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Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP
Just because ZIRP is so 2009 (and will be until the end of central planning as the Fed can not afford to hike rates ever again), the ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money. Enter NIRP, aka Negative Interest Rate Policy.
Bloomberg reports that "European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve. while cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15... “The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist at Barclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.” Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight."
There is only one problem when comparing the Riksbank with the ECB: at €747 billion in deposits parked at the ECB as of yesterday, the ECB is currently paying out 0.25% on this balance, a move which may or may not be a reason for the depositor banks, primarily of North European extraction, to keep their money parked in Frankfurt. However, once this money has to pay to stay, it is certain that nearly $1 trillion in deposit cash, currently in electronic format, would flood the market. What happens next is unknown: the ECB hopes that this liquidity flood will be contained. The reality will be vastly different. One thing is certain: inflating the debt is the only way out for the status quo. The only question is what format it will take.
More from Bloomberg:
“It won’t help the prospect of a functioning money market because banks won’t be compensated for the risk they’re taking,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. It would make more sense to lower the benchmark rate, thus reducing the interest banks pay on ECB loans, and keep the deposit rate where it is, Green said.
The ECB has lent banks more than 1 trillion euros in three- year loans, with the interest determined by the average of the benchmark rate over that period. Societe Generale SA estimates that cutting the key rate by 50 basis points would save banks 5 billion euros a year.
The deposit rate traditionally moves in tandem with the benchmark, which policy makers kept at a record low of 1 percent on June 6. Draghi said “a few” officials called for a cut, fueling speculation the bank could act next month.
Sadly, because all this is merely operating in the confines of a broken system, just as the LTRO provides a brief respite only to commence crushing banks such as Monte Paschi, so any further intervention by the ECB will only lead to a faster unwind of an unstable system.
Other institutions have opted against such a move. The Fed started paying interest on deposits to help keep the federal funds rate near its target in October 2008 and has reimbursed banks with 0.25 percent on required and excess reserve balances since December that year.
Some Fed policy makers last August argued that reducing the rate could be helpful in easing financial conditions. While they discussed doing so in September, many expressed concern that such a move “risked costly disruptions to money markets and to the intermediation of credit,” the Fed said in minutes published on Oct. 12.
The Bank of Japan (8301) introduced a Complementary Deposit Facility in October 2008 to provide financial institutions with liquidity and stabilize markets, and has kept the interest it pays for the funds at 0.1 percent since then. Governor Masaaki Shirakawa told reporters on May 23 there would be “large demerits” to reducing the deposit rate because it could lead to a decline in money-market trading.
It gets worse: by trying to help banks, the ECB will actually be impairng them:
“If the ECB cut the deposit rate, it would take an important profit opportunity away from banks,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London. By doing so, the ECB would also be “encouraging banks to lend to the real economy” even though “there’s hardly any demand for credit,” he said. Blattner predicts the ECB will cut its benchmark and leave the deposit rate at 0.25 percent.
ECB Executive Board member Benoit Coeure said on Feb. 19 that market interest rates of zero or lower “can result in a credit contraction.”
That’s because banks, trying to preserve their deposit bases by paying customers a reasonable interest rate, may reduce lending to companies and households because the return is too low and invest in higher-yielding assets instead.
Finally kiss money markets - which together with Repos are one of the core components of shadow banking - goodbye:
“A deposit rate at zero will be of particular support to banks in southern Europe because it could help encourage some flow of credit,” said Callow. “A negative deposit rate can be damaging for money markets.”
Negative rates would destroy the business model for money- market funds, which would face the prospect of paying to invest, said Societe Generale economist Klaus Baader.
“But the ECB doesn’t set policy to keep alive certain parts of the financial sector,” he said. “Policy makers want to show that they haven’t exhausted their options yet.”
Regardless of what the actual outcome is, one person who will be delighted however, is Hugh Hendry. As a reminder, 'He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year." Because in the end nothing pays off quite like levered bets on the stupidity and hubris of central planners.
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Lend my money to a criminal banker at a cool 0.25% interest ? Just point to the the line so I can sign up.
Someone's going to sue their pension fund manager over this...
Why pay someone to owe you money, not hold your money for safekeeping but 'owe' you money when you can just buy gold.
Eventually the penny will drop, and the lawsuits will begin.
I know I would, if I had a pension, but sadly I stupidly tied all my money up in gold and silver.
Thick as fuck me...
Cool, so govt's can pay me to lend me money and pay me more to keep it longer!
I'll vote for that too!
Can someone please fan the fire faster...
This limbo bimbo state is the worst fuckin shit.
Aaaaaaaaaaaaaaaaaand..................... it's gone!
http://www.youtube.com/watch?v=NmFo-LKHGY0
Thing is, the "Great Reset", when it comes, is going to demand tribute, and it will be a human killer. Stackers may survive the event horizon, probably by breaking upcoming new laws demanding they turn over their stacks, but the vast majority of the unprepared will be destitute, unemployed, and starving. Zero Hedge will be the place to come to too watch this beast emerge. Hope you Durdens got enough stack to keep this place open.
Running a web service in that situation is easy.
It's whether or not your customers have power to turn on a PC, the infrastructure has power to run the layer 3 infrastructure to deliver the content.
If it gets that bad, most people will be dead of thirst by that point anyways. It's how all water comes out of a tap if you are on central city water systems. Need power to make water pressure. Need power to run filtration and processing. I believe Pakistan is now serving as a good example of the ineffectiveness of military, business and government intervention in broke assed economies and water management
If they're going to charge for the privelege of holding and using my deposits, they I want them to pay me to BORROW money.
GAME ON !
this is all very unreal. not only are banks no longer in the banking business, they are headed for anti-banking business. and the central planners are completely out of control. maybe they rationilized that bank-runs will never occur since they are after all dealing with THE SHEEPLE.
they should increase interest rates and let this marketplace reset itself asap!
I did not think it was possible, but we have blown past "Full Blown Retard"....
"Full blown NEGATIVE retard"!
Go cash under mattress or.senior.debt markets. Put a fork in it
Thats OK, I definitely dont need to pay someone to 'hold my money' I can do that myself just fine.
That may work for you but where do you stash a few billion. There's an enormous amount of fiat out there and it has to be somewhere, mattresses don't come that big. Think of it as if the Fed et al. have been trying to save the world by printing cars, supply and demand says safe parking garages would be in high demand. How long will it be before some smart Swiss businesman starts the the first store-it-yourself cash storage unit. After that comes some entertaining episodes of Storage Wars.
Well that sounds like a Central Bankster problem, not mine. Hell Central Banksters can pay 50% to hold their piles of money I dont care.
I may have this all wrong... but... I think you hit on the eventual problem, no? And it was mentioned in the entry above. At some point this worthless money will no longer end up parked for zirp or nirp... that will be the "unleash the Kraken" moment. Prices haven't "inflated" the way the hyper-inflationists have predicted because, quite simply, we continue to teeter on cusp of a deflationary depression. That fake money sloshing around can't be "loaned" because there is no demand for it... so where does it go?
> so where does it go?
Certainly not into precious metals. There isn't enough to go around, remember?
well, Tyler has posted articles saying that in the US, most of it going into deleveraging the mountain of shadow banking liabilities.
I have not read it yet, but econmatters has here on ZH an article hinting that the deleveraging process "just got started in Europe".
Meanwhile, it's two officials speculating. And this talk is targeted at money market fund managers which are supposed to go into Timmy's USTs.
IF we get to an "unleash the Kraken" moment, then sure... metals are likely the first to pop, I would think. And I do expect this to happen, at some point. But the real value in owning metals is that you might have a chance to trade if for whatever the new currency will be, after all of the existing currencies die (Edit: or, of course, use it as money, which it is). Of course that is a society changing experience, and most likely not ushered in without out some sort of global military conflict... so it's really hard to say what things might look like after the transition.
Difficult to see. Always in motion is the future. - Yoda
It goes into the black hole known as debt default. Defaults make money disappear as in poof! Money printing is only filling in the great void by transfering the liability to the public.
If it wasn't loaned then it doesn't exist except as fake entries on the books. It can't be used to buy anything.
This just proves that the zombie economy is actually dead,
More heroin will just make it rot quicker.
It's time to start the funeral arrangements.
For most regular and even fairly well to do folks, self storage is a workable idea. A million dollars worth of gold only weighs about 43 pounds.
My 100 trillion zim dollar note fits just fine under the mattress.. Wait a while and you'll get your usd under there too.. Won't be worth shit but it'll help with the bedding comfort.
Yes you could, hence the drive for the cashless economy. Then you cannot get your money out, and they can charge you negative interest rates. Plus you cannot buy anything of value like gold without them knowing.
Dear Benny,
I would like to borrow $20 trillion at this NIRP please!
I promise I will use this money to stimulate aggregate demand, and thus produce a recovery.
Thanks!
Sincerely,
Aziz.
Time to pull the deposits and put it under the mattress. This certainly won't end in a deflationary spiral.
cue bank runs....
'Negative rates would destroy the business model for money-market funds.'
Oops, there goes another big chunk of the Shadow Banking System!
Deleveraging, bItcHEz! It's what's for dinner.
@Dr. Engali
Spot on. This would be the end for bank deposits and the rise of National Mattress Savings & Loan. Utter fail attempt, Mario. It's one thing to debase the currency, but it's entirely another to charge people for the honor of being in the system.
"May you live in interesting times" has arrived...
Please let me know where you live and how much is under that mattress?
Or pull deposits and buy real shit.
like a wheel barrow...
This is how the (hyper) inflation begins... buy now, before your "money" is taken away from you. The institutional cash, where does it go? eurodollars for now ?.... only if London is outside the scope of such actions. Asian banks? Corporate bonds? there is money to be made on this flight, but where? UST? Really? where thereafter?
I never understood the point of stashing soon to be useless banknotes in your mattress. Especially in an inflationary spiral.
It's not an inflationary event. This would cause us to tip into a deflationary depression.
I'm not sure how to deal with a deflationary crash. I haven't given it much thought. PM's would probably get smacked down pretty hard at first. I have lines of credit I could withdraw at low interest before the banks change their mind. I'm really not sure what I'd do. What do think is a good way to deal with the possibility?
Sorry, had to junk you. This phase is the deflationary phase. PMs down, interest rates hitting negative. Remember, deflation is first!
Negative interest rates, PM's down. Sounds like an opportunity to borrow money and back up the truck. What do you think?
It will end in a deflationary death spiral. There are not enough trees to print all the money so what are you going to hide under the mattress after the banks close their doors? You will have to wait 10 years for your deposit insurance cheque. Longer than 10 years if you are under 99 years old. I'll be on the street terading my leather shoes for a sandwich. If i'm lucky.
Time to pull the deposits and immediately convert into another physical medium of exchange, which acts like a REAL store of value.
Such is often referred to as GOLD !
(Sufficiently large) negative deposit rates are a sure way to create hyperinflation. At some level, all the hundreds of billions of excess reserves at the central bank will be withdrawn and will flow into capital markets, finally trickling down into the real economy. Think applying the historical money multiplier on today's monetary base. I doubt, though, that the levels of negative interest rates central bankers think about, are sufficiently large to cause this exit.
If that money isn't in the capital markets now at these rates , it's not going in at negative rates. More than likely you will see bank runs.
At the ECB, you currently get 25bp per annum on your money. In 2YR Swiss, German or Danish government bonds you get less (and partly negative rates). If you are charged, say, 2 percent p.a. on central bank deposits, you won't keep any money there.
Don't be too sure. It is likely a tipping point. Once some start withdrawing, it will be a bank run. Bank runs are already happening with ZIRP. NIRP guarantees them.
unless of course they offer spiderman towels....
Any mention of rehypothecated spiderman towels = automatic +1 from me.
Fuckin' towels didn't even have Spiderman on them! Goddamned stingy Kike bankers.
Which implies they want to see bank deposit bases slammed - or at least cash being forced out. Begs the question of what the real goal is here. Seems it is the planned response to effects of NIRP that is goal, not NIRP itself.
EXACTLY! What is the real goal? Or goals?
Remember, these are people who grew up with the Keynesian propoganda. The simplest answer is that they believe what they learned in school, and think that they can force growth by forcing people to spend money rather than saving it.
I was wondering when they would get around to charging us for the privilege of being an economic slave.
Nice to know I'm loved and appreciated for more than my stunning good looks. :>).
If you post a photo, I promise to be stunned.
My secret is out. Cog is Clooney. :)
Forgive the beard. Mrs Cog thinks it's sexy. Whom am I to argue?
Damn it CD you went and ruined it. I used to have respect for you , but now that I know your true identity.....
Or as Mrs Cog likes to say..........you ruinit.
BTW she dislikes Clooney as well. In spite of that she puts up with me. :)
@Cog Dis
You make much more sense than Clooney. IIRC, his father was a newspaper man.
You are correct. And I can't believe I just wasted 5 minutes reading his Wiki. :)
The good news is that both George and I will pay for the privilege of being an economic slave. However, he can blame the Republicans (or whatever boogie man he hates this week) and I'll be left blaming all of us for accepting a "reality" not of our own making.
Dear George. Can you NOT throw lavish Obama fundraisers anymore? Sincerely, ZH.
You will not be appreciated by TD; Clooney n Pitt on the same blog, this is not OCean's twelve! This is flight club from reality. Fright club from mortality; we are time bombed on our time line full of doom gloom dynamite!
Cog, you are the dream of every young secretary
first hyperinflation where 1 cup of coffee costs 100 euro...
beat down silver to stay at 26$...
loading up ON THE BARGAIN 1 MILLION OUNCES WITH ONE PAYCHECK!
and wait... a few months...
At this point, how can anyone with cash NOT buy physical PMs?
I mean specifically silver, when adjusted for the ACTUAL inflation rate, should be closer to $100 per ounce. Throw in the fact that silver is a consumable metal...I mean come on. I love gold but I love silver too.
We've been below $40 per ounce for a long ass time. THANK YOU BIS/BLYTHE MASTERS!!!
Very funny, but (sad to say) unlikely.
Do you work with that "woman who makes $86k per day on the internet without leaving her basement"?
'Work with her,' hell! I'd marry her ass.
What about the rest of her?
$86K per day out of her basement? The rest of her doesn't matter! :-)
Here she goes:
http://matildatuesday.blogspot.com/2010/12/weight-in-world-of-warcraft.html
I told you gold and was right. NOW do your dollar play (which you probably already have.)
Cool. Now you can be upside down in your house and your portfolio.
Is this one of the "tools" Bernanke talks about still having? Or does he use the term "ammunition"? I can't fucking remember.
So where would that $1 trillion flow to? I doubt the European stock markets...Can someone say PMs?
Question? During the delivery of the durable goods number this morning Santelli on CNBC spoke about an event on Monday which no one is talking about. Any ideas?
Initial end of 2Q data?
post end-of-the-quater-window-dressing in equities?
It's not because COMMON SENCE tells you not to do it that you shouldn't be doing it!
It's not because COMMON SENSE tells you it's impossible to happen that it won't.
Non native speaker. I could not do as well as he does in a second language. I have made your error before.
This doesn't make any sense. How the fuck will this NOT cause a flight away?!?
When the hell are they going to let gold correct itself.
"Well isn't that conveeeenient" - The Church Lady
And Satan is surely involved.
If you "trickle up" is it still golden showers?
Golden fountains, my man.
Of course negative interest rates simply destroy even more money, as if money were not being destroyed at enormous speed already.
In other news my retail customers in the UK seem to have stopped using plastic. Like turning off a tap, the flow of plastic at the payments desk has dried up and been replaced by cash.
OHSHI- **************
@Zaydac
We should welcome the NIRP because it makes obvious the stealth fall in value from other means of debasing the currency. If the man on the street is upset about NIRP, he should be made to understand that central bankers have shaved 95% of the value of the FRN away since it's introduction. Now that's criminal.
Hey! Good Idea! Maybe the credit card companies will start paying interest to their customers for using their credit cards to make purchases!
What, you don't have a cash-back card already?
Sure sign that credit has already seized up, and the 0,25 % interest have no bearing on reality what so ever...
If only Europe would embrace multiculturalism and capture the notion of sharing with one another this could all be fixed
It's clearly worked wonders for their financial sector.
You're just looking at it like a racist would look at it.
False flag.
From under a hood?
A "racist"?? Try a "realist".
Bob, what's your idea of "sharing"? Germany paying for everything?...'cause that's the only version of sharing that would work for the EU. (for a very short time mind you).
Bob b trollin'.
Yes. As long as the Germans agree to work until they die, so the Greeks can retire at 55 and drink cocktails on the beach for the rest of their days.
After the failure of carbon climate derivatives, i present to you 'diversity bonds' as the next politically correct scam. Don't buy them, be racis.
Off subject. Something must have just happened.
Gold jumped +$10 in 30 seconds.
OMG something happened.
That was me; sorry. Got funded today. Stupid bank bought my paper.
Hope this canoe doesn't sink !
I had a margin call and they liquidated my short position...
Just wait until the LME takes settlement in Yuan.
Coming soon.
suk it bernank. suk it long, suk it hard.
Isn't that, "Shuk it long, shuk it hahd?"
Or, as Bawney Fwank would say: "Suck it wong, suck it hawd".
(Oh, and gladly in his case, too.)
if the prudent savers don't pay for the reckless, who will? if the good guys don't get fucked, who will?
Truth? Everyone.
9/10 libs will tell you the government should pay for it.
9/10 libs don't realize THEY are the government.
somewhere... out there in the world... there is a tree tirelessly producing oxygen for you... i believe you owe it an apology
They = Banks and Corporations. Banks are holding the money we gave them and corporations are holding scared. It is the job of the gov to smack them in the head a bit. All saving and no speding make economy a dull boy ;-)
Right,and debt and defecits don't matter either. Dick Cheney is that you? Perhaps another unfunded war to keep spending going, oh wait...
Inflation, by definition, ONLY has a positive effect on Debt.
I had to ask myself if the rabbit hole went deeper.
pods
You ain't seen nuttin' yet. I suggest that you climb all the way in, pull the dirt in behind you and wait it out.
Might as well explore while you're down there. :)
Debt is now paying for itself, sorry bond holders (especially retired ones).
Let the coupon clippers pay!
(They'll make it up in capital gains as the Bond Bubble goes parabolic.)
NIRP me up, Scotty. I gotta pocket full of 100-year zeroes!
"(They'll make it up in capital gains as the Bond Bubble goes parabolic.)"
Only if Grandma and Grandpa suddenly became bond traders and actually sell before the bond matures. I thought the whole point of retirement was not working?
Let's see: worried about bankruns then decides to charge people to keep $ with them?
If that won't cause mass panic I don't know what will.
Normal citizens keeping their money in the bank is not the problem. They don't have savings!
It is not new - it is called inflation. IN a way it is a kinda neat idea. How do you start a fire without oxygen? How do you get inflation when there is no demand and your government will not create any.
They could just take after the Japanese & build themselves some robots...
~~~
http://now.msn.com/now/0626-giant-japanese-robot.aspx?gt1=50501
What does this imply about the business model?
Anybody care to comment?
Gold has morning wood.
What comes after NIRP?
NIRP / 2 ?
Is that where we cut the year in half and calculate -4% "APR" on 6 month intervals???
DIRP?
Debt cancellation comes after NIRP.
IIRP: "Imaginary Interest Rate Policy", wherein the central banks set the rate of interest at i, the square root of -1. Whereupon a host of angels fly from Ben Bernanke's butt, singing hosannas to his brilliance.
Not sure what it does for the housing market, though.
well, "Negative rates would destroy the business model for money- market fund" No shit Sherlock! Duh!
How do I record negative interest on my 1040ez form?
Don't, it will cost you more!
Do you guys have any comment about this ? http://www.shtfplan.com/headline-news/security-report-massive-cyber-atta...
Because in the end nothing pays off quite like levered bets on the stupidity and hubris of central planners.
No it is not stupidity and hubris....
It is outright and abject fear...fear in knowing there is nothing else you can do to stave off the coming disaster such that the history books won't label you a do-nothing. If these cats were to come out honestly and say NO MORE...things have to collapse....liquidation is the only way to reset the system, they will be tarnished forever in history.
That's what the Central Bankers and most politicians fear for the most....their legacy.
And they will let the world burn to save their legacy.
Frank Roosevelt was wrong.
We don't need 'freedom from fear.'
We need 'FREEDOM FROM FUBAR.'
Geithner is in favor of NIRP. He was quoted as saying that zero is too limiting.
He should know....why limit that asswipe to a rating of 0.....how about a high negative number...say -35 trillion
Geithner = dumb dumb. No other politically correct way to say it.
Timmy's job is to separate the Gentiles from their savings and send the cash to the elite members of The Tribe. So far he's done a damn good job of it. As a typical thief of his ilk, he has learned to act dumb dumb. He's done such an exemplary job of acting dumb dumb so far he's stayed out of jail and managed to milk the taxpayers of a rather tidy sum of salary, benefits and future pensions.
There is no politically correct way to say it.
I can imagine Ben Bernanke having this very conversation with Geithner...
https://www.youtube.com/watch?v=5GK_kfR9UBA
it's a classic scene at the end of the Coen's movie Burn after Reading...
"What'd we learn Palmer?"
To all the people outthere, don't you know, that the Investmentbanksters decide about politics and not the elected¨
or not elected politicians. GS-Chief from Germany just had to lay down its post c'ause of a scam with former
PM of Baden-Württemberg ,Mappus. This is just the famous tip of the iceberg.
After ZIRP and NIRP: DERP
I love the smell of deflation in the morning!
Is Capital One going to offer NIR Credit Cards?
NIRP would mean a tax on electronic money. Workers would demand physical cash payment for their labour. The only out for the FED is to ban physical dollar transactions. In Canada businesses have been paying a .025 percent fee on physical cash deposits for the last 3 years.
"Your moneys is ours."
Surprise (not).
It's like Economic Buckaroo
I'll just load one more tiny bag of debt...........
Sproinggggggg!
" bank’s deposit rate to zero or even lower"
Yes if interest rates go negative, customers depost's in the banks will indeed go to Zero or lower....
Some sentances have double meanings...if they do the former, they will get the latter.
"ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money"
Clever move. The trillion the banks received in the LTROs is stashed away in the ECB, doing no good there whatsoever. If the spread between the interest banks have to pay for the liquidity and what they get for the parking at the ECB gets higher (there is a loss on this already, a fact that seems to missed by bloomberg and Tyler), they will look harder for profitable business and so it will finally find the way into the real economy. Or they give it back asap (which they can after one year).