with an assist, of course, by the always ready willing and able fat girl at the [high crimes and misdemeanors] disco, JP Morgana, a legal president was established making the pilfering of customer deposits, regardless of how much was in the account (the more the merrier, right?), now, is perfectly fucking legal.

Easy!

The WSJ, and it's very famous mountain schnapps sucking investigative reporting wrecking crew always ceases to amaze with it's brilliant insights and conclusions.

And, of couse, ass fuck us all, again, without [even] a minimal courtesy of a "reach around"

Thank you WSJ - You will be among the first on the list!

... and that's why i don't do two shows a night.

JerrySpringer B All Over This Shiznit's picture

nah ya just have to unzip the zipper

Cadavre's picture

Aaaaah - America - Life is simple once the rules are understood.:

Put shorts on backwards for those da diebold machine sez we wanted to employ, bend over and take it up de ass.

It's not "what you can do for de country - ir all `bout de girth and length of de ZOG mafia man's flesh hammer zipper dragon a good citizen will open the cloaca for. Jiz like getting to Carnigie Hall - practice - practice - practice!

Like dumping a 12 lb shit. It don't hurt so bad once de head of de turd peek out de bung and see de light of de day.

We're a bunch of siisified pussies. All we have to is come together and shrug our shoulders in unison and dis matter be settled.

First time in history de enterprising employer, dat be us, be a shaking and quaking in fear cause de kiddie fondlers working for us, and the welfare queens we ALSO feed, in the banking sector, cause some phony baloney Harvard worded edict tell us to.

All we have to do is say, in unison, we are de stakerholders, this is our land, and de fucking child molesting  diebold selectees are powerless sissies, and we know it.

Dey know it. Fuck who got time - super bowl has passed like well remembered shit,  and NASCAR is shifting to high gear - juz have a bud, bud, and jack off to a blowup fuck doll - and flout the cloaca when de janitor want to fuck you in de ass

PT's picture

Hmmm, interestingsss, so where can little me borrow at these negative rates?  Can I get them fixed negative???

Says ... how abouts I borrow 1 Trillion dollars, at negative 1% interest, and pay the principal back in a year.  Hell!  Pays me the interest right now and I'll let you keep the Trillion yourself so you'll be guaranteed that I won't lose it on yas.  Good idea, no?  Is fair!

exi1ed0ne's picture

Neg interest is guaranteed income for those with access to negative interest rates - banks, governments, and those at the head of the money fountain.  It's stealth welfare for the well heeled, or the new buzzword guaranteed income, but only for the wealthy.  I wonder if anyone has (or could) do a chart of private credit by interest %.  Just like jobs, quality matters.  Neg interest doesn't matter to the economy as a whole if  Joe six pack is paying 18+ percent in credit card debt.

chunga's picture

This has to be why this Bernie Sanders fella has some popularity. I don't know the specifics of his remedy to bad bankers and bad wall street, because I refuse to vote and don't care. I supsect his remedy involves moar gov and crackdowns on the financial black hats.

His swing and a miss is that gov never cracks down on fraud. Gov encourages, enables, and protects fraud. It is fraud. It's a private corp. Go to Dun and Bradstreet and look up USA, FBI, DHS, BLM. They are corporations.

new game's picture

yup, backed by the iron fist and boots of violence. now what? be the protestor in front of the tank with a glock 19? ha, might i suggest something a tad moar stealthfull....

DownWithYogaPants's picture

Believing Yellen would be taking the "blue pill".  Conservatives are not stupid.  Liberals are. ( progressives ) 

chunga's picture

It's probaly best, and definatley safest, to just ignore current events because there isn't much one can do. Standing up will just get you mocked, ridiculed, the killed. (see Lavoy Finecum)

Here's the other banana...trump

"I think what I'd do, as president, is I would make a phone call to whoever, to the group," he said, adding later, "I'd talk to the leader. I would talk to him and I would say, 'You gotta get out — come see me, but you gotta get out.'"

"You cannot let people take over federal property," Mr. Trump said. "You can't, because once you do that, you don't have a government anymore. I think, frankly, they've been there too long."

Mr. Trump said he wasn't necessarily suggesting a large-scale military action, but that "at a certain point you have to do something and you have to be firm and you have to be strong, you have to be a government."

blindfaith's picture

 

 

You have stated that you do not vote...and do not intent to.

You therefore have no business and no EARNED right commenting on politics, politicians, the economy, the nation, government, Americans, and 10,000 other things that a responsible citizen has the EARNED right and priveledge to do.

Your avitar says much about you, that is clear.  You are either a citizen of this Nation, or you are not.

chunga's picture

To you, Mr. blindfaith, all I have is I stenruously disagree with you. I'm also offended by your presumption of my rights.

Miles Ahead's picture

I gotta back you in spite of your flag.  What... is that guy kidding?  What kind of an asshole tells another American whether he is "responsible" or not when he/she exercises his/her freedom of conscience?  You HAVE to vote?  That's sheep thinking.  No, sheep talk.  Sheep don't think.  They follow.

Poundsand's picture

I did not EARN my right to vote, nor my right to free speech and neither did anyone posting here.  That right was EARNED for me by the sacrifice of blood, sweat and treasure of the men who fought in the revolutionary war, and the wars that followed.  We can never honor or thank them enough.

skinwalker's picture

Lol. Like any war post 1790 was about freedom. 

Beam Me Up Scotty's picture

"You are either a citizen of this Nation, or you are not"

So, you are either with us, or against us, eh??  The conscious decision to not vote is in and of itself a vote.  If there are no good candidates to vote for, a non vote is a vote.

frankly scarlet's picture

blindfaith it is!  do you not understand that a "citizen" by contract (applying for a social security number is a contract with terms and conditions) with the USA Inc (or other nation Inc) then pledges to be the surety for ALL the debts of the bankrupt nations (the USA was last bankrupt in 1933) creditors as a joint trustee while the beneficiaries control the trust? As one of the Rothschilds once opined "own nothing control everything". You vote is and means nothing under this setup by gives presumed consent as you elect not representatives as you think but members to the board of directors of the corporation (USA Inc).

Miles Ahead's picture

Now the promise of Freedom of Speech is usurped by "The Right To Comment (or lack thereof)".  Only registered voters!  ZeroHedge needs to make everyone re-register with scanned copy of voter registration.

Borrow Owl's picture

Ahhh... yet another ignorant- albeit well-trained- herd animal whining because someone else refuses to go along with the scam.

Come on back if/when you ever learn the difference between rights and privileges.

 

 

Col_Sanders's picture

Actually he still has every right - even moreso...

Those who actually vote are consenting that they will abide by the results.  They are agreeing that if their guy doesn't win, they will follow the lead of the one who does.  In fact, they are duty-bound to do so.

Those of us who refuse to play the game, are also refusing to be bound by the results.

armageddon addahere's picture

Read the Constitution. Rights are not given or taken away by the government. They are endowed by the Creator and are inalienable. They cannot be take or given, bought or sold, or disposed of legally in any way.

hedgeless_horseman's picture

 

 

 

You therefore have no business and no EARNED right commenting on
politics, politicians, the economy, the nation, government, Americans,
and 10,000 other things that a responsible citizen has the
EARNED right and priveledge to do.

You couldn't be more incorrect on this matter.

 

11.  Read The Law, by Frédéric Bastiat.

12.  Make a list of your natural rights.

13.  Read The Constitution of the United States and The Bill of Rights.

http://www.zerohedge.com/news/2016-01-06/hedgelesshorsemans-revolutionar...

 

If that seems like too much effort for you, blind faith, then at least consider this quote from a man that knew a thing or two about American elections.

"I don't care who does the electing, so long as I get to do the nominating." - Boss Tweed

DeathMerchant's picture

Better to have the names and home addresses of the crew inside the tank

exi1ed0ne's picture

If you can't take out the supply lines for resource intensive battlefield equipment and must attack directly - always, always use fire.

Luckhasit's picture

Frame this response!

new game's picture

internal state of happiness, ha

hmmm, lets go shooting in my backyard! come on over and bring your fav piece. everything is ready and in place for some fun. tad cold at 9, but wtf, mind over mater. just the beginning of a wunderfull day! then you can help me with some sanding of mud. and maybe you can help me find a job in this wunderfully full employment economy. hey, life is great, i took another red pill, because the first one was wearing off...

Arnold's picture

The ultimate answer is 42.

My interpretation of that answer is to have another beer.

Some days, it is a pleasant change to be underemployed and pondering farcical worlds.

 

(not)

Mr. Universe's picture

I always knew there was something fundamentally wrong with the Universe.

pakled's picture

You've got to imagine that they have NIRP in Superman's alt universe Bizarro World.

 

J Jason Djfmam's picture

So long, and thanks for all the fish!

Kirk2NCC1701's picture

In the long run, people always discover or rediscover that genuine Money (that you can count on) is always based on Real and Precious Assets.  

All else is Monopoly chits.  Plan, hedge and speculate/gamble accordingly.

If it were me, I'd base all currency (paper or electronic) on (a) Precious Energy1 + (b) Precious Metals2 (Gold, Platinum, Silver).  Precious Energy

 

1 Precious Energy here means energy from Hydrocarbons, which not only provide Combustion Energy (and its residuals), but also act as the building blocks for the entire Petrochemical and Synthetics ecosystem.  Modern life -- a complex system -- would simply not be possible w/o synthetics (plastics, polymers).

2 Strictly speaking, depending on the times and resource need, it is quite possible to have other Precious Materials in the PM mix, e.g. Rare Earth Materials, that are critical to key industries.

Jim in MN's picture

Completely insane.  They've talked themselves into the notion that NIRP is somehow not just hyperinflation backwards. 

But it is.  Cash disappearing from your account IS THE SAME AS being able to buy less with a given starting amount each month.

Whatever the external rate of inflation is, this would just add to that in a positive feedback loop.

And to make it even worse, expectations would be flushed right down the toilet once this starts--it cannot be stopped.  Because of the mental scars you see.

Pandora's Box. 

 

May God bless what is left of our Republic.

 

(reposted from last night's War on Cash comments)

halfasleep's picture

+1 Very poignant. When Money Dies...

Mintcoin's picture

How does negative rates affect collateral value? I would think it would wipe out collateral and deteriorat its value, not improve it.. NIRP is just another tax, just like inflation is. It is net negative for the economy. Inflation is a hidden and indirect. NIRP is just direct. Both are taxing the economy. Will make the economy worse in the long run.

Arnold's picture

Another cost......

Only Congress can levy taxes.

Ummm........ I need to rethink that a bit.

blindfaith's picture

"How does negative rates affect collateral value? I would think it would wipe out collateral and deteriorat its value, not improve it.. NIRP is just another tax, just like inflation is. It is net negative for the economy. Inflation is a hidden and indirect. NIRP is just direct. Both are taxing the economy. Will make the economy worse in the long run."

It is called a "futures table"   At least when the interest rate is positive.  It is supposed to tell you what the possible value is after a debt is amortized, on say a house, a manufacturing plant, a muni bond for a school...certainly not a car or whatever.  When the interest rate is near zero, value stands still, it will be worth no more tomorrow than today.  It is keyed into inflation which is sort of what interests is designed to create.

It is why we have yield chasing crap stocks, low grade bonds, etc., and not investing in hard assets that produce anything.  Business don't want to invest in this climate, not when it cost more to buy the raw materials than what you can sell them for finished.  It is why companies buy theirown stocks back instead of investing in R&D.

mkkby's picture

Well, the fed is not going to do NIRP.  Now that gold is going back up they can't.  They have to protect the reserve status at all costs -- this is the number 1 prime directive. 

Gold is going up.  Oil is crashing and adversaries are making progress on reducing the petro dollar.  To protect the franchise, yellen must keep raising rates. 

They all know this, but of course the public has to be told fairy tales about inflation expectations and full employment.

Jack&#039;s Raging Bile Duct's picture

I am presuming by collateral you mean tangible assets? Please correct me if I am wrong.

NIRP takes money from the people and gives it to the banks. To avoid that, people will be chased into cash (if available) and physical assets. Banks stealing unspent money will then spend it in an attempt to avoid confiscation by The FED. Then again, banks could then just take out a negative interest loan proportionate to whatever deposits are being confiscated and call it even. Fucking evil.

All that money will bid up prices in an extreme manner. That's The Plan. Real estate will soak much of it regardless of whether cash stays legal. That will solve alot of horrendous bank insolvency issues, and fuel governments with higher property taxes and sales taxes on their slaves. Fucking evil. If we think the economy is completely distorted now, just wait for NIRP. There will be contrary and unintended consequences of wild proportions. Good luck to everyone. We shall need it.

MalteseFalcon's picture

The only problem is the negative rate experiment failed too soon.

Will Krugman write an editorial saying that rates didn't get negative enough?

Could helicopter money possibly be worse than negative interest rates?