The European Central Bank will extend its asset purchase program through March 2017 in an effort to boost inflation back toward its target of near but just below 2%, ECB President Mario Draghi announced Thursday. The ECB had previously planned to end the program in September 2016. Draghi said the program could be extended further beyond March if needed. The ECB will also include purchases of regional government bonds in the program, Draghi said. Earlier, the ECB further lowered the deposit rate it pays on money parked at the central bank to minus 0.3% from minus 0.2%.In this case, the confiscatory negative interest rate of -0.3% is intended to be a way for the ECB to charge the big banks for the cash they store in the ECB, but there's apparently nothing to stop those banks from passing the cost onto their customers. I say apparently because the Alternative Bank Schweiz has just done exactly that.
The Alternative Bank Schweiz (ABS) caused shockwaves with a letter sent to all clients in mid-October informing them that it would begin imposing interest charges on deposits in 2016.Admittedly, 1/8 of 1% isn't a big charge; if you've got the equivalent of just below that 100,000 Swiss franc line, I'll use $90,000 instead of $98,650, it's only $112.50. On the other hand, if you don't use that money and leave it in the bank, it will slowly evaporate away.
For current accounts, the bank said it would impose a -0.125-percent rate, while slapping a -0.75-percent rate on client deposits higher than 100,000 Swiss francs ($98,650, 92,420 euros).
Let's pause for a little banking refresher lesson, for those who don't think this way. Just like "It's a Wonderful Life" (and just in time for the analogy), when you deposit cash in the bank, it doesn't stay there. You give the bank a debt; an obligation to pay you back the same amount on demand, and in exchange for you loaning the bank that money, they pay you interest. At least they used to pay you interest. Should the bank go belly-up, you stand in line with everyone else that they owe money to in order to get your share.
With negative interest rates, you're paying them for the privilege of loaning them money. Which they then loan to others, and back when the economy used to work, they loaned it to someone else at higher interest than they paid savers, making enough to stay in business on the difference between those two interest rates. The root problem is that the central banks have lowered interest rates so much, the bank you loaned to doesn't make enough money on the interest they charge to pay you anything.
The central banks are destroying the world's financial systems. Look, if Quantitative Easing hasn't helped Japan in the last 20 years, with all the QE the Bank of Japan has done, why would anyone think it's going to help anywhere? Draghi, Yellen, Kuroda, and all the rest are either idiots or criminals. All they're doing is taking money from lower incomes and transferring it to their cronies.
If you're loaning money to the bank at a loss by depositing it there, why would you willingly do that? Bill Bonner points out the obvious "bird in the hand is worth two in the bush" corollary:
Money today is inherently worth more than the same amount of money a year from now. Because something could happen in the intervening period. Someone else could buy the house you wanted. The borrower might die and not pay you back. Or you might die, without ever seeing your money again.There's risk in loaning money the moment it leaves your hands. If you're assuming the risk of loaning the money to the bank, which seems to have gotten riskier, shouldn't they should be paying you more, not making you pay them to use your money?