Thursday, June 5, 2014

European Central Bank Goes Full-Up Confiscation

Of course they don't say that, they just say they've adopted negative interest rates.  For the entire lives of everyone living today in the EU or the US, we've been able to deposit savings in a bank and earn a modest but guaranteed interest on it.  Like many of us, I'm sure, when I was a tiny child (6 or less),  parents or grandparents opened a passbook savings account for me in my local Savings and Loan bank.  In the days of the gold standard, the interest was earned simply by charging interest on loans and paying a portion of that interest to the people with savings accounts.  This is the way we all learned it; the way it was immortalized in the movie "It's a Wonderful Life".  Without a gold standard, it's a bit more complicated than that, but not worth going into now. 

The point is that's not the case anymore, at least in Europe (for now).  Starting today, you will have to pay for the "safety" of a bank.  The ECB has developed a plan to charge customers for keeping their money in the ECB.  Let me share what I absolutely love about this (emphasis added):
The European Central Bank on Thursday cut interest rates and took a raft of unconventional steps to prevent the 18-country eurozone from sliding into a bout of deflation that could kill off a muted economic recovery.
Of course they're unconventional steps!  If they worked, everyone would be doing it all the time!!

Technically, the ECB is just charging banks to deposit money with the ECB and they speculate, "Time will tell whether cutting the deposit rate will encourage banks to increase lending, ... or whether banks will treat this as a cost of operating and simply pass it on to consumers and businesses."  Hahahahaha!  I wonder if people, faced with losing money on savings, will pay to keep their money in banks or resort to stuffing it in the mattress?  If you have a relatively small amount on deposit, you could do that.  If you have large deposits, your cost of doing business just went up. 

Denninger, like me, doesn't buy it:
I give this move by Draghi a half-life of anywhere from a few hours to a few days.  The simple fact is that false "growth" that results from pyramiding debt leverage is a fraud and eventually must and does end for the simple reason that you ultimately wind up exactly where Draghi is -- you are forced to destroy nominal funds through negative rates if you keep attempting to press your foot in the accelerator.

This brings into immediate and irrefutable focus the factual act of destruction of purchasing power that has and is taking place.
That "destruction of purchasing power" that's taking place is due to the inflation the central banks are creating.  Remember: it has been said that our own Fed Head, Janet Yellen would like negative interest rates here. 

If you ever wondered about differences between what central bankers see and the reality we all experience, this underlines it.  They're doing this to deliberately create inflation; they're scared to death of deflation.  I ask you: would you object if the next time you bought something, prices were a little lower instead of higher?  Yeah, I wouldn't like my pay to go down, but it wouldn't sting as much if prices were going down.  All of these effects: inflation, deflation, and negative interest rates are the results of central banking. 
Mario Draghi: the ECB's Janet Yellen.

My guess is that this one of those events that changes everything.  I don't think for a minute that it can't happen here: you'd better believe it can.  What would you do if they told you they were going to charge you interest to put money in the bank?  One thing for sure - and I've said this forever - savers are going to be destroyed.  They're desperately trying to destroy savings to get that money into circulation, which they believe fixes everything.  If they have to destroy us, hey: omelet, eggs.  You know the story.


  1. "If they worked, everyone would be doing it"
    Well, it depends on what the meaning of "worked" is. If the intent is to stave off the collapse and also to involve more people and more entities in the process so that the blame can be spread around, then it will probably work. Our own economy should have gone belly up in a really big way in 2009 but it continues to limp along and the stock market is hitting records. Of course it is belly up underneath the facade of borrowed money, printed money and massive deficit spending. But here it is 5 1/2 years later and the MSM ignores the problems and says ho hum to the problems so has it all worked? If Obama can keep this phony economy looking like it's still alive like Weekend At Bernies until he gets out then the Democrats and the MSM will blame it all on the next guy/gal.

  2. Off topic

    3-D bioprinting builds a better blood vessel


    73, Jim

  3. Can someone please explain to me why a deflationary period would be such a bad thing?

  4. Deflation. If it is a slow and long deflation caused by increasing technology and productivity it is a good thing. If it is a deflation caused by a depression then the deflation is more a symptom of the problem. Also deflation exacerbates debt so if the government owed 16 trillion in "real" dollars and we had massive deflation even with no additional borrowing the new debt might be 18 or 20 trillion in "real" dollars. Also when deflation is a result of economic turmoil it is not usually across the board. This means while your home may decrease in value by 50% and your real wages may decrease in value by 50% the cost of food and energy could actually increase. This then is a triple whammy for most people, i.e. your wages go down, the value of your home goes down and the cost of living goes up. Additionally the effect is similar for businesses and as they deal with the economic madness they will shed employees. There really are a lot more negative effects too.

  5. Real wages going down in real dollars happens with inflation too, which also destroys savings, causes the cost of living to go up.

    So avoiding the value of your home going down, which happened twice in 2008 and 2010 during an inflationary period...

    Once again, not really seeing how a period of deflation is worth all the economic pain.

  6. "Can someone please explain to me why a deflationary period would be such a bad thing?"

    Banksters & .gov benefit from inflation, everyone else loses. Deflation works the other way. All that one needs to know?


  7. That is like saying a minor cold and fever is the same as a serious illness. What you aren't getting is that there is more then one kind of deflation and while one type of deflation may be beneficial or at least not too harmful there are other deflationary periods which are very harmful. Wouldn't it be great if we had a modest deflation of all prices/costs slowly going back to yester-year? But in fact the deflation we are experiencing and predicting is more wild in it's swings and doesn't apply to everything across the board. In this instance the deflation is a symptom of something far worse and not the single factor. We are probably going to experience a dramatic economic crash with all it's accompanying ills and problems. ONE of those problems is deflation of wages and investments but simultaneously we a will experience inflation of energy, food and necessities. How, exactly, this will play out cannot be known but probably it will be similar to past economic crashs here in the U.S. and elsewhere in history.

    I remember asking my parents why the great depression was so tough and people had no food. My thought was that there shuld have been lots of food because the farms didn't disappear overnight. The answer was that there was food availabe but no one had money to buy it. THAT was deflation of wages but not the cost of food. There will be plenty of gasoline at the pump and electricity at the pole outside your home but you won't be able to afford it. This uneven deflation hits the poor and middle class the hardest.

    Another example is in the past 8 years SS payments have been adjusted for inflation by about 8% while food stamps have been adjusted using the same inflation measure by 44%. The senior citizen experienced deflation, the very deflation you are claiming is a good thing. Food and energy prices are up and keep going up but the deflation the retiree is experiencing is not beneficial. It WOULD be if everything deflated (or at least it would be a zero sum game).

    Another thing to consider is that the economy doesn't operate in a vacuum. It doesn't simply go up or down while we all do nothing. Humans interact with their environment and attempt to change it. During both booms and busts the government, large corporations and big investors "manipulate" the economy to the extent they can to benefit themselves or some other agenda. This causes distortions in the market and the economy. I live in a popular area with great summer and winter attractions. During the housng bust since 2009 housing prices did indeed decline here but every house on the market sold, literally grabbed up as quickly as possible. Compare that with places like Detroit. Why? Because individuals wanted to take advantage of the bargins in the market to live here. While in Detroit the government has destroyed the market and individuals made a free choice to abandon that market. Gor to Detroit and see the "benefit" of uncontrolled and unequal deflation (and of course government meddling). The point is whether we have inflation or deflation the people with influence and money will do what they can, what they must to protect their own interests and those actions will distort the market. The distortions will help some and harm others. The same deflation but different results and effects for different individuals. Joe Kennedy made millions in the 1929 stock market crash and the following great depression. Most Americans lost everything they had. So ask yourself is deflation good or bad? The right answer is elusive and can best be summed up as "it depends".

  8. Anon 1108 (and earlier, I suspect) - good stuff, but I suspect AM's question really centers not on deflation being categorically good, but more along the lines of why does the Fed try to control the economy to produce the so-called "persistent benign inflation" around 2%. Maybe I'm reading AM wrong, but what's so good about that, as opposed to producing a "persistent benign deflation" of 2%.

    Just to be clear, I don't believe either inflation or deflation is benign by definition. Both have their problems, and the worst case aside from deflationary or hyper-inflationary collapse is the one you describe (which we're having) of wages deflating while prices are inflating. Specifically, the prices that are inflating are the ones the Fed doesn't include in calculating inflation (mostly food and other energy costs).

    I maintain, more like Itor's comment, that the banks are hurt less by inflation than deflation. For at least the last 40 years, contracts like mortgages are written in dollars. As I see it, if the dollar inflates, the bank still gets the number of dollars they're owed. If the dollar deflates, that makes defaults more likely. "Persistent benign inflation" is therefore only benign to the banks. As a bonus from their viewpoint, people who either don't or can't calculate what's really happening to their pay, their home price, their retirement savings and so on, think those numbers getting bigger are really creating wealth for themselves rather than just taking a stack of dollars and re-writing the denomination on them - the essence of what inflation does.

  9. The Japanese had a long period of "benign deflation" that benefitted consumers and the middle class as the yen they had on hand began to have more purchasing power.

    So I'm not talking about wages deflating, I'm talking about currency deflating.

    In the current era where money managers are trying to hurt savers, deflation would reward savers.

  10. This is linked to why governments and central banks are pushing for a cashless society; if everything is electronic, they can easily take their 'bite' of it, with negative interest rates, taxes, fines, fees, etc. They don't like cash or bullion since it sits (mostly) outside their control.