The Bank For International Settlements just released a report stating that the spread of negative interest rates hasn’t caused the world to end. From this morning’s Bloomberg:
In its quarterly report published Sunday, the Basel-based “central bank for central banks” said that “so far, zero has not proved to be a technically binding lower limit for central bank policy rates.”
The BIS’s verdict on negative rates gives backing to the European Central Bank, the Bank of Japan and others at a time when such unconventional methods are facing increasing criticism for their potential impact on the financial industry and currency markets. A sell-off in European bank stocks this year was partly driven by fears that further rate cuts by the ECB would damage profitability in a sector still recovering from the debt crisis.
“The experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are,” report authors Morten Bech and Aytek Malkhozov said. “Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”
The report also presented calculations of the average effective rate that banks pay on cash above the minimum requirements or exemptions at the ECB, the Swiss National Bank, the Riksbank and the Danish central bank, showing that a lower negative policy rate doesn’t necessarily translate into a more expensive proposition for lenders.
The BIS report does include some caveats along the lines of “it’s early in the process and there’s no way to know if more deeply negative rates will cause trouble.” Still, the idea that the system isn’t being stressed by today’s negative rates is belied by some trends that have gotten a fair bit of press lately. Consider:
Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy.
The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money.
With economic growth an anemic 1%, many Swiss withdrew cash from the bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia’s GDP.
Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination 10,000-yen notes rose 6.2% last year, the largest jump since 2002. But 10,000-yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves. Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week.
That academics and bureaucrats have responded by calling for the partial elimination of cash isn’t helping calm the masses. From the above Wall Street Journal article:
“In certain circles the 500 euro note is known as the ‘ Bin Laden,’” former U.S. Treasury SecretaryLarry Summers wrote last month in calling for a global ban on notes worth more than $50 or $100. He noted interest from European Central Bank President Mario Draghi and said that “if Europe moved, pressure could likely be brought on others, notably Switzerland.”
Fellow Harvard economist Kenneth Rogoff wants to retire cash altogether, primarily because “a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.” But he doesn’t hide the additional monetary-policy motive: “Getting rid of physical currency and replacing it with electronic money,” he wrote in 2014, would allow central bankers to set negative interest rates without people “bailing out into cash.”
On a different but related note, gun sales are up along with cash and safes. See Gun Sales Soar After Obama Calls for New Restrictions, which includes this fairly striking chart of Americans’ shift from rifles to handguns. The red line is handgun sales as a percentage of total sales. We’re clearly envisioning more up close and personal uses for our guns these days:
Similar trends are taking hold in Europe, where gun culture is not traditonally part of the mainstream.
Spokesman Andre Hartwich of the Düsseldorf police estimates at least eight to ten application requests per day, which if continued throughout the year would dwarf the previous year’s requests total of 1,500.
Ralph Pipe of the Frankfurt Police procedural office has said, “We have been beginning every day with at least 13 applications,” in comparison to last year in which there were only one or two applications per day.
Cologne police also mentioned that pepper spray is not covered under the Arms Act and does not require a permit or license. Sales of pepper spray in Germany have likewise increased and, as Breitbart London has reported, many vendors are even sold out.
This is all part of the same process, in which fiat currency printing presses lead to excessive debt and unwise foreign adventures, which lead to slowing growth, greater wealth inequality and geopolitical blowback, culminating in the kind of generalized mess that we see today.
People react to these uncertainties by trying to protect themselves with cash and guns, and governments respond by trying to limit citizens’ ability to do so.
If this play has a third act, it will involve the abolition of cash in some major countries, the rise of various kinds of black markets (silver coins, private-label cash, cryptocurrencies like bitcoin) that bypass traditional banking systems, and a surge in civil unrest, as all those guns are put to use.
The speed with which cash, safes and guns are being accumulated — and the simultaneous intensification of the war on cash — imply that the stress is building rapidly, and that the third act may be coming soon.