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ECB say negative bank rate an option–business.html


This position somewhat strange to put it mildly and I suspect this maybe coming our way soon.


Worth 27 minutes of anyone’s time.


Okay, back to basics in the real world.  I appreciate reality is in very short supply in some quarters, but let’s just remind ourselves what banks do.  They try to attract depositors to lend ‘em money in the form of deposits.  The two primary drivers of this are security and interest payments.  Sure there are a few useful sundries, direct debits and the like, but fundamentally its safety and interest.


The claims of safety have been well and truly battered in recent years by the bank-runs and the bailouts.  Then there’s also the idea now being floated that your money isn’t really yours and the governments should be able to help themselves to 10% of your savings and give you back a sovereign bond in return.


You may recall just how attractive Greek government bonds were and this is the future for all of ‘em more or less, otherwise why the need to compel the trade? 


As to interest rates, well if they expect more than a token amount of SAoT’s hard earned, then I would expect interest rates to be positive in real terms.  They aren’t; I fancy anyone who keeps more than a few quid in the bank to be pretty stupid given the negative real interest rates.  It seems to me to be a guaranteed losing bet.   But at least it is marginally better than keeping it all under the mattress right?


Well not if Benoit Coeure gets his way.  He thinks the ECB may charge banks for depositing with it and so by extension, wouldn’t banks charge depositors?  They can’t just swallow the costs as most are pretty illiquid anyway, so you would think they have to pass on the costs just as they do when interest rates are positive and y’know, sane.  And honestly, would you keep any money in the bank if you were charged to do so?  Could you think of a quicker or more certain way to bust a bank than this? Can he really think this will get ‘em lending more? 


Let’s not even extensively mention the Austrian school which says deferred consumption can be saved and then lent to businesses without expanding the money supply and thus stave off mal-investment but you can’t spend the same money twice by simply counterfeiting some more without there being inflationary consequences leading inevitably to boom and bust.


But for me the reality of all this vile suffering and wholly avoidable poverty can be grasped with this quite monstrous verbage…


Coeure said there was a lack of understanding about the euro zone’s approach to tackling the region’s debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.


“I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk,” he said. “The ambition to provide long-term foundations for (the monetary union) in less than a decade is a historical step of great significance.”


I had to re-read that.  Well Ben fundamentally you haven’t fixed a damn thing in four years, things are in fact getting worse, so maybe those who think you can’t fix things could be right?  They seem to have the evidence on their side.  Fundamentally the current ECB approach seems to be ‘screw debt repayment and saving, we will print (just wait) and coerce more and more borrowing and play Alice-through-the-looking-glass banking because of a demented attachment to thoroughly debunked demand-deficit theory.  We are politically committed to this so to hell with the economic reality we will now ignore. 


More suicide economics in this quote


He underscored the bloc’s decision to give the region’s permanent bailout fund the ability to capitalise banks directly, a move he described as “crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis.”


So now the ECB will just pick banks it likes (and ignore sovereigns it doesn’t apparently until the next time they waiver on the edge) and give them money from somewhere (the ECB does not have a big enough balance sheet for this without some serious counterfeiting) on the basis of what exactly?  The worse run the bank (and thus most indebted) get the most money?  More cash for the most reckless idiots?


You will recall how well government bailouts for industry generally work so now let us do it on a pan-European basis with funny-money. Christ-on-a-bike, this is total madness and the end of the European banking system as we know it is in sight if anything like this is implemented. 


I do not give financial advice yada yada. But if you have half a brain (making you better by half than some European bankers) you may know what to do.





  1. Lynne says:

    …you may know what to do.

    Does it involve tall lamp posts?

  2. Single Acts of Tyranny says:

    Nah, see as an anarcho-capitalist I am wedded to the non-aggression principle.

  3. RAB says:

    I have a mattress… And I know how to use it! ;-)

  4. wh00ps says:

    SAoT, they have already agressed against YOU. My version of the non-agression principle has the word “initiate in it.

    We are more or less forced to use the banks. If I and I suspect most other people wished to avoid having a bank account it would also require finding another job. My employer does not pay in cash and nor do most others.

  5. Single Acts of Tyranny says:

    @wh00ps ~ well true enough I suppose but one cannot build a society based on non-violent co-operation if you initiate it with violence! You can of course, direct denits aside, nip down the bank very month and withdraw your salary in cash. It will drive the Inland Revenue and probably NCIS and the spooks crazy, but it is possible.

    The only real problem I see is trying to book a hotel without a card or pretty much any internet shopping save for paypal.

    Now counterfeiters are being aggressive for sure, by trying to steal your value by devaluing how you hold it (ie in cash) but that’s an easy fix, just don’t hold cash and certainly not in banks.

  6. Laird says:

    As to negatived bank rates, I would point out the US TIPS bonds (inflation-protected government bonds) are already trading at negative yields, and have been for some time. See this:

    US government bonds have long been trading at negative real yields (the nominal yield is the sum of the risk-free interest rate, a default premium, and inflation expectations, and even assuming a zero default risk [wholly irrational, in my book] there’s no way the risk-free rate is only 0.226% or whatever the current 2-year rate is, so the implicit inflation premium is necessarily negative). The TIPS bonds make that explicit. Even allowing for the possibility that some of that is driven by a “flight to quality” (US bonds being viewed as the cleanest dirty shirt in the laundry), it still suggests to me that the market is anticipating deflation, not inflation. Anyone have a different explanation?

  7. Single Acts of Tyranny says:

    “Anyone have a different explanation?”

    Yes indeed. Some people maybe expecting deflation but they are in for a nasty shock. Now it’s certainly true that we absolutely should have seen prices falling as insecure positions are liquidated and the market adjusts to the new reality, but a succession of mechanisms (notably the insane, criminal QE) are preventing this and perversely, inflation remains.

    As to the bond market, there are those who simply cannot see the wood for the trees and still regard the dollar as quality not the doomed currency that it clearly is ($15 Trillion national debt anyone, and utterly unpayable and wholly unfunded bills coming down the demographic track, oh and Obamacare to speed the destruction). Add to that various statutory mechanisms that compel funds to hold a portion of their assets in treasuries, plus proposals to compel high net worth individuals to do likewise and you have a combination of the unwilling and the unaware still supporting treasuries.

    However, as the world wakes up, we are seeing central banks having to buy more and more of their own government’s bonds. I submit this is not in any sense deflationary albeit a recession should absolutely be deflationary if the market were allowed to function. Also commodity prices whilst wildly varying remain pretty steamy for a word recession, again, not in my view indicative of much needed deflation. Finally debtors; governments being the biggest find inflation a jolly wheze and deflation utter death for them, so if it were ever in serious sight, QE would kick in with abandon, hence the moniker, helicopter Ben.

  8. Laird says:

    I don’t disagree with any of that, SAoT, but it’s not the question I asked. My question was why have the bond markets bid up the price of TIPS bonds into negative yield territory, and my proposed answer is that the market is expecting deflation. They may be wrong in that expectation (for the reasons you cited), but I can’t see any other reason for pricing being where it is. Can you?

  9. Single Acts of Tyranny says:

    @ Laird ~ Yes, I see your point, apologies I missed it initially. I saw on SKY tonight that Spanish bonds were at 7.6% (from memory) but the cost of a sovereign default insurance is 6.4% (and the insurance policies themselves are seriously dubious if you ask me, I can’t see anone getting paid out at all if a major country defaults either for technical reasons like trying to wriggle out via the small print, or not actually having the cash to pay in the first place). So net 1.2% if you insure, before inflation.

    So quite why anyone buys them, other than compelled trades is indeed baffling.

  10. Plamus says:

    “Anyone have a different explanation?”

    Ummm, Laird, take a step back, and recall who owns TIPS and who makes the “market” in them. A good chunk is owned by the FED, and I am sure the bulk is owned by various bond funds. I don’t expect we need to discuss the FED’s motivations as a “market” participant. The bank portfolio and bond fund managers get paid to beat their benchmarks, not to deliver real return. They are happy to front-run the FED – buy at the Treasury auctions, put a limit order in, wait till the FED decides to buy.

    I seriously doubt you’d find a hedge fund loaded to the gills with TIPS. The TIPS market is no longer a market anymore than the carbon credit market is. The demand side is not motivated by real return, and on the supply side you’ll get a fresh infusion of TIPS whenever “the market can bear it” from the helpful Treasury.

    If you allow a bit of humorous oversimplification, it’s true that “the market is anticipating deflation, not inflation” – but the market consists of Helicopter Benny, “Timmay” Geithner, Vikram Pandit, and Bill Gross in a circlejerk. The market’s function has been diverted from price discovery to a dual goal of managing inflation expectations and recapitalizing broke banks.

  11. Laird says:

    Plamus, I don’t know who owns TIPS bonds, so if your characterization is correct then your explanation seems reasonable. I certainly like your comment on “front-running the Fed”. Is there any way to find out the total principal amount of TIPS bonds outstanding? It could be that this market is so thin that the data is essentially meaningless.

    Anyway, I think you’re even more cynical than I am. My hat’s off to you!

  12. Plamus says:

    Laird, good aggregated information on the TIPS market is indeed hard to come by. The total market seems to have been about $700 bln. as of mid 2010 (see here – and notice that the same paper mentions “massive arbitrage opportunities”). Of those the FED holds about $69 bln (see here), and TIPS funds (I presume that’s funds that only or primarily invest in TIPS) hold about $130 bln (see here. The Treasury “helpfully” does not break out foreign TIPS holding from total foreign US gov’t debt holdings, but I think $100 bln is a very conservative guesstimate. That leaves about $400 bln, and your guess is as good as mine as to how much of it is in funds that are not “TIPS funds”, and how much in TBTF bank portfolios.

    The weekly trading volume seems to be in the $5-10 bln range (see Figure 1 here). Thus, while the market is not thin per se, it seems to be very granular. Say, if the foreign holders keep 10% of their holdings in TIPS, their TIPS purchases over a 12 months are about $60 bln, which is 2-3 months worth of the full yearly trading volume that is just portfolio maintenance, not actual investing with consideration of inflation of deflation. But we don’t know – what if these chaps hold 20% or 30% of holdings in TIPS?

    Anyway, it’s not the thinness of the market that bothers me – it’s its composition and the motives of the agents. It would take millions of you-and-me’s (scared of inflation) buying TIPS to offset the decision of a Bill Gross or some Chinese central bank bureaucrat to sell some fraction of their portfolio because they bought hook, line and sinker the liquidity trap crap (craptrap?) in Krugman’s latest column.

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