The previous Blog including my bit on NIRP can be found here - it might be worth reading this first, or refreshing if you have not read it for a while (it was written as one of the usual Weekly Charts Blogs but contains the NIRP stuff near the beginning):
How NIRP can impact Savers and help kill an Economy
By lowering Interest Rates to below Zero, a Central Bank is in effect charging Banks to park their Cash in its vaults. This is problematic because in times of stress particularly, Banks want to store their spare Cash for short time periods with the Central Bank because that is where it is safest. They worry that if they park the Cash with another Bank, then they run a ‘Counterparty Risk’ that the other Bank could go bust and they lose their Cash. This Counterparty Risk problem was really the nub of the Credit Crunch in 2008 where lending between Banks totally dried up because they could not be sure that any borrowing Bank could remain solvent. Banks also have to hold Cash to comply with Regulatory Requirements that are dictated by the Central Banks (or if not by the Central Bank, it is imposed by a Regulator of some sort) - some of this they will wish to deposit with the Central Banks because it is perceived as ‘safe’.
Therefore, it is costing a Bank money to lodge their Cash with the Central Bank, so they need to cover this cost and it will mean that they start to charge Retail Depositors (and of course non-bank Business Depositors). This will be clever (a posh word for ’sneaky’) and to some extent hidden in special charges like ‘Handling Fees’ or charges for things like making a Withdrawal or simply an ‘Account Management’ fee. However, the problem here is that normal people on the Street will soon figure out that if they keep their Money in Cash under the Mattress, then they are better off than if they put it in a Bank Account. This is already happening in Japan where sales of small Safes to stick in your House are rocketing.
Just to clarify, think of an example where you park £30,000 in a Bank Account. In this case, you may end up paying ‘Fees’ of perhaps £300 each year - so if you try to take your Cash out after 3 years, you will only get back £29,100 - it has cost you £900. So, rather than doing that, you shove the Money in your Safe under the Stairs and now you have £30,000 at the end of 3 years (less the price of the Safe !!!).
I also read today (8th June 2016) that one of the Major European Banks was thinking of storing Cash itself in a Vault that it will manage - it is thought that the cost of Security etc. will be lower than the Central Bank’s charges. Part of the issue is that the Bank is unable to lend the Cash profitably as the Interest Rates in the Market are too low for the Risk involved - unless it is prepared to take high levels of Risk, it cannot earn a profitable Return. We continually hear from Politicians that “those awful Banks won’t lend” when the truth is more like no one actually wants to borrow. This Bank also seems to be annoyed by the Central Bank forcing it to either take on silly Risks or to get charged for Depositing it with the Central Bank - so part of the motivation to build a Vault seems to be bloody mindedness !!
The wider Implications
Once people realise what is happening, if there are no controls on how much Cash you can take out of your Bank Account, then Cash is going to flow out of the Banks and into people’s Mattresses and Safes. This then creates a big problem for the Banks as in a ‘Fractional Reserve’ Banking System, the Banks don’t hold all the Cash for all of their Depositors - at best, probably only 10% have any chance of getting their Cash.
You can read about Fractional Reserve Banking here:
I would guess that initially it will be a slow bleed of Cash out of the Financial System but this will most likely gradually accelerate and could result in full blown ‘Bank Runs’ - like what happened to Northern Crock when Robert Pestilence blabbed on the telly back in 2008.
Even if we avoid Bank Runs, the slow trickle of Depositors’ Cash out of the Banking System has huge ramifications - it will lead to the Capital Base of the Banks being eroded which will mean they are unable to lend within the Economy and this will have a very Deflationary effect (the exact opposite of the Inflation that the Central Banks are trying to create !!) as Banks need to call in Loans due to their smaller Capital Bases, and because they will be very fussy about who they lend to. This is already happening and it helps to explain why so called ‘Challenger Banks’ have been doing so well lately - they are stepping into the spaces within the Market for borrowing which the Major Banks have retreated from.
How will the Authorities stop this?
We are already getting clues with regard to what the ‘Powers that Be’ will do to prevent such a Run on the Banks and Deflationary pressures. Just recently, it was announced in the Eurozone that the 500 Euros Note was to be scrapped - the ‘excuse’ was that “nobody uses it except for Criminals and Terrorists”, which of course sounded plausible. I have read in various places that we will see more of this and gradually Notes will be removed from circulation, starting with the big denomination ones and moving downwards.
In addition, there is already considerable talk about moving to a ‘Cashless Society’ and all Transactions and Banking being done electronically - this plays into the same theme as it is very difficult for the Authorities to Tax and control Cash whereas if everything is electronic, they will be able to keep track and get to your Dough. This trend towards Electronic and Mobile Fone based Payments is clearly gathering pace with things like ‘Contactless Payment’ becoming more and more widely used. I am such a strong believer in this ‘theme’ that I hold both Paysafe PAYS and PayPal PYPL shares and there are plenty other Stocks related to this theme, like Safecharge SCH or perhaps something like VISA in the US. Apple Pay and the Android equivalent are also part of this theme.
On the flipside, if Cash is scrapped, then I suspect De La Rue DLAR might face problems as it makes Bank Notes.
We all assume that the trend to a Cashless Society is for our convenience and all that, and this might well be true. However, a helpful side-effect for governments is that Electronic Money is far easier to keep tabs on and we will be easier to tax.
There will be no escaping from NIRP policies by shoving your Paper Notes into a Robert Dyas Safe…….(other Hardware Stores are available)...
It may be no coincidence that Gold has suddenly got back into favour recently - it seems likely that many wealthy individuals have started to realise what is going on and see Gold Bars, Sovereigns, etc. as a better way to store value than as Cash - which of course can be devalued.
One of the other pretty daft ideas that is getting some Press Coverage is the idea of ‘Helicopter Money’. This gets its name from an idea that was muted by Ben Bernanke in a University Thesis he did prior to becoming the Fed Top Dog - the essence being that if you had an Economy that was in Recession/Depression then you could “chuck Dollar Bills out of a Helicopter” to get People spending again and firing up the Economy.
Obviously this is beyond daft. All it will do is stoke up Inflation and devalue the Currency - it anything, the fact that this is even discussed shows how broken the Economic System is and how the Authorities really have run out of sensible options - they just do not have the guts to tell the Electorate what is really going on. Simplistically, the essence of the problems facing Western Economies are:
- Chronic over indebtedness - both Public and Private debt (and much of it hidden and off-balance sheet).
- Over regulated economies.
- Aging populations and declining Birth Rates.
- Increasing Migration as governments rely on this as their only way to get even meagre growth in their stagnant Economies.
- Technological Change destroying Jobs - this started at the bottom end but is now working its way up to the Middle Classes and of course the advent of highly functional and intelligent Robots will create huge unemployment.
- Fracturing of traditional Political structures, leading to rise of minority Parties and undesirable elements like the Far Right.
- Declining Productivity.
- Devaluation of Currencies via Policies such as Quantitative Easing QE.
- Bloated Welfare States - including largesse for Political and Civil Service Elites.
- Crony Capitalism and the rise of the 1%.
- I could probably write many more issues if I could put my mind to it……
It is pretty obvious that Central Banks in Western Economies (China is a law unto itself and I cannot even begin to make a start on trying to explain the utter mess the Communist Party seem to be making over there) are running out of ideas now to enable them to stimulate moribund Economies and the Politicians lack the will (and probably the ability) to undertake the painful reforms and deregulation that are needed to sort out the mess. Even if they had the gumption to try and address the issues, their Populations would not make it easy to implement the necessary changes - you only need to look at the recent flare-ups in France to see how Populations are likely to react to necessary, but unpopular, reforms. The Central Banks are expected to resuscitate Economies but the reality is that governments should also use Fiscal Expansions but for various Political reasons this is not possible.
Central Banks are now undertaking vast Monetary Experiments that have only been tried before in the likes of Germany between the Wars and in Zimbabwe - and we know how that ends (if you want to know more about the Hyperinflation in Germany around the 1920s, then go to Wheelie’s Bookshop and get a copy of ‘When Money Dies’). The aim is to create Inflation but so far their attempts have been pretty useless, however, there is an enormous Risk that at some point they will get more Inflation than they bargained for - and this would be when things get really ugly.
It’s very strange because various ‘Experts’ have been calling for Inflation for probably as long as a Decade nearly, but there is little sign of it. If anything, this shows just how little real Demand there is in Western Economies and the Inflationary efforts by the Central Banks are just mopping up some of the weakness. However, as I mentioned before, it is very possible that all of a sudden we will get massive Inflation - this would not be good.
If we get Inflation, then Real Assets are the way to go. I seem to recall that Stocks did very well for most of the time in Germany in the 1920s although towards the end I think this failed to continue as the Prices of everything just got so daft - you could probably swap all your BASF Share Certificates for a Loaf of Bread !!
Property and Gold I think are the sort of things to hold - Bonds would definitely be bad news as their Coupon Payments would soon become negligible - however, Inflation Linked Government Bonds might be ok.
And an AK47 might be useful along with Tins of Beans and bottled water…..
It’s been an unusual departure for me to talk so much about Macro stuff, but I think it’s an important subject and probably not something many people have really thought about or understood - hopefully this will help makes things a little more clearer.