Negative Interest Rates:

Voodoo Economics?

By John Schroder - March 4, 2016 

For illustrative purposes and for those people not familiar with economics or finance, let us tell a story about someone that falls ill with cancer back in 2008.  The gentleman discovers he has cancer during a routine check-up with his doctor, but the doctor decides instead to simply give the man morphine and other pain killers to ease the painful effects of the cancer (mind you the doctor did not prescribe chemotherapy or any other treatment to eradicate the cancer).  When the patient was asked how he felt in 2009, 2010 and subsequent later years he said he felt OK (but he still had the cancer eating away at his body, he just has not felt the painful effects of it because of the constant regimen of pain killers he has been given over the years).  Now in 2016, after seeing the pain killers have worn off and are no longer masking the pain (remember, the cancer is still there and has not been treated), it is decided to administer a new radical treatment involving snake venom administered by a voodoo witch doctor from the outback who claims success with treating cancerous kangaroos.  Of course what our witch doctor has not disclosed is that out of 100 kangaroo patients who received this treatment, 80 have died 20 are precariously holding on albeit now cancer free.  The devil is always in the details, and the side effect warnings regarding the medication as well (yes this new drug will lower your cholesterol, but side effects include nausea, vomiting, painful swelling of the legs and has shown to increase the possibility of testicular cancer in laboratory mice).

So, by now you will deduce that from our metaphoric tale that the cancer patient is the US  economy (and that of other G-8 nations), the doctor represents the political leaders and central bankers in said countries and our famous morphine drip are the various fiscal or monetary policies that have been concocted (TARP, TALF, QE, FU, operation tail twister, operation turn-style, and so on).  Now that we have moved away from traditional medicine to supposedly aid the patient and instead are embracing voodoo remedies, we return to the question we asked roughly 8 years ago, which is as follows:  Are these people (politicians and central bankers) really that stupid or are they really that clever (knowing exactly what they are doing and what the end outcome will be)?  Truth be told, the US (and other effected economies) have NOT come out of recession since 2008.  All this has been a tale of inventive and repeated so-called monetary and or fiscal stimulus that temporarily appears to show progress (remember the patient feels no pain temporarily while the pain killers are being administered) only to fall back down again with a rinse and repeat cycle of doubling down.


The definition of Insanity is doing the same thing over and

over again and expecting different results the next time.

 – Albert Einstein.

Negative Interest Rates: The Way We See It

In our opinion, an adoption of negative interest rates by some of the world's central banks tells us two things:

1. The Central Banks of the G-8 nations have lost control over their own money policy, fiscal policy and as a result or by definition, their own economies.

2. The respective economic situation in their countries must be much, much worse than what they are telling the general public because a negative interest policy is tantamount to grasping for straws (or reaching out to a voodoo doctor when you own medical physician has failed to offer results from traditional treatment)

Aside from the fact that negative interest rates hurt bank account depositors of all kinds (both individuals and businesses as well), our concern is that these gurus of finance will adopt the same repeated logic as they have in the past with other policies.  QE1 did not work as planned?  No problem, let's roll out QE2 and double down (must be the case we did not do a high enough amount the last time).  QE2 not quite as expected.  Let's roll out QE3, but change the name so as to instill confidence and not alarm the public.  So, with that logic applied, who is to say they will stop at just a negative 1 percent interest rate? Why not double down to 2 percent, or 5 percent or maybe even 10 percent?

The problem is that depositors of all kinds place funds into a bank account with the understanding that at least their money is secure and at best that they can earn some kind of interest with it.  Retirees of course have been drastically hurt with these extremely low or even zero interest rate policies, and now they are not only suffering from no interest, but the bank will take away money each time they make a deposit. So, let us say such pensioners have their monthly US$1,000 or equivalent in Euros electronically direct deposited to their bank accounts.  Using a negative 2 percent rate for illustrative purposes, they end up with US$20 less the moment those funds are credited, resulting in a monthly pension of US$980 (and not US$1,000).  Can you imagine?  And now let us imagine the financial gurus at the central bank decide to increase those negative rates to 10 percent, or more.   The average citizen becomes the victim of a robbery by the same people charged with maintaining the stable value of the currency.  And business owners who get paid by customers see an immediate loss in payment income (which means less profits) not to mention everyone else having their salary direct deposited as well, who by default get a very real pay cut for no fault of their own.

The fear of the central bankers would appear to be deflation, as deflation awards the pious savers with NO debt and castigates the debtors (as those debts become more costly to pay off and service in a deflationary environment).  Inflation on the other hand is the debtors best friend and the fiscal enemy of savers.  So once again, it would seem central bankers are rewarding the foolish (and maybe even the crooked) and punishing the pious and financially responsible.  Just like inflation however, negative interest rates are a form of hidden or stealth tax against the population.  In fact, while inflation is very difficult to control exactly, negative interest rates are a very directly induced forced inflation onto the populace.

But who then in their right mind would want to willfully see their money balance immediately devalued simply because they did something as innocent as make a bank account deposit?  Those people with understanding will probably want to deal in cash as much as possible, and keep money OUT of the banking system as much as possible as well.  So, we cannot say what these star economists at the central banks think they will achieve with negative interest rates, but we can certainly predict less funds in the banking system as a result, the hoarding of cash and perhaps even increased interest by the general public in other forms of store of value (gold coins, silver, real estate, high end jewelry, art work, and any other tangible form of wealth).  However, the real possibility exists that the central banker wonks become frustrated by all this and push the politicians to outlaw the use of cash altogether.  It has already been done on a trial basis with a small municipality in Scandinavia, so how far fetched do you think this to be?  The public of course will duped and sold on the idea that use of debit cards and such is a good idea for safety and convenience.  The truth of it is much more sinister.

Surviving The Inside Bank Job & When Money Dies

I read something recently by Mr. Dinesh D'Souza, an immigrant to the United States that offers a unique perspective of someone that grew up in India but now is a man earning his livelihood as an author and documentary producer.  Mr. D'Souza, a self labeled conservative, had some of his previous beliefs in the United States altered through his experience inside a US detention center and this prompted him to write a book titled:  Stealing America: What My Experience With Criminal Gangs taught me about Obama, Hillary and The Democratic Party.  This is of course not a book review, but I would encourage anyone to pick up a copy and read it (well written and well worth the cost).  But the main point to be made is he said some things that caught my attention, which are as follows:

Now India aspires to become more like America, and America seems to be moving in the direction of India.  This is the scary thing.  But India is progressing and America is regressing (very similar to some comments and observations I had made some time ago whereby I said the United States is trying to become a Third World Country and the Emerging Markets are trying to become what America used to be).  Chapter 3 of his recent book is titled: How To Steal A Country: A Heist To End All Heists.  Mr. D'Souza writes:  This book is about a remarkable scheme to steal America.  The scheme I refer to is under way, and in fact is working extremely well.  America is being stolen, a good bit of it has already been stolen.  I am referring to the entire wealth of the nation, the value of the homes and the lifelong savings of all the people, the sum total of the assets of every industry, in sum, the entire wealth of America, built over more than two centuries (end of quote).

I personally find this observation amazing, coming from a fairly recent immigrant arriving in the land of the fleeced and home of the duped, who came to the same conclusion I myself did albeit more then 20 years ago.  A lot has changed in 20 years, but the song remains the same.  With that said, I do not pit the politically conservative against the politically liberal, Republic against Democrat as it were because both parties and politicians of both stripes are accomplices.

Getting back to the economy, Royal Bank of Scotland credit chief Andrew Roberts via a January 8, 2016 report advises clients to: Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.  He also opines that Quantitative Easing has failed and was EXPECTED to fail. Say again Andy? Was expected to fail? That is not what the politicians and central banks told the rest of us.

In any event, you can make up your own mind, but just make sure it IS your own mind you are making up (as opposed to having blind faith in central banks, academics, economists on the government payrolls and all the other assorted talking heads).  Mr. Dinesh D'Souza is convinced there is a systemic and organized plot to steal the wealth of America by a number of self interested politicians through the typical slight of hand.  Our contention is that many central banks have finally lost control of the economy and their senses as well, resulting in yet another form of pilfering of the general citizenry at large.  While Mr. D'Souza remains optimistic, I for one do not (call me a cynic, but I just do not see it – all of these countries need a few good men but just like Elvis, they seem to have all left the building).  And as such, we still tend to believe survival is the name of the game, as in get your money out (before it might be too late) and maybe get yourself out as well. 

And Now A Word From Not Our Sponsor:

(And If this is not enough proof for you, then I do not know what else could be - in reply to our question: Are they really that stupid, or are they doing all this on purpose).

Keynesian Economics