Bill HolterJapan announced negative interest rates Friday, which caused a bounce in Europe and then in the U.S.. It is as if "they saved the world"! I have just a couple of comments before digging in to this, first, "why didn't someone think of this before" and "if it were only this easy!".
Last summer as negative interest rates began to appear in Europe, especially BETWEEN financial institutions I wrote this http://www.globalresearch.ca/negative-interest-rates-debt-is-better-than-cash-whos-running-the-monetary-asylum-anyway/5444901. Rather than write a complete rehash today on negative rates I encourage you to read a past missive as the mission for today is to look at this from a very broad perspective.
Of course there are all sorts of ramifications with negative interest rates. The most obvious is how it will affect the banking system? Negative rates on deposits will certainly prod some to withdraw actual currency and dig a hole in their backyard. It is said negative interest rates can (will) cause a bank run while others believe a move to digital currency will be used to stem the ability to withdraw from the system. Both of these thoughts are likely.Gold vs Levels Of Interest Rates 1970-2012
It must be understood that all monetary policy over the last 100 years has been an effort at "reflation". All monetary policy has been about "growth". Before you start screaming at me and calling me naïve, I am not talking about economic growth or "for the good of the people", I am talking about expanding and assuring the global financial PONZI SCHEME continues! You see, for the first 70 years or so, expanding the amount of debt was easy as assets and unencumbered collateral of all sorts were available to be lent against.
As the fractional reserve/Ponzi scheme matured it hit an inflection point around 1980 as interest rates spiked. Rates have come down ever since as a means to allowing more and more debt to build up. The next inflection point was 2008 when we reached debt saturation levels and interest rates have basically been zeroed out since then. Any nominal interest rate level since that point would have blown up the game. Now, in order to keep the game going, we must have negative rates because there is nowhere else to go.
But what about the Fed raising interest rates last month? We have seen what financial markets think of that decision. Even looking at the Fed's statement after the last meeting is "telling" as they did not include ANY "risks" in their statement. Before and after the December rate hike, various Fed officials "floated" the possibility of negative interest rates. I believe we will see another round of QE AND negative interest rates hit the U.S. as the current margin call evolves, there is no other option.
Over the weekend, Zerohedge put an article out explaining the situation in China. They are in the exact same boat but they do have room to lower rates A Chinese Banker Explains Why There Is No Way Out. The key passage as expressed by a junior banker at a Chinese commercial bank follows:
"If I don't issue more loans, then my salary isn't enough to repay the mortgage, and car loan. It's not difficult to issue more loans, but let's say in a year's time when the loan is due, if the borrower defaults, then I won't just see a pay cut, I'll be fired, and still be responsible for loan recovery."Gold 24H Composite Historical Patterns 1974-2012
China has the exact same problem with too much leverage as does the West. No doubt whether immediately or in the near future, China will also be forced to go the devaluation route. This will send 1 billion+ trying to exit yuan ahead of devaluation. But where will they run? Certainly we will see some funds moving into the dollar (and out as official reserves are sold) but China is a culture that understands "money". Just as they have officially accumulated gold and urged their citizens to accumulate, a big "exit door" will be into gold. I am of the belief that this accumulated gold will be their trump card ...used only after the current currency game has no more breath.
Do not be fooled by the jubilation of this past Friday. As I said earlier, "if only it could be this easy"? This goes back to the reality that no central bank or sovereign has EVER printed its way to prosperity. Yes, devaluing does help a nation's trade in relative terms to their partners but what we have today is the entire system shrinking together. Will a larger slice of a smaller pie "be enough"? Global trade, GDP and consumption are all shrinking at a time debt levels have never been higher. This is akin to going on a buying spree all done on debt and then getting the bad news you are getting a pay cut!China's Real Negative Interest Rates historic 2001-2011
As for Japan going "negative", their action is simply part of the "race to the bottom". We have said all along we live in a world where central banks are in a "race to the bottom" with their currencies, Japan is only the latest illustration. The world is already well into a collective margin call, the day is coming where investors will SELL into the "good news" of further rate cuts and negative rates. Once this action begins it will say loud and clear "CENTRAL BANKS HAVE LOST CONTROL"! Don't get me wrong, this has already happened as they have no policy options left other than negative interest rates. However, the key will be when market participant's head for the exits and use whatever PPT/negative rate "bids" as their exit door.
To finish, negative interest rates are not even "real". A real and functioning system cannot exist with negative rates. The same thing is true for backwardation in precious metals. In a real system with a rule of law they theoretically cannot exist, in a correctly functioning system, backwardation certainly cannot exist. Negative interest rates are a sign of outright panic by TPTB, the reaction on Friday will not last long once this understanding sinks in. The coming global financial crash will be greater than anything ever before seen in history. The time for REAL INSURANCE has never before been this great!