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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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[Deep sigh].
I'd almost think you were MDB, but I actually think you mean this.
I'll sigh with you.
This NIRP have been tried several times already and that was the exact rational. So far I have yet to see a positive result that was actually measurable.
Sigh
at negative interest rates, why wouldn't you borrow every dollar you could and buy gold with the net?
Or cold hard cash as the debt ponzi collapses
Because you could lose on that trade. Simply put it in a longer term gov bond and make free money. Want to make more, increase leverage to infinity.
to cursive
thats a great great post
We used to call tit twisters."Nirples" when I was a kid.
This NIRP sounds a little childish also.
Fucking Ponzi goes on...!!!
morceaux de papier
its morphing and faster, look around, its becoming mainstream that you wouldnt dignify your ass with these pieces of paper. i respect my bum, its performed yeoman service for a considerable length of time, i think gold might suddenly get serious.
Just a reminder -- we've already had negative real deposit rates for consumers for 4 years, even using the rigged CPI.
"Greek Vortex."
jigsaw puzzles commence completely incoherently , funny shaped things in a pile. then, one fits another, then a third fits the two.Then a fourth the three.
it gets easier, suddenly the picture forms, and the coordination process rockets .... its called legitimizing gold, this is underway. Seatbelt sign.
“Enter NIRP, aka Negative Interest Rate Policy.” And the capital destruction steps up a notch.
Lawless criminals of the black hole ...bitchez. http://www.youtube.com/watch?v=PVTsBaqiNIg
I kid you folks not.
Someone is gonna get shot over this, with extreme predujice. This is fucking surreal. Charging you for looking after YOUR FUCKING MONEY??
I fucking wish I could wake up from this, it feels like a bastard dream.
A. At times like this I wish I had a REAL mattress instead of a water bed (just kidding got rid of the water bed years ago)
B. It sure seems as if there is an opportunity for some credit worthy entity to sweep in and gobble up deposits from "savers" for like 2% interest. The growth would be massive if they could publicize it. They could Ponzi it for a while, but would eventually have to find a way to make money with 2% money. Seems as if it should be easy ... maybe it is not.
At some point, just taking your money out of the Eurozone should give you at least a 2 % return...
so what?
we've been discussing NIRates for over a year here on zH
the SNB had had neg rates for weeks if not months and possibly the danes too, who also have a EUR peg and are printing with abandon, as policy
marioECB has got a zombie on his hands; it is just part of a fascist fiatsco shell game to transfer wealth to banksters thru their corporartions; but the corporations are criminal organizations at this point and must be kept BK for defensive purposes
this is shaping up as a textbook crime against humanity imo and should lead to the greatest trial since nuremburg and thousands more hangings than after the last WWar; this time, the financeers will swing on the ropes of shitheads formerly known as debt slaves and the military will be paid overtime for rounding then up (which was meant as a joke, but NAT0 and UN ginslingers prob do get OT, don't they?)
these idiots are going to reprice gold, put it on tier one, suddely its worth 8316, italy and spain are magically solvent, grease oozes up n hits the sidewalk cafes. easy options squirt, this is easy, mumble here, mumble there, revalue gold and by extension silver
eur/usd gets punk'd etc .... Short Term Technical Analysis
More reason to get out of the US dollar and Euro. Go ahead Bernanke and ECB destroy yourself with negative rates. The big money will shift and reward countries which are fiscally responsible.
The end of the money Ponzi is getting closer; the central bankers can’t make this work without debt and taking what’s left. The Fed is the leader as the world’s backup, i.e., Go ahead, we have your back. When that’s gone, the banks start to fold… The insolvency becomes front page…
Cashout is also a dilemma for retiring boomers, many of whom have their IRA nest eggs in IRA CDs for “safety” because their declining life span allows no time to take chances and make up losses from the stock market. The government does not allow these IRA funds to be held in cash under the mattress; if the lump sum is withdrawn and not rolled back into another IRA vehicle within 60 days, it is considered income for that year and is taxed as such (also, only one 60-day rollback is allowed per year). Depending on state income taxes and income bracket, a year’s income taxes could decrease a retiree's entire holdings by almost 40 percent – a tragic end to a lifetime of work and savings for one’s retirement.
It’s called entrapment, banker entrapment.
Pay 40% to take it out now. Buy gold and silver and watch that double or more in the next few years. Go ahead and leave it in the ira and lose a few percent a year (or more probably) forever.
Risk is risk. And with slightly more luck than in the silver market, the retirees can do at least a 1000 percent at Las Vegas.
hahahaha..... welcome to Bernanke's PURPLE NIRP-LE on the USA
NIRP? Best guarantee to blow up the EU. Bring it on!
On the reset avoidance chart, conceptually I see negative interest rates as potential soft landing to extend and pretend. Just wait until cash has an expiry date. Use it or lose it.
Let’s see how this can work:
1)
Cash must be backed by gold.
2)
Cash expires at 5% a year
3)
If you hold gold, you can print 5%/yr +/- the market price ;]
Do I undestand this correctly? Banks will charge the rubes to "hold onto the money" which is nothing but so many 1s and 0s. I can't even fuckin' remember the last time I got a paycheck instead of direct bank deposit and I've never been paid a 2 week check in straight money.
Every now and again the idea of banks charging people interest instead of paying interest is bandied about in America. It literally is Money For Nothing for the banks, a financial swindler's wet dream.There is only about 700 billion dollars worth of paper and metal U.S. currency out there so what would they be charging people for? What would they be "holding?"
i gotta say, if i know the game, everybody knows the game. no one can win. just changing numbers with new numbers that, although they look different, mean the same thing: the system is failing to its mathematical death.
export via cheaper money vs export by cheaper money. that circuluar flow is of the down the drain variety.