Yves here. For those who oppose fiscal stimulus, be careful what you wish for. We’d have a bigger economy, lower unemployment, and a less negative or even a positive real interest rate. Draghi’s near zero rates have resulted in banks that don’t engage in casino banking to start imposing negative interest rates on savers. The case described in the post could lead other banks to follow suit if there isn’t a big backlash.
The ECB under Draghi like the Fed, is engaged in “extreme measures at the zero bound” experiments. If Europe and China stall and pulls the US closer to deflation, you could well see negative interest rates here too.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
Deutsche Skatbank, a division of VR-Bank Altenburger Land, which was founded in 1859, is not the biggest bank in Germany, but it’s the first bank to confirm what German savers have been dreading for a while: the wrath of Draghi.
Retail and business customers with over €500,000 on deposit as of November 1 will earn a “negative interest rate” of 0.25%. In less euphemistic terms, they have to pay 0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.
Inflation has had a similar effect in the zero-interest-rate environment that the ECB and other central banks have inflicted on savers, but this time it’s official, it’s open, it can’t be hidden. Instead of lending your moolah to the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you’re financially better off hiding it in the basement. Grudging respect is due the ECB and other central banks: through the perverse regime of ZIRP, they have succeeded in transmogrifying cash from an income-producing asset to a costly liability.
“Punishment Interest” is what Germans lovingly call this. It’s the latest and most blatant step of the central-bank strategy to confiscate in bits and pieces and over time the wealth that prudent people and businesses have accumulated, and that should have re-entered the economy via the intermediation of the banks.
Last summer, the ECB imposed negative deposit rates on member banks. At first, it was 0.1%, which has now doubled to 0.2%. The reason? The ECB dragged out its “mandate,” which is, as it said, “to ensure” that “price stability” is “below but close to 2% inflation,” which in turn is “a necessary condition for sustainable growth in the euro area.” Whatever. There is no scintilla of evidence that inflation is required for economic growth; however, there is plenty of evidence that economic growth can stir up inflation. The good folks at the ECB know this. It’s just the official pretext for using inflation to eat up debt – along with savers.
“There will be no direct impact on your savings,” the ECB announced five months ago. “Only banks that deposit money in certain accounts at the ECB have to pay.” But it added ominously, “Commercial banks may of course choose to lower interest rates for savers.”
And that would be good for savers:
The ECB’s interest rate decisions will in fact benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.
Thank you hallelujah, ECB, for helping out the savers!
This is in line with its policy, as it says, to “punish savers and reward borrowers.” No kidding. To bring some perspective to it all, it adds, “This behavior is not specific to the ECB; it applies to all central banks.”
Now the wrath of Draghi is hitting German savers and businesses. The first bank is already trying it out. Other banks haven’t yet jumped in line. They’re taking a wait-and-see stance but refuse to exclude the possibility.
“There is no planning in that direction,” Direktbank ING Diba told the Welt.
“We believe that negative interest rates on deposit accounts – whether for private or business customers – are a dangerous signal…” said a spokesman of the German Savings Banks and Giro Association (DSGV). But he did not rule out either that some member banks might not follow the same example in the future.
“The banks will try to avoid negative deposit rates,” explained the Federal Association of German Cooperative Banks, but in this zero-interest-rate environment imposed by the ECB, negative rates on large deposits “cannot be excluded.”
“At the moment, we are not imposing negative interest rates on retail customers,” said the second largest bank in Germany, Commerzbank. At the moment….
“We cannot earnestly rule out punishment interest in the future,” said Frank Kohler, CEO at the Sparda-Bank Berlin, the largest cooperative bank in Germany in terms of membership. He pointed out that the banks that are the most susceptible to punishment interest are those whose business model relies on pure banking with individuals and businesses, and whose earnings cannot be improved by investment banking, risk-taking, gambling, market-rigging, and other big-bank activities that “have triggered the financial crisis in 2007.”
“So precisely those banks suffer the most that have never put the financial system at risk,” he said. “This is unfortunately not free of bitter irony….”
The door to punishment interest has been cracked open. It starts with large deposits and small rates. Then step by step, deposit amounts get smaller and punishment interest rates get larger until everyone gets smacked with it, and no money is save. It’s all part of the time-honored central-bank strategy to flog savers until their mood improves.
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Instead of lending your moolah to the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you’re financially better off hiding it in the basement.
I like Wolf, but wish he’d update his banking model to the 20th Century. Banks don’t loan out savings.
My thoughts too. He also seems to miss out that investments in the productive economy are down and have been trending down for quite a while. And that businesses are sitting on accumulated savings waiting for the economy to improve. I assume that the ECB is trying to encourage these businesses to spend/invest their savings rather than parking it in deposit accounts with the negative interest rates. Essentially, trying to use a stick to beat businesses into spending, rather than the far more sensible policy of funding governments fiscal spending to stimulate economic activity, which would in turn encourage businesses to invest.
Good points, Nell. The ECB would have more luck forcing negative rates down onto smaller account holders in the hope they’ll withdraw and spend their savings than trying to force lending onto businesses that don’t want it.
Are you a proponent of Abenomics then?
It is apparent that Wolf does not read Naked Capitalism.
There is no scintilla of evidence that inflation is required for economic growth; however, there is plenty of evidence that economic growth can stir up inflation. The good folks at the ECB know this. It’s just the official pretext for using inflation to eat up debt – along with savers.
Good folks my ass. They are economists, and generally clueless. Not one will acknowledge that globalization is a world devouring catastrophe.
the banks that are the most susceptible to punishment interest are those whose business model relies on pure banking with individuals and businesses, and whose earnings cannot be improved by investment banking, risk-taking, gambling, market-rigging, and other big-bank activities that “have triggered the financial crisis in 2007.”
“So precisely those banks suffer the most that have never put the financial system at risk,” he said. “This is unfortunately not free of bitter irony….”
Why are those big banks that are “risk-taking, gambling, market-rigging” still around? Sounds like criminal activity to me. The ECB could actually do something useful and euthanize those big banks, but instead makes sure they survive in their zombified state to wreak ever more havoc. Again, clueless economists are making these decisions, and it shows.
Fire them all. They are the useless eaters.
The door to punishment interest has been cracked open. It starts with large deposits and small rates. Then step by step, deposit amounts get smaller and punishment interest rates get larger until everyone gets smacked with it, and no money is save. safe?
That, will force the price of gold up and create a demand bottleneck for home safes.
Here’s the pattern: Big capital has a free for all around the world, moving in wherever it can extract the most profit and leaving poverty in its wake. Then it is suddenly rudely awakened by the fact that economies are too impoverished to support the growth required to keep big capitalism going! And then oops, Deutschebank gets defaulted on massively, and slinks away, refusing to spend another dime and leaving the toothless ECB to keep the EU glued together and grin like Draghi doing whatever it takes. Egg on face. But even DB knows that it has killed the system. We must hope the Europeans can see past the carcass of DB, poster boy for TBTF, and begin to allow government spending to create an entirely new economy. If all our previous 40 years of “inflation” were due to a churning of capital just to keep bank profits high, then new economies might not suffer inflation if the economies they create do not rely on it.
Banks don’t loan out savings. Ben Johannson
No they don’t but bank loans do create additional claims on the reserves backing those savings and if depositors had a realistic alternative to the banks and the mattress such as a Postal Savings Service that makes NO loans and government deposit insurance and the lender of last resort abolished then the banks in aggregate would have to be nearly as careful with new lending AS IF they were lending someone’s savings.
I don’t know what to think about negative interest rates for savers. But I have to confess I don’t know what to think about positive rates, either… Will it encourage people to spend? To change bank? To stash their money?
Anyway, this monetary nonsense cannot replace good old public spending.
“I don’t know what to think about positive rates, either”
They should have a minimum floor rate of 2%, regardless of what the economy is doing – The result being absolutely no “demand” behavior change on the part of business and consumers, same as now.
However, this would make financial sector practices like the hugely leveraged carry trade, malinvestment, asset mis-pricing, high return outsourcing investment, high return leveraged takeovers, and generally fraud, less profitable. Call it reducing the “Fraud & Destruction Money Multiplier”.
An unforeseen consequence would be forcing these “capitalists” and “investors” away from the “search for FDMM” and try harder and be content with creating money “the old fashioned way”. Another unforeseen consequence would be that government may have to do something useful.
A “Black Swan” would be if the economy did something useful.
the 2% would also cover the basic transaction cost.
For example, the typical DC platform charges between .5-2% fees… so at less than 2% yields with no chance of capital gains, why would one put money there? If they think that a 50 year old is going to go 100% equities at this point in the cycle, they are deluded.
They are indeed promoting a black market… the last thing they should do considering they need as much activity to appear in GDP as possible and to collect mome taxes.
Yea if you really want to question capitalism and capital why have a real positive rate of return, ie earn money without labor and without something equitable like a citizen dividend or social security, just because you happen to hold money? But then at near 0% or even 2% you probably aren’t even keeping up with actual cost inflation anyway, so the real positive return may not be an issue.
The swiss gold referendum shows how dumb goldbugs can be.. I could, sort of, understand requirement to increase gold reserves. But to have a requirement that you’re NOT ALLOWED TO SELL IT? Hello? Anyone at home? I didn’t think so.
I suggest that in case the referendum passes, SNB declares that it will comply with the “do not sell” and “all swiss gold in switzerland” requirements by grinding the gold it has and ever purchases into a gold dust and sprinkling it over swiss alps (while retaining it ownership).
Maybe you can’t sell your gold, but I’m sure you can borrow against it.
12% Gold Card?
After all, banks always seem to win no matter what happens in the world.
Borrowing against it would automatically increase SNB’s gross assets (which is what the intiative about, it’s not “20% of net assets”, it’s “20% of assets”), of which 20% are required to be in gold, hence 20% of any borrowing would have to be immediately converted into gold that couldn’t be sold to say repay the loan. So your loan would have to generate >25% return.
Not to mention that I doubt you’d be able to persuade someone to lend you with security being something you’re prohibited from giving them.
Sorry, doesn’t work.
Just kidding.
The logic of the “do not sell” mandate makes perfect sense to me. Gold is the only asset on a central banks balance sheet that is not someone else’s debt. That puts it in a class all by itself. Because of the interconnectedness of the banking system, a systemic crisis could possible affect all fiat currencies the same way, making it foreseeable that a reset will more likely include an upward revaluation of the only non-debt asset to restore the solvency of the whole system. Gold is the only way to reboot and immediately restore stability. Not talking about a gold standard here. I am just talking about having a non-debt asset of some sort on the balance sheet.
We constantly hear that France and Italy — especially Italy — are in trouble. Yet France and Italy hold the 4th and 5th largest gold reserves in the world. Are they foolish to hold onto their gold? Time will tell.
Of course, MMT advocates find it inconceivable that there could ever be a global reset. Time will tell.
I’ve always thought this was simply an elite mind-set problem. Take Draghi (yes, someone, please do take Draghi, with my blessing) for example. Can he seriously imagine what life is like for us plebs ? No, of course he can’t.
Mr Draghi, I’m sure you’re not at all likely to read NC and won’t sully yourself further by reading comments from the cheap seats, but just in case. I live outside the Eurozone (lucky me, but not that lucky as I live in England). I and hundreds of millions like me face the same basic question and please let me assure you that while neo liberalism continues to rule the roost, we will continue to reply to it with the same answer. If we are fortunate enough to have any cash on deposit we will, to cut a long story short, keep clinging to nurse for fear of worse.
I am a case in point. I have a few £k’s in liquid cash. I earned £6.44 last month in interest on it. I still though will not spend it. Faced with middle age, financialisation thievery everywhere I turn, eroded employment protection and a dreadful labour market, I am not about to give up what scant security I have. If I earned zero interest, I still wouldn’t spend the money. If I get charged via a negative rate, I still won’t spend the money. If I am really penalised, I will take my cash out and hide it under the mattress or the equivalent avoidance technique. From where I stand, these are rational decisions and will continue to be so for as far as I can see into the future.
If, Mr. Draghi, you want me to start spending, which I assume is what you intend via your financially repressive policies, you’d be wiser to bring about social and economic reforms which mean I don’t live in fear of being unemployed, at the mercy of an unravelling safety net, with little prospect of finding a “middle class” job and having whatever resources I might have put by scammed out of me via a motley assortment of FIRE industry rent seeking, pick-pocketing HMOs, crappified institutions and monopoly food/energy/water companies who seem to see me as a walking cash machine they can take from whenever they wish.
As you will on doubt find over the course of the next few years, the tolerance of (especially, but not limited to) the German population to your attempts to inflict pain will exceed your ability to inflict it.
(I don’t know about you Mr. Draghi, but I certainly feel better for getting all that off my chest).
Yea…me too…what Clive said!
Clive
Well said – as a fellow limey, I know how you feel.
I also have a desire not to play the fool, not to be fooled. Call it pride. I think the markets will play the average person for a fool. And what drives us into them? Greed …. wait let me put that in non-moralistic economic terms: a desire for a higher rate of return is what drives the average Joe into the stock market. So into the corrupt immoral markets we go against our better judgment. Sure the whole system stinks, doesn’t care about human beings, and threatens all life on earth, but perhaps there’s a flash of hope of gaining the world at the expense of our souls.
But the whole stupid part is we probably won’t even gain that and be left holding the bag when the markets crash and we were played for fools. We’ll be like characters in a fable, perhaps the one with the scorpion, perhaps the one with the dog and his bone and wanting another bone on seeing his reflection. What if I don’t want to be the moral of a story?
Here in the US, the government drives us into them. We are driven into the markets by the tax structure. See pensions (if you can find any) and 401(k)s and IRAs. Staying out of the markets dramatically increases our tax bill.
Yea there’s a hand on the scale for sure, our lovely government. But if the hand on the scale drives us to not act in the larger social interest, in our class interest as working people, or probably EVEN in the long run in our own narrow atomic self-interest (the market collapses)… all that still stands.
Not that I think money that ends up taxed is particularly well spent, it funds a lot of war. Oh wait taxes don’t fund war, but they legitimate government spending, which in the U.S. funds a lot of war.
In Draghi’s defense – he can’t do that. He can only influence monetary policy. Bernanke actually pushed for a more activist fiscal policy during his second term, but nobody listened, so all we got was QE.
Indeed. Draghi has more faults that you can shake a stick at, but he did say repeatedly for a few years now that fiscal policy needs to be loosened otherwise nothing will happen. One of the reasons why he’s not on speaking terms with Germans anymore.
I do agree with Clive, but TBH, Germans have themselves to blame for this, and on more than one front. Their elites refuse any fiscal policies – despite creaking infrastructure (Kiel canal need urgent investment, but it’s not getting it… despite the fact it cost 0 for the GE govermnet to borrow).
They also pushed the real wages of German workers down mercilessly (and German workers were complicit in this to make it absolutely clear), exporting the unemployment out – but while their kept the nominal unemployemnt down, the wages earned by the employed were pushed down a lot. Sort of similar to what is happening elsewhere, except Germans were at it from early 2000s.
The real solution, and the more I think about it, a major part of any solution, is to force the companies who sit on enormous piles of cash (and there’s lot of them, in US, UK, EU, Japan…) to release that cash. If they use the piles to pay more their staff/SME suppliers, that’s great. If they use it for buybacks or dividends, tax it heavily. If they keep it as cash, tax it even more.
I’ve had a cup of coffee and, moreover, a biscuit, so I’m feeling generous. You’re definitely right there vlade, It’s certainly true to say that he’s had a go at trying to get fiscal policy brought into play in addition to just monetary policy. I’ll give him that (if nothing else). But I really can’t say he’s done enough on that score in my opinion. Not that he’s unique, Janet Yellen is seemingly similarly stricken with the coyness bug, maybe she got it from Bernanke.
If either of them had an ounce of leadership, they’d be telling it to the political class that there is nothing further they can do, they’re already past the pushing on a string phase with regards to monetary faffing around. But that would be tantamount to the man/woman behind the curtain stepping out of his/her own volition saying that there’s no Great Wizards, just some old guy (and gal) putting on a show with smoke and mirrors. No little dog required.
I agree he could have done more – though I do think he did much more than Yellen who believes (heck, that’s what her research was about) that monetary policy can solve it all…
I’d love to know – not that I’ll ever do – how much of it is because he believed he’d be holding the ship togehter and do some concensus with Germans. Who clearly aren’t interested in concensus, but in what they believe is right. And I do wonder whether Draghi will blow up on that or not – as I say, he’s not on speaking terms with Wiedmann anymore, and on tough terms with Merkel. Draghi publicly blowing up and telling Germans its them who holds EU recover bank is one of the best things that could happen to the EU now, but somehow I doubt it..
The only reason why things are holding up is because there have been gains on fixed income portfolios as investors have been reaching for yield. But now at the zero bound, that game is FINISHED in many countries.
Most DC platforms charge between 1% and 2% fees… so at the zero bound you are getting hit by inflation + fees. Up to now this has been stealth because of capital gains in the bond market but just you wait when the gains stop and volatility increases! After 6 years of speculation, we are bound to see some defaults… imagine the impact on credit spreads.
At the zero bound, our entire financial system makes NO sense and if rates stay there much longer, comedy will turn to tragedy.
Revisionist history. Bernanke wasn’t making noise when it mattered, in early 2009, and by 2012, had joined the deficit hawks.
What. Clive. Said.
And im in an American state with a good job market and lots of opportunity in my industry right now.
I have no plans to quit clipping coupons anytime soon.
Yeah — me too.
Well said Clive.
However, I’m beginning to like not spending. I can’t save much. Very, very, very little. But I do enjoy not feeding the hydra-headed beasts in the guise of governments and businesses these days. Not spending is becoming my way of protesting.
In other words, the beatings will continue until morale improves.
Sorry but savers start getting negative rates, they won’t spend it but they will surely yank their money out.
Pension plans will surely collapse… the are all using 5-7% returns and with 0-2% bond yields, they are in a pickle.
Our economy is not structured for negative rates. This zero bound experiment is a time bomb.
Something tells me that the ROW still wants the USD to be the reserve currency and keep the current world order intact for a little longer. Look at the elite in most countries… bankers and exporters. They want their currency to drop.
6 years have given the US good time to restructure its debt. I would not be surprised to see US raise rates and force the world out of that zero bound experiment.
My 2 cents.
Currency wars expose free trade as part of the problem as well. Trading makes no sense in a world of no profits and up to now most profits have been created by devaluation. Interest rates have been inextricable from inflation. Technically no country should have such a surplus that it becomes prosperous by austerity but inflation itself and high interest rates crashed capitalism and it now pretends things just need a little time to recuperate. If pensioners pull their money and pension funds collapse, the big investment funds and private equity and investment banks will be the big losers. Pensioners will be in the same boat as everybody else. There is no fixing the mess that free market capitalism got itself into. We have to start over.
Try this free book: “Interest and Inflation Free Money” by Margrit Kennedy:
http://kennedy-bibliothek.info/data/bibo/media/GeldbuchEnglisch.pdf
Take a little or take a lot. From Ellen Brown’s ‘Public Bank Solution’ (2013)
Chapter 29: The Ultimate Affront: Bail-Ins, Derivatives and Forced Austerity
‘”The ultimate test of international bank sovereignity, and the ultimate affront to our own, are the new “bail in” policies first surfacing in Cyprus in March 2013. These policies are designed to keep highly leveraged and risky derivative banks alive through the legalized confiscation of the funds of creditors – a class that includes depositors. At risk are not just individual deposits but local government revenues and pension funds.”
“We’d have a bigger economy, lower unemployment, and a less negative or even a positive real interest rate.”
Then start by asking yourself if any of that stuff is good. Making it easier for a heroin addict to get more heroin is not necessarily a good thing. I’m personally in favor of austerity because it grinds down the official industrial/market economy and causes people to seek (possibly sustainable) alternatives. The elites of the world have already shown that they have neither the capability nor inclination to tackle the real existential problems that curse humanity today, therefore the best option is to perform actions that redistribute power from elites to the people, which is what the aforementioned “alternative” involve.
I guess one way to get around the penalty is to exchange your euros for Danish krones. It’s pegged to the euro and doesn’t have negative interest rates (at the moment).
Achtung Savers!! Achtung.
Der BEETING villl Continue Till ze MOOORAAL imfroves.
Hugs,
For
Signor Draghi.
Hopefully, negative interest rates at banks will help people realize that monetary sovereigns themselves are the only proper providers of risk-free storage and transaction services for their fiat and those services should be free up to median account size and number of transactions and available to all citizens. And that being the case, then government deposit insurance should be canceled. And since lending by a monetary sovereign would constitute stealth embezzlement of it’s citizens’ funds then a lender of last resort is not valid either.
Whence then endogenous money creation? Let 100% private banks with 100% voluntary depositors try to create as much credit as they dare and when their first check bounces liquidate them in bankruptcy court because when it comes to checks payable on demand, illiquidity = insolvency.
Or let businesses and banks use their own common stock as private money and avoid all sorts of trouble including the boom-bust cycle for one.
Great, now Germany will be the poster child for the catastrophic t consequences of fiat money: both inflation and deflation will now be blamed on printing money and Germany will be trotted out the exemplar. Talk about two handed economists! Talk about talking out of both sides of your mouth! Double Fiat Monetarism: It’s 2, 2 causalities in one!