Despite all of the central bank manipulations over the past seven years, it
is finally becoming clear economies will not be able to achieve escape velocity.
The U.S. central bank has the longest track record of treading down the path
of monetary manipulations. And has achieved anemic average annual growth of
2.2% since 2010. Therefore, to further demonstrate the failure of money printing
to engender economic growth, the dismal Q1 GDP read of just 0.2 % displays
the failure of this policy once again. Wall Street Shills have been quick to
once again blame snow in the winter for the Q1 miss. However, it is becoming
evident that Q2 will not produce any such anticipated rebound.
Markit's Flash U.S. Services PMI (Purchaser Managers Index) for April indicated
that business activity rose at a slower pace than expected. The April reading
came in at 54.2, which was below the consensus of 56.2 and below March's level
of 55.3. Adding to the bad news was the Conference Board's Consumer Confidence
Index that hit 95.2 in April. Economists polled by Reuters expected a reading
of 102.5. And, the Richmond Fed Manufacturing Index fell into the minus column
for the second month in a row at -3 for the start of Q2.
Things don't look much better across the globe. The Euro zone Purchasing Managers'
Survey disappointed investors with the German PMI index falling to 54.2, from
March's eight-month high of 55.4. France's PMI also showed a slower expansion
than forecast in the services sector and a worse contraction in manufacturing
than predicted.Manufacturing PMI in France decreased to 48.4 in April, from
48.8 in March.
Japanese manufacturing activity contracted in April for the first time in
almost a year, as domestic orders and output fell. The Markit's Japan Manufacturing
Purchasing Managers Index (PMI) fell to a seasonally adjusted 49.7 in April,
from a final 50.3 in March. The index fell below the 50 threshold that separates
contraction from expansion for the first time since May of last year.
We are in our seventh year of record-low interest rates and banks have been
flooded with reserves. However, the developed world appears to be debt disabled.
That is, already saturated in debt, therefore unwilling and unable to service
new debt due to a lack of real income growth.
So the problem for central banks and governments is how to get the money supply
booming in an environment where consumers want to deleverage and save. Zero
percent interest rates (ZIRP) are inflationary and negative real interest rates
foment asset bubbles and encourage new debt accumulation. For decades central
banks have used their control of the price of money to coerce boom cycles that
eventually turn to bust. But for the past six years, their foray into ZIRP
land hasn't provided the boom cycle they were expecting. Sure, they have created
massive bubbles in bonds and equities--but the economy has yet to enjoy the
promised growth that is supposed to trickle down from creating these bubbles.
They have set the markets up for a bust, yet the economy never enjoyed the
boom.
This has left Keynesians scratching their respective heads and scheming new
ways to encourage even more borrowing and spending. The Keynesians who rule
the economy now control the price of money but are having difficulty controlling
its supply and producing rapid inflation rates.
Bank deposits that pay nothing and ultra-low borrowing costs haven't proved
effective in boosting money supply and velocity growth. The growth rate of
M3 has fallen from 9% in 2012, to under 4% today. And monetary velocity has
steadily declined since the Great Recession began. Therefore, unfortunately,
the next baneful government scheme is to push interest rates much further into
negative territory in real terms; and also in nominal terms as well!
You would think this is absolutely absurd but it is already happening. The
European Central Bank, has a deposit rate of minus 0.2 percent and the Swiss
National Bank, has a deposit rate of minus 0.75 percent. On April 21st the
cost for banks to borrow from each other in euros (the euro interbank offered
rate, or Euribor) tipped negative for the first time. And as of April 17th,
bonds comprising 31% of the value of the Bloomberg Eurozone Sovereign Bond
Index, were trading with negative yields.
Could Negative Interest Rates Arrive In America?
They already have. Beginning on May 1st, JP Morgan Chase has announced they
will charge certain customers a "balance sheet utilization fee" of 1% a year
on deposits in excess of the money they need for operations. That amounts to
a negative interest rate on deposits. Banks formerly competed for your money--now
they want to charge you to park it with them.
With interest on deposits at next to nothing, or now slightly negative, the
only reason for consumers to keep money in the bank is convenience. The more
money you lose money on your deposits in the form of a "utilization fee", the
more attractive your mattress becomes. But, as long as paper money and your
mattress are available, the Fed will not be able to fully implement its negative
rate policy in its quest to create inflation. After all, there would be a global
run on the banking system if rates were to fall into negative territory by
more than just a few percentage points.
So how can central banks and governments ensure rapid money supply growth
and velocity if consumers have the option to hoard cash? Some of the "best
minds" in Keynesian thought, like Kenneth Rogoff, have a solution to this.
They are floating the idea that paper money should be made illegal and the
evidence shows governments are listening. If you outlaw hard cash, and make
all money digital, there is no limit to how much borrowers can get paid to
borrow and how much savers get charged to save. This would make it unprofitable
to hoard cash, and compel people to consume and borrow electronic currency
as fast as possible. Money in the bank would become the "hot potato": as soon
as it hits your bank account the race would be on to move it to the next person's
account. Whoever gets stuck with the money when the music ends pays a fee;
that would be some increase in velocity! And vastly negative real interest
rates would force the amount of leverage in the economy to explode.
This idea sounds fairly Orwellian-allowing central banks to control every
aspect of monetary exchange and giving the Federal Government an electronic
gateway to every financial transaction. But when you think about it, the idea
of a fiat currency and the Federal Reserve were radical ideas before they became
common place. Indeed, this is exactly why the authors of our constitution tried
to ensure gold and silver would have the final and only say in the supply and
value of money.
Just as gold once stood in the way of governments' desire to expand the money
supply, physical cash is now deemed as a fetter to the complete control of
savings and wealth by the state. History is replete with examples of just how
far governments will go to usurp control of people under the guise of the greater
good. Sadly, the future will bring the collapse of cash through its illicit
status, which will in turn assist in the collapse of the purchasing power of
the middle class. Wise investors would take advantage of the opportunity to
park their savings in real money (physical gold and silver) while they still
have a chance.
