Everywhere you look, talk is growing about negative interest rates, the next insane scheme dreamed up by central bankers that picks up where quantitative easing (QE) left off.
Well, more than $12 trillion later, QE has proven to be a failure. Stock markets around the world are deep in bear territory, and growth is anemic at beast. Danger signs flashing for global economy, years after crisis, The Associated Press just reported. A few desperate central banks have implemented negative interest-rate policies (NIRP), most notably Japan, and the writing is potentially on the wall for negative rates in the U.S. now that the Federal Reserve has been stress-testing the big banks for NIRP-like conditions.
For about a decade, ever since the financial crisis, zero interest-rate policies (ZIRP) have been punishing savers, who cant find any substantive yield on their bonds and bank deposits and thus are forced into riskier investments like stocks.
Negative interest rates take that punishment a step further by allowing banks to actually charge their customers for the privilege of storing their bank deposits. The goal is to force people to spend their money and take out loans in order to generate monetary velocity and thus inflation.
Cash is a kink in NIRP agenda: But the Achilles heel to negative interest rates is physical cash. The danger for the central banks is that savers instead of spending will hoard their currency outside of banks and under mattresses to wait out the gloomy financial conditions that necessitated negative rates to begin with.
Thus, the companion policy emerging now alongside the negative-rate push is a call to ban physical cash. That way, banks can gain total indeed, almost totalitarian control over their customers digitized capital, since a cash ban would preclude simple under-the-radar transactions using paper currency.
Weve come a long way from the gold- and silver-linked legal tender that our Founding Fathers proscribed. First the central banks inflated away the value of your small change reducing real copper pennies and silver dimes, etc., to practically plastic tokens and now theyre coming for the higher-denominated paper bills.
Physical currency must go because people who hold cash outside the system might be saving it instead of spending it, commented Frank Hollenbeck via The Mises Institute. Naturally, from the Keynesian perspective, this must be stopped.
500-euro note in ECBs sights: On Monday, the European Central Bank made news when President Mario Draghi announced that he is considering scrapping the 500-euro note. The 500-euro note is being viewed increasingly as an instrument for illegal activities, he said, arguing that the proposal has nothing to do with reducing cash.
Now, a former U.S. Treasury secretary has written an op-ed piece making the same argument, only its the $100 bill that he wants to abandon.
Its time to kill the $100 bill, says Larry Summers in The Washington Post. Its time to go after big money.
Why should investors take his call seriously? Because Summers is one of the biggest names in economics: a former Harvard president who also has served on the White House Council of Economic Advisers, as chief economist of the World Bank, and as a top candidate for Fed chairman. Thus, the appearance of Summers editorial suggests that those who would impose negative rates and ban cash in the U.S. are bringing out their big propaganda guns (namely, Larry).
Summers even targeting the $50 bill: Blasting high-denomination bills as enablers of terrorism and money laundering, Summers opines: Id guess the idea of removing existing notes is a step too far. But a moratorium on printing new high denomination notes would make the world a better place.
And later on his blog, Summers even appeared to take aim at the relatively low $50 bill, writing, Even better than unilateral measures in Europe would be a global agreement to stop issuing notes worth more than say $50 or $100. Such an agreement would be as significant as anything else the G-7 or G-20 has done in years.
Summers likely found his script (or perhaps composed it while sojourning there) at the World Economic Forum at Davos, Switzerland, where negative rates and cash abolishment were seemingly on everyones lips in January.
This is just the latest frontier in the radical monetary policy weve been increasingly witnessing since the 2008 financial crisis, Hollenbeck noted. In addition to rampant money printing, weve also seen mind-boggling taxpayer-funded bank bailouts in the wake of the financial crisis and then so-called bail-ins, in which bank depositors cash is seized in order to pay a failed institutions debts, as in Cyprus.
NIRP theoretically bullish for gold: This new salvo calling for a cash ban is surefire proof that central banks and governments are hell-bent on generating inflation at any cost and therefore negative rates are on the way. What do negative rates mean for gold?
Its going to take some time for negative rates to be fully priced into gold, HSBC metal analyst James Steel told Bloomberg. Itll depend on how negative they remain and how long they remain for. But certainly on the theoretical basis its bullish for gold, through opportunity costs I mean, you dont have negative rates without level of some risk in financial markets. Thats the reason for negative rates to begin with. And it reduces the opportunity cost of owning gold as well, and I think theres a currency component also. Were expecting a weaker dollar against the euro this year, which would be positive for the bullion market.
Even if negative rates dont actually materialize, the fact is that expectations for higher rates have fallen dramatically since the Fed lifted them in December. The fundamentals for gold remain strong in either a NIRP or a ZIRP environment. The call to ban the $100 greenback is a sure sign of the growing desperation of key top-level policymakers.