A Glimpse into the Future…It’s Not Pretty

Part one

Central banks have set us for an epic fail.

The use of low interest rates and printing money to buy financial assets has taken us to a point from which there is only one outcome…unless of course you believe this time will be different.

US Household Net Worth as a percent of GDP
Source: Forbes

Newsflash…it is never different.

Booms always bust.

And it’s the prospect of this next bust that’s got the establishment heavyweights worried.

Last weekend, The Bank for International Settlements (BIS) released its Annual Report.

It made for sobering reading.

The title of the Reuters article published on 30 June 2019 says it all…

‘Preserve your ammunition, BIS urges Central Banks’

But just to flesh it out, here’s a snippet of what was reported (emphasis added)…

Bank for International Settlements (BIS) chief Agustin Carstens has urged top central banks to preserve their ammunition for more serious economic downturns rather than deplete it chasing higher growth.

We would stress that it is important to preserve some room for maneuver for more serious downturns. Monetary policy should be considered more as a backstop rather than as a spearhead of a strategy to induce higher sustainable growth.

Note the use of the term…serious downturns.

The BIS knows the future is going to present us all with some rather challenging times.

The BIS is pleading — a bit late I might add — for central banks to exercise restraint with interest rates. Lowering rates now means that stimulus option won’t be available to fight the next crisis.

At least that’s what conventional thinking leads us to believe.

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Central banks have proven to be unconventional

But central banks have proven to be rather unconventional in their inflation seeking endeavours.

According to a recent article from the International Monetary Fund (another one of those establishment heavyweights)…

Severe recessions have historically required 3–6 percentage points cut in policy rates.

I know you already know this, but the IMF goes on to state the obvious…

If another crisis happens, few countries would have that kind of room for monetary policy to respond.

The BIS says ‘it’s important to preserve some room to manoeuvre’ and the IMF is saying …

OECD Interest rates
Source: IMF

Which brings us to the title of the aforementioned IMF article…

‘Cashing In: How to Make Negative Interest Rates Work’

I told you these ‘evil scientists’ are hatching sinister plans behind the scenes.

While the concept of negative rates is foreign to Aussie deposit holders, they’re not to Europeans.

As reported in Bloomberg on 22 March 2017…

…the European Central Bank became the first major monetary institution to venture below zero. The ECB charges banks 0.4 percent to hold their cash overnight. Sweden, Switzerland and Denmark have also adopted negative rates…

While most banks have been reluctant to pass on negative rates for fear of losing customers, a few began to charge depositors.

Two years later, the reluctance to pass on negative rates has caused serious problems for Denmark’s largest bank.

This is yesterday’s headline from Bloomberg…

Bloomberg Headline regarding Danske Bank Crisis
Source: Bloomberg

Here’s an extract…

Danske Bank A/S has been dealing with negative interest rates longer than any other major lender. That’s why its latest crisis, which cost a top executive his job, carries an important warning for peers in Europe.

The biggest bank in Denmark, where benchmark rates have been negative since July 2012… was hit by another embarrassment after overcharging retail clients for investment products.

Danske should have followed rules that require investors to be offered the best deal, even if that hurts the bank — in this case, regular deposits, where returns are around zero.

The problem for Danske and others coping with negative rates is that the more money they hold in deposits, the greater the cost. Banks have balked at passing on the burden of negative rates to retail savers for fear of losing business. Instead, they’ve looked for ways to mitigate the pain, such as focusing on services that carry fees.

In an attempt to offset the costs of negative rates, Danske ‘steered’ clients into high fee paying, low returning investments…resulting in losses to clients.

Not exactly what you’d call ‘acting in the clients best interest’.

With that source of fee revenue now being shut down, Danske’s bottom line is looking a little thin.

But, as Bloomberg reported, this problem is not isolated to Danske (emphasis added)…

As the prospect of returning to positive interest rates in Europe seems more remote, the impact of the policy on the region’s banks warrants attention. In Denmark, finance industry profits were down 25% in 2018, according to FSA [Financial Supervisory Authority] data. Berg says his [FSA] agency is now starting to worry about profitability among banks.

Banks have been unwilling to impose negative rates on deposit accounts for fear of customers closing their accounts and putting the cash in a safety deposit box.

Better to earn nothing on a stack of cash than to lose money in a bank account.

Pretty straightforward equation.

This experiment of negative rates in Europe has provided the IMF with some food for thought.

What if we could create a system that acted as a deterrent to withdrawing cash?

In theory, if we had a cashless society (one where you did not have the option to withdraw physical cash), then negative rates could easily be implemented.

How so?

This is a direct quote from the IMF article…

In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.

I warned you the boffins who preside over global policy are up to no good.

How they could even think that stripping savings out of the system won’t have any serious long term repercussions is beyond me. But these people only ever focus on a ‘solution’ to the current crisis and deal with the next bigger problem (created by the current solution) later.

Anyway, as you know, we don’t have a cashless society…so the IMF ‘solution’ is averted?

Afraid not.

The IMF suggests…

One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries.

And this is from the Dutch News on 1 July 2019…

Dutch News headline
Source: Dutch News

Under the guise of acting tough on criminal behaviour…

Cash payments of more than €3,000 could be banned under plans by the government to crack down on money laundering.

The [Dutch] cabinet is also lobbying at European level to withdraw the €500 note from circulation, as studies show it is almost exclusively used by criminals.

Is this the thin edge of cashless society wedge?


But we won’t be fully cashless before the next crisis hits.

Which then begs the question: So what are those geniuses (sneaky little bastards) at the IMF planning?

The answer to that question and the other surprises the establishment heavyweights have in store for us, will be in next Thursday’s edition of Rum Rebellion.


Vern Gowdie,
For Money Morning

Editor’s note: The above article was orignially published in The Rum Rebelllion. To access more hard hitting articles, you can subscribe by clicking here.

Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia.

Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. In his leisure time Vern remains active with triathlons and pilates.

Money Morning Australia