Negative rates: heading towards a global economic collapse

The European Central Bank held, on March 10th, a meeting dedicated to monetary policy. The ECB lowered the rate on deposits by 10 points, to -0.4%, and cut the main refinancing rate to 0.0%. Also, the ECB decided to continue the Quantitative Easing policy. The main task is to cope with deflation and increase the money supply, thereby stimulating economic growth. The last time the ECB lowered interest rates was December 9th, 2015 (from - 0.20% to – 0.30%). The ECB has held negative interest rates from June 11, 2014, however, the commercial banks are against the reduction of interest rates. They warn that lowering the interest rates can lead to the formation of financial bubbles. In addition, it will affect the banks themselves and the holders of deposited funds, both corporate and private banking clients.

The phenomenon of negative interest rates

Negative interest rates on deposits are a relatively new phenomenon in the world economy. Their main task is to make the banks lend to the real sector of the economy, and to allow ordinary people to spend money, thereby increasing the demand, as keeping money in deposits becomes unprofitable. Money should be put to work; the first to make such a decision was the Swedes. In 2008, the Swedish Central Bank established fees for commercial banks for the placement of funds on corresponding accounts for amounts that exceed the required reserves. Later the Danes, and then the Swiss, used this mechanism in order to cope with the money supply that was gushing from the EU due to the weakening of the Euro. Since February 2016, Japan introduced a negative interest rate on deposits.
The world economy is showing the signs of stagnation and deflation. According to the neoliberals who are in charge of world leading economic structures, deflation is a more dangerous phenomenon for the world economy than inflation, so they tend to spur economic growth by stimulating it by lowering interest rates on loans, and introducing negative interest rates on deposits. However, these measures do not bring the desired results.

The First Deputy Managing Director of the International Monetary Fund (IMF), David Lipton, spoke recently оn the need to stimulate economic growth. Otherwise, according to the manager dependent of the Rothschild’s structure, the global economy will collapse; Jacob Rothschild himself predicted the crisis. In his letter to RIT Capital Partners’ clients, he noted the falling economic growth in China, the US, and the EU, which may signal a significant decline:

Indeed we may well be in the eye of a storm. The litany of problems that confronts investors is daunting: the QE tap is in the process of being turned off, and its impact in stimulating asset prices is coming to an end. There is a slow down to an unknown extent in China. The situation in the Middle East is likely to be unresolvable, at least for some time ahead. The progress of the US and European economies is disappointing, however, our view is that 2016 is likely to be more difficult than the second half of 2015.

Deflation: the EU example

Despite the launch of the EU program of Quantitative Easing, which is similar to the US one, the money supply did not fall into the real economy. There is a situation of deflation; money in the economy is becoming less. The cause is that the money spinning in the financial sector is creating bubbles or is accumulating in banks. Overproduction of money in this situation does not lead to inflation, but to the opposite result - deflation. In a situation of deflation, theoretically, the money is more appreciated, and interests on deposits grow, so it is more profitable to keep them in banks rather than to invest in the economy. So the real sector is completely bled.

The purpose of lowering the interest rate on deposits into the negative is to overcome these damaging trends, but these measures are unable to cope with them. Despite the fact that simultaneously interest rates on loans are becoming lower with the introduction of negative interest rates on deposits, the money goes not to the real sector, but to the tighter financial sector, where they are inflating the next bubble. In the real sector, it is impossible to get such a fast and quick profit. The very existence of the profitable and completely virtual financial sector destroys the anti-deflation policy and leads to a dangerous continuation of Quantitative Easing policies, as well as a decline in the deposit facility rate. All of this threatens to spawn a new crisis in the world economy.

Furthermore, the regulatory policy of the European Central Bank leads to the elimination of small banks that are engaged in lending, and contributes to promoting major financial speculation. This initially concerns several thousand small community banks, mainly in Germany, that are operated not for profit, but for co-operative members or the public good (such as the Sparkassen public savings banks or the Volksbank people's banks).

Professor Richard A. Werner from the University of Southampton addes:

This has been coupled with the ECB's policy of flattening the yield curve (lowering short rates and also pushing down long rates via so-called 'quantitative easing'). As a result banks that mainly engage in traditional banking, i.e. lending to firms for investment, have come under major pressure, while this type of 'QE' has produced profits for those large financial institutions engaged mainly in financial speculation and its funding.

That is, the result of the ECB’s policy leads to inflating financial bubbles and the concentration of capital in the hands of a limited number of large banks.

The War on Cash

At the same time, negative interest rates lead to such a phenomenon as the "war on cash". Global financial institutions are not aware of, or do not want to, recognize that the reason for deflation is not that people keep their money deposited, but it is the system itself, where the first priority is not the real economy, but a virtual, disproportionately bloated financial sector.

Paul Craig Roberts said:

Central banks, neoliberal economists, and the presstitute financial media advocate negative interest rates in order to force people to spend instead of save. The notion is that the economy’s poor economic performance is not due to the failure of economic policy but to people hoarding their money. The Federal Reserve and its coterie of economists and presstitutes maintain the fiction of too much savings despite the publication of the Federal Reserve’s own report that 52% of Americans cannot raise $400 without selling personal possessions or borrowing money.

The introduction of negative interest rates on deposits leads to an increase in demand for hard currency and cash from the population. Accordingly, the demand for large denomination bills is growing. To combat the tendency of people to keep their savings, neoliberal economists propose to withdraw large bills from circulation or completely abandon cash, and use electronic money instead. It cannot be removed from bank deposits except through spending. The recipe suggests further virtualization of the economy and simple robbing of ordinary people. Former IMF staffers Kenneth Rogoff and Peter Bofinger, and current Bank of England spokesman Andrew Haldane, have declared a need to abandon cash.

Death of money

The reason for this systemic crisis is a process that economists call "the death of money." This is a multi-level process whereby money ceases to serve the real economy, becoming instead merely a means of hoarding. It’s cost decreases while QE measures continue (essentially it is just printing money).

A side effect of the death of money is changing the functions of banks. Since operations on loans and deposits become operations with negative profitability (a loss), the only way to generate revenue for the banks is from financial speculation. Small banks are going bankrupt or are absorbed by larger ones, and as a result the speculators win.

Forecast

The phenomenon of negative interest rates looks like a Keynesian demand stimulation mechanism, and even something similar to the ideas of heterodox economist Silvio Gesell, who suggested stimulating demand by introducing so-called “free money” - Freigeld. Such money, after a certain period of time, would have to lose some of its value, which would boost its use in the real economy. But the idea of Gesell was to limit the growth of finance capital by restricting money grubbing, and now we are seeing exactly the opposite process. Above all, he feared the dominance of the financial sector on production; the bloated financial sector does not allow money to enter the real economy.

The emergence of such phenomena as negative interest rates, which, in principle, is not inherent in the capitalist system, is evidence of the crisis. The model of financial and economic domination, which was constructed by banks during the previous several hundred years, is falling. As a result, they will be forced to move to new, more aggressive forms of exploitation, using political and military institutions, including private ones, and brutal force. At the same time, elite groups offer different options for a solution to the coming world crisis: from the complete abolition of cash, which will lead to the full virtualization of the economy and a post-apocalyptic reality like the "Matrix" (where everyone is dependent on the global virtual emission centers, and disobedience to the system would mean certain death) to the introduction of a global gold standard. The author of the “death of money” concept, American economist James Rickards, supports this idea. In particular, he proposes to create a global IMF currency with gold backing. It is significant that the Rothschilds, who control the IMF according to a number of independent analysts, also control most of the world's gold. It means they are prepared for global collapse.