Under guise of preventing fraud the ECB voted to kill the €500 note.
Fraud was not the real reason. The real reason was to make it more difficult for banks to store physical cash to avoid negative interest penalties.
Cash Under the Mattress
Please consider Banks Seek Cheap Way to Store Cash Piles as Rates Go Negative.
The idea of keeping piles of cash in high security vaults may sound like something from an old movie plot, but some banks and insurers have recently started considering the idea as interest rates sink below zero across much of Europe.
After the European Central Bank’s most recent rate cut in March, private-sector banks are paying what amounts to an annual levy of 0.4 per cent on most of the funds they keep at the eurozone’s 19 national central banks. This policy, which has cost banks around €2.64bn since ECB rates became negative in 2014, is intended to spark economic growth by giving banks the incentive to lend money out to businesses instead of holding on to it.
European central bankers say they could cut rates again should economic conditions worsen, but private bankers and insurers are already thinking of creative ways to avoid those charges altogether.
One way is by turning the electronic money they keep at central banks into cold, hard cash. Munich Re has experimented successfully with storing a double-digit million sum of euros in cash at what the insurer describes as a manageable cost. A few other German banks, including Commerzbank, the country’s second-biggest lender, have also considered taking the step. But when a Swiss pension fund attempted to withdraw a large sum of money from its bank in order to store it in a vault, the bank refused to provide the cash, according to local media reports.
If this practice becomes widespread, it would have big economic implications. If banks are not paying central bank interest charges, then they will not be as affected by further official interest rate cuts. They therefore would not be spurred to lend out more money.
Lending Reality
- Lending is a function of the willingness and ability of banks to lend, and the willingness of creditworthy (or deemed by the bank as creditworthy) borrowers to take on loans. Banks can make mistakes in regards to credit worthiness as they did in the housing bubble, but if banks believe they will be paid back (or bailed out by rising asset prices), enough to compensate for the risk of lending, they will lend.
- Capital impaired banks cannot or will not lend, regardless of what stress tests show.
- It is impossible for banks to lend excess reserves in a way that reduces excess reserves except to another bank that is short of reserves and needs them. Otherwise, loans just get redeposited somewhere. It’s the size of central bank balance sheets that has created the massive pile of excess reserves.
- If banks aren’t lending, they are either capital impaired or they do not have creditworthy customers willing to borrow.
- Negative interest rates add to banks expenses, eating at bank profits, making them less likely to lend.
Counterproductive Central Bank Actions
It’s a mystery why central banks think making banks more unprofitable will spur lending, especially when excess reserves cannot be lent. To top it off, Low interest rates punish savers who have less money to spend than they would have at higher interest rates.
For further discussion please see Self-Defeating Central Bank Interest Rate Policies.
Mike “Mish” Shedlock
Further reading: https://mises.org/blog/war-cash-fix
Banks are holding physical cash: https://www.sovereignman.com/trends/its-a-revolution-german-banks-told-to-start-hoarding-cash-18777/
People could just put those loans under a mattress, and then there would be no excess reserves anymore
Three one liter milk cartons of gold have a value of USD 2.4 M. Weight about 60 kg. Easy to transport in a wheel barrow.
I am watching this movie eagerly. I am waiting to see what these clowns at the central banks intend to do the day the cost of storage and insurance equals the negative interest rates. Ban cash, Helicopter drop and QE4ever… as long as these deranged central bankers are in charge we cannot expect anything sensible. Something that breaks the system is the only way we are going to get a market crash that many are expecting now that a Lehman moment WILL NOT BE ALLOWED TO HAPPEN IN THEIR WATCH. Interesting times indeed. It is now CB Vs Mr.Market and as of now the CBs are in charge…
Hoarding cash is highly deflationary. It is a money velocity divisor.
It is impossible for banks to lend excess reserves in a way that reduces excess reserves except to another bank that is short of reserves and needs them. Mish
Because individual citizens, their businesses, etc. may not have accounts at the central bank, then reserves, just another name for fiat account balances at the central bank in the case of depository institutions (aka “banks”), are trapped within the usury cartel. Otherwise banks could lend their reserves to individuals, their businesses, etc. except for the semantics that the reserves would simply become fiat account balances in those cases.
Which brings up the question as to why citizens, their businesses, etc. may not have inherently risk-free accounts at the central bank itself but must instead work through a government privileged usury cartel?
This question will be sharper still if physical fiat (notes and coins) is abolished since then individual citizens will not be able to use their nation’s fiat AT ALL!
Btw, the proper abolition of government provided deposit insurance should require, in the case of the US, $trillions of new fiat to be equally distributed to all adult US citizens to finance the transfer of currently insured deposits at depository institutions (aka “banks”) to inherently risk-free accounts at the central bank itself.
There’s a “sound money” way to finance a Steve Keen like Debt Jubilee.
The capital impaired aspect of Mish’s post above is a subtle but important piece of the puzzle. Governments impose minimum bank capital ratio requirements for shareholders equity to loans outstanding. Here it’s something like 3% shareholder skin in the game to prevent banks from abusing their ability to create new credit money simply by lending. This doesn’t always work as planned due to the fact that some money created by banks (in aggregate) finds its way into bank capital creating a potential instability. For example, banks earn fees and interest on the money they lend which accrues to bank capital thus supporting more lending. This feels great on the way up (bubble expansion) but sets the stage for bank capital losses in a downturn. When the vast majority of banks have losses the payment system itself is threatened as ever more banks exceed their capital ratio limits. At this point government must step in and recapitalize the impaired banks. Normally shareholders are wiped out. The root cause of bank problems now is the price of collateral the banks hold as a cushion against capital losses is falling because banks are not lending because they are capital impaired because their collateral prices are falling …
It’s Minsky financial instability running in reverse. See how that works?
CBs are buying everything in sight to support collateral prices world wide to avoid collapse and recapitalization. It’s not going too well in Europe.
When the vast majority of banks have losses the payment system itself is threatened as ever more banks exceed their capital ratio limits. peterblogdanovich
Inherently risk-free individual, business, etc. accounts at the central bank and the end of government-provided deposit insurance and all other privileges for depository institutions would mean, by definition, that all REMAINING deposits with “banks” would be at-risk, not necessarily liquid investments, not co-mingled with necessary day-to-day liquidity.
Which means the banks would no longer hold the economy hostage via a single payment system that MUST work through them.
I don’t understand the flack you’re getting here. Obviously we have to break the debt deflationary trap we are caught in (first) and then we need a debate over how to avoid the trap again (second). Ellen Brown wants to form government owned banks state by state. North Dakota has this now. One thing to keep in mind is private banks serve an important function in being shrewd judges of character in lending to entrepreneurs. When of course they’re not stupidly lending to asset flippers who are stupidly driving a Minsky instability of rising asset prices driven by bank lending. Who performs this function in your system? Please don’t say the CB.
Who performs this function in your system? Please don’t say the CB. peterblogdanovich
No, the CB should not lend at all. Nor buy private assets. Nor perform any other fiat creation for the private sector.
Instead, 100% private banks with 100% voluntary depositors could act as loan intermediaries between savers and borrowers.
And if interest rates are deemed too high then let the monetary sovereign increase deficit spending, including if desired, via equal fiat distributions to all adult citizens.
Steve Keen has modeled such a system. If private banks purely intermediate between savers and borrowers and all the money in the system stays fixed (no govt deficits) then growth will eventually be zero. Each dollop of new money injected by govt. by deficit monetization will have a transient impulse in growth but a continuous sequence of deficits is required for continuous growth. Govt. is not renowned for its wisdom in spending newly created money. I prefer private banks create new money by lending to entrepreneurs as they do now. But then the question is how to stop them from being idiots with our societal forced savings. BTW it was Schumpeter who first coined the term “forced savings” because he was the guy who did the math in his head and concluded that banks lending money they don’t have is the genius behind capitalism’s power to create real wealth. He was Austrian and the father of Austrian school of economics. Oh yea, he was a banker too. See how that works?
If private banks purely intermediate between savers and borrowers
Not purely since 100% private banks with 100% voluntary depositors could still get away with SOME deposit creation.
and all the money in the system stays fixed (no govt deficits) then growth will eventually be zero.
Nor should we have a non-growing fiat supply.
Each dollop of new money injected by govt. by deficit monetization will have a transient impulse in growth but a continuous sequence of deficits is required for continuous growth. Govt. is not renowned for its wisdom in spending newly created money.
Equal fiat distributions to all citizens does not require any special wisdom by government.
I prefer private banks create new money by lending to entrepreneurs as they do now.
I prefer a just system so the blanketey-blank bankers will stop threatening world peace!
QE and CB interest rate manipulation just distorts risk/reward.
I am in a position to borrow to invest, but why buy over priced assets, which all hang now on whichever way the wind blows at the Fed.
The low hanging fruit has all been picked and investors must now get a ladder and climb up to the higher level fruit. This presents greater risks but the the CBs refuse to offer greater rewards. “Let the fruit rot”, is what investors are saying.
You know, if you really want to figure out why ostensibly smart people act and do things that look stupid, you need to stand in their shoes and/or sit in their chairs and take a look from their perspective.
Now, since you can’t sit at a FOMC meeting and participate, the next best thing is role play with yourself or a few friends.
Your objective: what would cause you to make the same decisions they make. Assume they are not stupid or crazy. Assume they are rational people who are in essence not much different from yourself.
However, the FOMC does not live in a vacuum. They are part of a system. A system has interrelated parts that interact. They follow a hierarchy. There’s always something at the top that controls everything else, although control is not the same as micromanage. For example the sun controls photosynthesis that feeds the world and provides oxygen. Animals use the food to live. Your food is not the same as a other’s in the system. But all need the sun and photosynthesis.
Seriously. Try it.
For example.
Assume you’re a upper 1%-er. You need to keep the dollars flowing. How do you do it? Answer: you pull strings. You use people to use other people to get your way. You’re rich. You buy people who know how to get to others and get in their heads. You hire ‘economists’ to develop and or promote existing theories that will give you want you want. You donate to politicians who put the right people in the right jobs. These people do what they’re told, otherwise they get replaced. At least, this is how I think the world works.
Assume you’re a member of the ECB. Why do you need low rates and debt monetization? Duh? The Eurozone ends without them. Everything else is obscene stubbornness and salesmanship.
Assume you’re a member of the FOMC. Why do you want to keep rates low for so long and keep QE in progress? 1) The theories and models based on those theories tell you to. Ask yourself, where did those models and the theories they are based on come from? Why ‘this’ theory as opposed to ‘that’ theory? Why are they used when their predictive validity isn’t good? What social pressures would you face if the most popular theories of the day were ignored in favor of common sense, even though said popular models do not work? Could you keep your job? 2) The President most likely adds pressure for his political purposes. Rates need to be kept low so the stock market stays high until January 2017. Yes, the Fed is ‘independent’. But come on now, do you really believe it? 3) You basically do what you’re told to do by the people at the top.
Economic theory is also based on common sense, but that’s another post for another day.
As I keep repeating, it’s not that complicated.
.
The real reason was to make it more difficult for banks to store physical cash to avoid negative interest penalties. Mish
Yes, but who says that central banks should not be able to charge for the inherently risk-free storage of and transactions with fiat?
So here’s how Steve Keen’s “A Modern Jubilee” could be implemented using the US as an example:
1) Allow everyone, including foreigners, to have inherently risk-free accounts at the Federal Reserve itself.
2) Individual adult US citizen accounts at the Fed shall be negative interest free up to, say, $250,000.
3) All other* accounts to be charged negative interest from $0. This should, btw, increase the demand for US Treasury debt.
4) All US Treasury debt thenceforth to yield at most 0% and to be sold directly to the Federal Reserve for resale, if desired, to the private sector for sterilization purposes.
5) Announce the scheduled abolition of government-provided deposit insurance.
6) Use new US Treasury debt to finance the Jubilee and provide the needed new reserves for the transfer of at least some currently insured deposits from depository institutions to inherently risk-free accounts at the central bank itself.
What’s not to like? Since the Federal Reserve will have new US Treasury debt to sterilize the new, equal fiat distribution if desired? And since the abolition of government-provided deposit insurance and other privileges for the banks should increase the use and thus the demand for US fiat?
*excluding the US Treasury account, of course.
Respectfully, that Steve Keen sounds like a crackpot. His ideas are so transparently bad that arguing with them in specific detail is nuts.
His ideas are so transparently bad that arguing with them in specific detail is nuts. cdr
Do try anyway, please. Besides, Steve Keen is a friend of Mish, last I heard.
Also, this particular implementation of Steve Keen’s “A Modern Jubilee” has not been put forth by Steve to my knowledge.
Hi Andrew,
Sorry, I don’t feel like barking at the moon today.
Based on your other comment you don’t have much to contribute anyway?
Many thought Oliver Heaviside was a crack pot, until he transformed the field of communications. I liken Keen to Heaviside. Way ahead of his time. Read up on Heaviside. His life and times is a case study on how true genius is first viewed but finally accepted.
The fact is prices are collapsing in Central Europe including Turkey. The flood of goods coming out of a bankrupt Russia cannot be stopped…and to add misery to Europe’s misfortune the Pound has now collapsed…so good luck competing with that.
The USA has been battling deflation in a totally incompetent way going on two plus years now…although certainly better than Japan, Germany and China that’s not saying much. Unsurprisingly the massive Real Estate bubble of the last five years is now heading South. There is some carry in the US yield curve…no one ever expects the Fed to ever raise interest rates again though…and I would think prices at the retail level for just about everything is about to plunge big time. And with it all those tax revenues.
Darn right the 500 euro note is to be banned. You could buy half of Libya for that right now.
Possible solution here, treat cash as more like a license. Every US dollar has a serial number, I assume Euros do too (don’t have any one me at the moment so I can’t check). Let banks print and destroy 500 Euro notes. But banks would have to register the serial number of each 500 note they own with the Central Bank. The actual notes could be destroyed and the banks would store the notes electronically, a bit like bitcoins are stored. When a bank wants paper currency it can either print 500 Euro notes directly, removing them from their electronic wallet, or buy from the Treasury different currency notes as they need.
Down the line could this be rolled out to individuals too? Perhaps we could have apps that could spot verify serial numbers on notes. Instead of extraordinary tricks to keep counterfeiters at bay it could be the serial number that’s the key to verify money.
Brian,
How do you make change for an electronic $500 bill? And why would you need it?
You don’t, the ‘keep track of serial numbers’ would only be used for storing large amounts of cash and transferring them (say bank A wants to give bank B a billion Euros, it simply transfers the serial number ownership to them).
Day to day currency would be left in paper form. This would only be useful if you’re storing a large amount of cash and not intending to use it in paper transactions for a long time. Should the need arise, however, banks can simply fire up approved printers and convert some of their digital serial numbers into paper bearer form.
The solution is not to increase privileges for the banks but to eliminate them.
With banks eliminated, do I bury my cash in the back yard or in the mattress? Where do I get a loan. Will cash be abolished in favor of debit and credit cards (or electronic $500 bills – how do you buy a can of pop with an electronic $500 bill? Will there be a sign on the Pepsi machine that says “No electronic $500 bills accepted?”)
If so, doesn’t no cash remove free choice in favor or central control? Will loans and debt be abolished? Or will we just call them something else and pretend loans and cash no longer exist? Little details like this matter when you plan out systems like that.
With banks eliminated, cdr
So removing privileges for banks is the same as eliminating them?
Andrew, read your own posts. I was quoting you. You’re debating yourself now, and apparently finding disagreement.
I’ll answer in more detail later. Right now I’ve got better things to do than refute foolish questions.
With banks eliminated, do I bury my cash in the back yard or in the mattress? cdr
1) Who said anything about eliminating banks?
2) A monetary sovereign has an inherent duty to provide a risk-free accounting and transaction service for its fiat for ALL citizens and not just depository institutions.
Where do I get a loan. cdr
Where do you get them now?
Will cash be abolished in favor of debit and credit cards cdr
Maybe, but not in favor of credit cards since a central bank should not lend. Otoh, physical fiat has safe storage and transaction problems so it need not be necessary to abolish it in order to have negative rates at the central bank for non-individual citizen accounts and for individual citizen accounts above, say, $250,000 US.
(or electronic $500 bills – how do you buy a can of pop with an electronic $500 bill? Will there be a sign on the Pepsi machine that says “No electronic $500 bills accepted?”) cdr
Maybe if you owned the Pepsi machine, it would. But the last I checked a debt card can be used for small purchases too.
If so, doesn’t no cash remove free choice in favor or central control? cdr
Banks would still exist but as 100% private businesses with 100% voluntary depositors. Use one of them or some other form of private money besides bank deposits.
Will loans and debt be abolished? cdr
Banks could still create as many deposits/liabilities as they dare but as 100% private businesses with 100% voluntary depositors.
Or will we just call them something else and pretend loans and cash no longer exist? Little details like this matter when you plan out systems like that. cdr
I’ve answered you and others in detail.
Completely short sighted policy as banks do not lend reserves, vault cash or deposits. Banks lend first then secure reserves if needed. What this policy will do is cause banks to use excess reserves to speculate in markets and drive up asset prices which is what I believe the intent is anyway.
Am I the only one having a problem getting my head around the concept of negative interest rates? The unintended consequences of such a policy will end up being horrific.
If you don’t understand negative interest rates then how can you claim to know what they’ll cause?
Please go away and do your trolling elsewhere.
When someone here can refute me, not before.
I can’t get my head around the mental ‘models’ that assume the system blows up with negative interest rates.
To me the difference between an interest rate of -1% and 1% is two percentage points. Rates going from 1% to -1% should be just about the same as interest rates going from 3% to 1%.
What exactly is the model at play here that says the world will behave normally if you get very close to 0% but even a tiny bit below 0% will cause chaos?
“Banks can make mistakes in regards to credit worthiness as they did in the housing bubble…”
Banks didn’t make mistakes in regard to credit worthiness. Greenspan took the lending standard to ZERO and the banks ran with it, aided and abetted by the rating agencies and Wall Street, which peddled bad mortgage debt as AAA. Banks packaged and sold mortgages, instead of holding them, thus they had no concern for any ones credit worthiness. Fog a mirror, get a loan.
Instead of an ownership society,we wound up with a housing crash and the lowest home ownership since whenever.
The FBI warned congress of massive mortgage fraud in September 2004. Nothing was done about it- except to change the bankruptcy laws in 2005, as it was obvious what was coming, a financial crash.
Yet, in 2005, Greenspan praised bankers for getting people into homes they otherwise could not afford. The truth being that they could not afford them, under any circumstance, leading to a crash in home ownership. A truth which Greenspan had to know at the time he was praising bankers.
Recall that it was big public pension plans like Calpers that begged/threatened Fannie and Freddie to start buying riskier mortgages in their quest for yield. The pensions were legislatively tied to “safe” outlets like the GSE’s, so they begged the GSE’s to essentially become less safe. The GSE’s were envious of Mozillo at the time.
These funds have been having a harder and harder time reaching their yield targets ever since Greenspan started lowering rates. Either the CB is run by morons that are blind to this fact, or they are run by evil people who know damn well and want to force them into dependency.
“Negative interest rates add to banks expenses, eating at bank profits, making them less likely to lend.”
Negative rates add to “depositors” expenses, making “depositors” less likely to lend their money to banks. Why should “depositors” lend to banks, to lose some of their hard earned money to them?
You hit the nail right on the head. This is the line in the sand.
Negative rates in the US – will the people rise up in anger if they occur, or will they accept them like good sheep after being ignored after they complain? We’re almost there now.
Here’s the analysis, but I don’t have a clue as to how it ends … Negative interest rates benefit prolific borrowers. The US Treasury is the most prolific borrower in the US. Going negative is equivalent to a commitment that US Govt borrowing is the most important financial transaction in the country. Deficit financing is here to stay and will get worse, bigger, and go indefinitely. Negative rates are a tax on US citizens. Since income taxes won’t pay for government spending and inflation can’t be ignited as another form of taxation, negative rates are all that’s left.
Low rates also benefit the upper 1%-ers who use the cash for junk investment that involves flipping of financial assets or stock buybacks to support payroll bonuses. Negative rates would not exist without their support or manipulation.
Bogus theories that promote the virtues of negative rates will abound and are leaking out from Fed presidents even as I write this.
Will it end this way or not?
The Eurozone is living this today. The EU commission fills the role of the upper 1%-ers there. Europe would fail without negative rates. They will never go away for as long as there is a Eurozone.
It’s a top-down economy by decree. Soon there will be no legal real economy, the closest being flea markets and the so-called underground economy. This is a real dictatorship in action. Turkey and Russia are democracies, central banks are unelected dictatorships.
“Counterproductive Central Bank Actions”
&
counter productive government actions
I wonder what’s gonna happen when the only way to save bank balance sheets is an hastily aggressive regime of rate hikes. Surely global growth will be out of its tailspin by then, right? Or do we all go down with the ship?
The central bank’s policy toward prudent savers boils down to “The beatings will continue until attitude improves”.
“It’s a mystery why central banks think making banks more unprofitable will spur lending, ”
Maybe the real goal is to make the banks insolvent. Then they can be nationalized. The biggest threat to central planning is solvent banks that don’t need central planners.
If you tried to nationalize a solvent bank, you’d get cries of “cronyism” or “fascism”. But if the bank is insolvent, people seem to beg for nationalization/bailouts. Better to put the frog in warm water and then boil it rather than toss the frog into already-boiling water.
That makes the most sense of anything I have read on the subject. Certainly, de facto, it is going in that direction. Federal regulators were stationed in the banks by Obama, which allows government personnel to prepare for a nationalization in stages. CEOs of banks are richly paid to aid and abet.
“It’s a mystery why central banks think making banks more unprofitable will spur lending, especially when excess reserves cannot be lent. To top it off, Low interest rates punish savers who have less money to spend than they would have at higher interest rates.”
To paraphrase Ayn Rand, if your conclusion makes no sense, check your premise.
The evidence suggests that contraction is the desired result.
CBs buy assets to support asset prices which are collateral backing the whole Ponzi house of cards. If they buy bonds the bond price goes up so bond yield goes down. The overnight window rate should be below the longer duration bond rates and now many shorter duration assets have negative yield. The instant CBs stop supporting asset prices this way yields will rise (asset prices will fall) and its game over.