Negative Interest Rate Policy & The War On Cash by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 23, 2016
IN THIS ISSUE:
Corsair Capital was down by about 3.5% net for the third quarter, bringing its year-to-date return to 13.3% net. Corsair Select lost 9.1% net, bringing its year-to-date performance to 15.3% net. The HFRI – EHI was down 0.5% for the third quarter but is up 11.5% year to date, while the S&P 500 returned 0.6% Read More
- Negative Interest Rate Policy is a Sign of Desperation
- Why NIRP is Not Working & Probably Never Will
- What’s Really Behind the Intensifying War on Cash
- Banning $100 Bill Means Liberals Are Out of Ideas
We are living in strange and unprecedented times to say the least. Interest rates on bank deposits have gone into negative territory across much of Europe and more recently Japan. While we have yet to see negative savings rates in the US, Fed Chair Janet Yellen recently warned that NIRP (Negative Interest Rate Policy) is on the table if the economy slips.
Yet the truth is that NIRP is not working as intended. I’ll tell you why as we go along today.
Meanwhile, monetary policy leaders and liberal politicians are increasingly waging a war on cash. Specifically, left-leaning policymakers in Europe and more recently the US want to make it harder for their citizens to hold large amounts of cash. To do so, they have called for the elimination of large-denominated treasury notes such as the €500 bill and the US $100 bill.
The promoters of the war on cash claim that large-denominated euros and greenbacks are used primarily by criminals, drug dealers, tax cheats, terrorists and bad people in general. They claim that law-abiding citizens around the world have little use for these large-denomination treasury notes and would have little resistance to their elimination over time.
What these left-leaning groups don’t admit is that it is their goal, ultimately, to eliminate cash altogether over time and convert us to digital currencies which can be used to track all of our transactions, at least those over certain defined amounts.
Since these two alarming trends are getting very little attention in the mainstream media, that’s what we’ll talk about today. I want my clients and readers to know what is happening and why. Let’s start with NIRP.
Negative Interest Rate Policy is a Sign of Desperation
The idea of a negative interest rate is that it charges banks interest for parking their money in a central bank, which discourages them from doing so. In theory, it should encourage those banks to lend more of their deposits out to qualified consumers and businesses, which in turn should boost consumption, business expansion and job creation.
As long as benchmark rates remain low, or negative, businesses should have more incentive to borrow at a low cost and put their capital to work. Another potential value of negative interest rates, so they tell us, is that they also help spur inflation. And a healthy inflation rate – say, in the 2%-3% range – is suggestive of a strong economy, so we are to believe.
Short-term interest rates first went negative in parts of Europe in late 2014. Since then NIRP has spread across Europe, and just recently, the Bank of Japan has joined the party. Yet while encouraging lending and a potential rise in inflation are the supposed upsides of a negative interest rate policy, there are also three negatives associated with NIRP.
First, negative interest rates are intended to discourage saving and interest-based investments. On this point, the question is simple: Who wants to pay a fee to hold your money in supposedly risk-free investment vehicles such as Treasuries, CDs and money market accounts? Answer: No one. This ensures that investors would be losing real purchasing power from the money placed in those assets.
In another context, negative interest rates penalize those among our nation’s seniors and Baby Boomers who felt victimized by the 2007-2009 stock market crash, and who still don’t have the stomach to invest in the volatile stock market again. Often loaded down with interest-dependent investment options like CDs and savings accounts, these individuals would find it very difficult to grow their wealth and reach their retirement goals.
Second, financial institutions being penalized by central banks will pass the costs on to their customers by imposing higher fees. If banks are going to be charged by a central bank for hanging onto cash, but they remain leery about lending, they will instead boost fees to raise additional cash. Monthly charges for maintaining a checking account, higher fees for wire transfers and overdrafts, fees for out-of-network ATM usage and even fees to see a teller as opposed to using an ATM could come into play and rise.
In fact, many of these fees have been rising, on average, over the past couple of years, whether we realize it or not. If these dangers demonstrate anything, it’s that a NIRP may not be a cure-all for Europe and Japan or the US economy if we go there.
And third, most nations that have jumped on the NIRP bandwagon started out with a negative interest rate of only -0.1%. Yet since that time, they have increased their negative interest rate several times, such that rates are at -0.3%, -0.4%, -0.5% and even lower in some countries.
Bloomberg reported earlier this month that there is now over $7 trillion in sovereign debt earning negative interest. There is nothing “normal” about this.
The Outcome: NIRP is Not Working & Probably Never Will
As noted above, the goal of NIRP was that by taxing idle money, it would make banks put that money to work in the form of more loans. In turn, negative interest rates were expected to influence individuals to increase spending and decrease savings. But as is so often the case with central bank monetary machinations, there have been unintended consequences – and that’s putting it politely.
More to the point, NIRP simply has not worked even as the European Central Bank (ECB) has influenced the Euribor (equivalent to our Fed Funds rate) lower and lower into negative territory.
The ECB first set the daily deposit rate below zero on June 10, 2014. Today, Euribor rates are below zero all the way out to 12-month maturities. The European economy, while not technically in recession, is only growing at a meager 1% on balance. Not exactly a success story.
Meanwhile, NIRP has not succeeded in slowing or reducing saving on the part of European consumers. As Bank of America Merrill Lynch reported recently, savings rates across much of Europe have gone up in recent years despite increasingly negative interest rates.
The bottom line is that, at best, NIRP has not worked in Europe and, at worst, it has been an abject failure. Banks are not lending; consumers continue to maintain or build savings; and the overall economy continues to underperform.
And how about Japan which decided to join the NIRP party at the end of January? While it may be too early to draw any conclusions about Japan’s economy in response to negative interest rates, the government reported last week that 4Q GDP fell by an unexpected 1.4% (annual rate). That does not bode well for growth in the first three months of this year.
On another front, NIRP was supposed to lower the value of the Japanese yen, especially against the US dollar, thus making its exports cheaper on the world markets. Oops! The yen has risen by 10% against the dollar since January 30 when the Bank of Japan went to NIRP.
I could go on with examples of how NIRP isn’t working, but I think you get the point. Yet despite the mounting evidence, Janet Yellen says the Fed will not hesitate to move to NIRP should the US economy falter in the months ahead.
This raises the question of whether or not the Fed will raise short-term interest rates again this year. I think the answer is no but some believe that if we get a good 4Q GDP report on Friday, Yellen may push for a second quarter-point rate hike at the March 15-16 FOMC meeting. I’ll have more to say about that next week.
What’s Really Behind the Intensifying War on Cash
The term “war on cash” is relatively new. In recent weeks, we have heard calls from prominent liberals to eliminate large-denominated treasury currency such as the €500 bill and the US $100 bill and other large bills around the world.
Just a week ago, Larry Summers released a column in the Washington Post calling for stopping the issuance of both of these high denomination bills and withdrawing them from circulation over time. You may remember Summers as President Clinton’s outspoken Treasury Secretary and Obama’s Chief White House Economic Advisor for a time.
Also last week, Mario Draghi, the head of the European Central Bank, announced a new study to look into eliminating the €500 bill and subsequently the €200 bill and eventually the €100 bill. Recently there have also been coordinated calls to eliminate large-denominated bills in other developed countries.
The latest calls for the elimination of the larger-denominated bills have a common theme: that these large bills are primarily used by criminals, drug dealers, tax cheats and terrorists. They claim that law-abiding citizens around the world have little use for these large-denomination treasury notes and would have little resistance to their elimination over time.
This is a ruse! We have all seen movies since we were kids depicting criminals and mob bosses making illegal deals with briefcases full of $100 bills. It’s true in real life as well. There’s nothing new about that. So why is it such a big deal all of a sudden?
Simple: with interest rates going negative – meaning that you have to pay to keep your money in a bank – more and more people are going to take their money out and keep it at home in a safe or “under-the-mattress” so to speak, where it costs them nothing.
Banks and regulators know this all too well, and they are panicked about the possibility that people will begin to hoard money. It’s not because they want to crack down on criminals, drug dealers, tax cheats, terrorists, etc. all of a sudden. They now are concerned about all the rest of us not wanting to pay to hold our money in a bank or in negative-yielding treasury notes.
So what better way to make it less desirable for us to hoard cash than eliminate large-denominated bills? Think about it: $1 million in $100 bills weighs apprx. 22 pounds; in $20 bills, a million weighs apprx. 110 pounds. By eliminating the big bills, it makes it much harder for people to hoard large amounts of cash.
That’s really all there is to the war on cash. Here’s a great article I read over the weekend.
Banning the Benjamin [$100] Suggests Democrats Are Running Out of Ideas
by Seth Lipsky, New York Post, February 19
The latest brainstorm being cooked up by the Democrats — to do away with the hundred-dollar bill — is front-page news all over the world. And for good reason. It’s a terrible idea, and not only because the c-note is the most popular form of green.
Banning the Benjamin would strip Americans of a layer of privacy and a currency of convenience. It’s being advanced as a war measure to make it harder for terrorists to carry cash. But it’s a smokescreen for the fact that the Democrats are out of ideas on both the economy and national security.
The putsch against the Benjamin is being sprung by Lawrence Summers. He was President Bill Clinton’s treasury secretary and also a president of Harvard. He came within a whisker of being chairman of the Federal Reserve under President Obama.
Mr. Summers wrote up his idea in the Washington Post, touting a proposal from a think tank he directs. It wants the Europeans to stop issuing new 500-euro notes and America its hundreds — and maybe even withdraw such notes already in circulation.
This, Mr. Summers suggests, is justified because these denominations — and Portraits of Grant (meaning $50s) — are being used by criminals and terrorists. In “certain circles,” Mr. Summers says, the 500-euro marker is known as the “bin Laden.”
That strikes me as an unconvincing argument, particularly from the Democrats. They have withdrawn from nigh every front in the war on Islamic terror. They don’t want to name our enemies or even call our struggle a war.
Meantime, they’re downsizing our army. Secretary of State Kerry is preparing to surrender in Syria, and the Russians and Communist Chinese are on the march. The best the Democrats can come up with is taking away Americans’ favorite form of cash.
It’s the financial equivalent of gun control. When criminals use guns the Democrats want to take guns from law-abiding citizens. When terrorists use hundreds, the liberals want to deny the rest of us the Benjamins.
Ordinarily this would invite ridicule, save for the fact that it’s part of a larger game — the movement to do away with cash altogether. This movement is growing by the year, at home and abroad.
Just this month, the American editor of the Financial Times, Gillian Tett, issued a column on the benefits of doing away with cash. She quoted the head of Germany’s biggest bank as predicting that in a decade “cash probably won’t exist.”
What the government fears is that if people use cash, they’ll be able to act privately. It’ll be harder to impose on them the sky-high taxes the government likes. It would never occur to a government official to deal with this problem by, say, lowering taxes.
Nope, they just want to make it harder to use cash. Mr. Summers actually argues that one reason to do away with high-denomination banknotes is that $1 million, carried in the form of 500-euro notes, weighs only 2.2 pounds.If a terrorist were forced to lug around his million in $20s, it would weigh 50 pounds. This is what they’re teaching up there at Harvard these days…
Welcome to the age of modern money. First the government runs down the value of the dollar. Then when people start easing their backs by carrying what little money they have in hundreds, the Democrats start complaining about terrorists.
The truth is that the Democrats aren’t worried about the terrorists. (Apple won’t even unlock a cellphone to help the government catch terrorists.) If the Democrats are so worried about terrorists, why are they preparing to give $150 billion back to the Iranians?
Then again, how about this for a plan? President Obama can use the government’s stock of hundred-dollar bills to pay off the Iranians. As soon as the cargo planes are in the air, Congress can pass a law saying Benjamins are no longer legal tender.
Why, it could be the start of real monetary reform. END QUOTE
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All the best,
Gary D. Halbert