Contrived Low Interest Rates Impoverish USA Middle Class

Are you a member of the saving class?  The world central banking cabal is separating you from the income on your accumulation of wealth, transferring it to themselves. We all know this is true, for in recent years we earn virtually nothing on our bank accounts, while we are charged fees for every service.  The theft is accomplished by ultra low interest rates at the Federal Reserve level, but who benefits?

Central banks in Europe, and most recently Japan, have lowered the interest they charge “member banks” that borrow hundreds of billions from them to 0%, or below.  Are you aware that major banks in reality own the central banks that pretend to control them?  It is no stretch to assume that all actions by central banks reflect what is best for their hidden owners, and not for us savers. This incestuous relationship guarantees the rich member banks sure profits on printed money they borrow, at, say, the FED or the Bank of England. This unspoken scheme guarantees the wealth of banks and the eventual destruction of the saving class.

But, after seven years of rising stock prices, big banks like Goldman Sachs and JP Morgan seem to have come to the end of the climb, as their stocks lead the plunge in value–not far behind those of petroleum producers.  This tremor has caused a rush for ‘”accommodation” by central bankers, with our own FED soon to follow.

Through its world-wide oligarchy, the US Federal Reserve has, since 2008 and before, floated stocks, bonds and real estate investments on a sea of federal debt, which now exceeds $18 trillion in the US alone.  The world’s largest banks have been kept solvent, Ignoring a huge hangover of bad real estate debt and derivatives. To keep them going, the world’s central bankers have systematically driven the interest rates banks charge each other down to near zero.  Now we read about sub-zero rates, a mystery we are powerless to imagine.  Favored predator banks now use depositors’ money without paying for it.

How does this financial witchcraft work to keep the banking system profitable without making business loans? The savings of millions like you and me is the key.

The FED (which pretends to be part of government but is private) lends almost unlimited dollars to favored banks at near zero cost.  It must be emphasized that the FED prints these dollars in its own special way.  The member banks recycle newly printed dollars back through the US Treasury through the purchase of bonds, notes and bills issued by the US Treasury.  These instruments end up in the bellies of the member banks and they pay several time as much interest as the money to buy them cost at the FED.  Your savings, borrowed from you almost free by the favored banks, is also dumped into this investment pot, which “earns” the spread for the bank.  An actual example of this is provided later, and you can figure out the bankers’ arithmetic by looking at a thing called the “Yield Curve”.  It will show you that your share of the profits is virtually zero.

During seven years of quantitative easing (and similar FED programs), the US Central Bank (FED) bought hundreds of billions of dollars of bad, mortgage-backed securities from these banks, printing the money to do so.  Similarly, foreign central banks have been able to purchase longer term government debt in London, Berlin and Tokyo with depositors’ funds and to show a profit without making a loan.  “Accommodation” is the quaint, central bank language for driving down interest paid on savers’ deposits, flooding the credit market with printing press money, and driving down short term interest rates.

Japan is the latest to “go negative”.  Haruhiko Kuroda, head of the central bank of Japan, in a interview with Financial Times, said there was “no limit” to monetary easing on his watch, as he vowed to slash Japanese interest rates deeper into negative territory if necessary.  “Go negative” means that the central banks loan short term money to favored banks and pay them to take it!  On February 12, Janet Yellen announced that negative interest rates would be considered in view of the latest economic statistics, remarking that negative rates are not “off the table”.

Mr. Kuroda’s words mean that Japan’s banks can borrow short-term money from the Bank of Japan and receive (not pay) interest on the money they borrow, while investing the borrowed funds (along with depositors’ money) in longer term US or Japanese paper that pays a small but significantly larger rate of return.

For instance, US 5-year Treasury notes pay a current return of 1.20%, while banks can borrow funds for one month at a time at .26% per year, leaving a spread of .94% per year.   Thus a qualifying bank, like JP Morgan, can earn almost 1% a year, (about $10 million on every $1billion it borrows) from the FED by buying 5-year notes.  Banks simply roll over again and again the short-term loan they take out to buy the longer term bonds.  Why would banks risk making loans to customers, let us say an US oil-producing company which may default on a loan, when they can glean the spread of almost 1% on borrowing short from the FED and buying longer US Treasury bills, notes and bonds?

The answer is they will loan you money on credit cards that require you to pay double digit interest plus fees.  Big banks are not making loans to small businessmen because they do not need to, and this is a growing problem in the economy.  So the more the central banks “monetize” (print), the less banks lend to businesses!   No wonder we are in a growing recession in spite of all the printed money.  Japanese banks will now have it even better, for their cost of borrowing, we are now told, will be less than zero–they will be paid to take borrowed yen from the Bank of Japan!  Amazingly, the same is true of several European countries, including Germany, UK and Switzerland.

The scheme that makes banks billions of dollars of interest on capital they borrow is not available to public investors, only to certain privileged supra members of the FED.  Lack of income at the bank drives the savers into speculation.  The public must buy real estate, long-term bonds, or stocks in order to hope for a decent return. Most of us do this though mutual finds or hedge funds, resulting in returns of 2-4% annually or less, and many of these funds are managed by the very banks we are trying to get away from.  This exposes savers to market risk, as markets flooded with cash become increasingly volatile.

US Gov bond risk was discussed in a recent Financial Times ( story, “Bond yields send recession signal”.  “Domestic investors have little choice but to extend beyond the 10-year JGB segment,” says Andre de Silva, head of emerging market rates strategy at HSBC.

The FT article quotes other Investment managers: ”’The lifespan of the rally in government bonds will depend on how long investors keep faith in central banks,’ says Tad Rival, chief investment officer for fixed income at TCW, a Los-Angeles based asset manager. Every economic cycle has a grand narrative that eventually unravels, he says. In the late 1990s it was the information revolution, in the 2000s it was housing prices….this cycle the narrative has been that central banks have got the ball, know what they’re doing and can keep the game going as long as they want.”  He concludes, “But humans have not found a way to abolish cycles.”, to its credit, tells us ever so gently what We Hold These Truths has long ago shouted, that the long-term Treasury bond market has been turned into a Ponzi scheme kept alive by confidence, not reality.  If we depositors take our life savings out of non-interest paying bank accounts at Wells Fargo, our alternative is to put it in a mutual fund (many are managed by one of these same “member banks”) that invests in long-term government issued paper paying 3-4% per year and charging us fees to invest.

But why would anyone who thinks more than 30 seconds trust the value of Treasury bonds, notes, and bills to be stable?   If rates rise, as we hear may happen, the market value of existing instruments will go down and erode the holder’s principal.  Unlike the banks, we are not borrowing the money to buy them free.  We risk our saving with every investment we make.

This writer discussed this possibility last April in  US Treasury Bonds,The Godfather Of All Bubbles, .  In that article we noted that, in the process of getting $17 trillion in debt (it’s now headed for $19 Tr), our government had sold its debts to several other countries, including Japan, China, and Russia, the former two holding more than $1 trillion each.  US mutual fund investors hold over $4 trillion of this US paper.  What would happen, we asked, if, say, China decided to dump its $1.3 trillion US debts, or if the mom and pop mutual fund holders started liquidating their huge collective holdings?

Our answer was, just as Bernie Madoff’s Ponzi was eventually detected, the US debt bubble must someday break. The principal of debt expansion by both the US and Japan is very similar to the Madoff Ponzi.  Mr. de Silva, who works for the huge European bank, HSBC, is telling us the same thing in his polished Brit way.  A fantasy beyond the Wizard of Oz, it is alive and well in the Japanese banking system.

In another Financial Times story, on March 3, entitled “No Limit to Japan Easing”, Japan’s central bank president Kuroda describes the Japanese plan, stating:  “The constraint of the ‘zero lower bound’ on a nominal interest rate, which was believed to be impossible to conquer, has been almost overcome by the wisdom and practice of central banks, including those of the Bank of Japan.”

Yes, this central banker is really telling us that they used to think 0% is the lowest interest rate possible, but because central banks print the money anyway, are now learning it is possible to pay bankers to borrow money, guaranteeing the bank an even bigger profit on the money they are paid to accept.

Kuroda continues, “It is no exaggeration that [ours] is the most powerful monetary policy framework in the history of modern central banking”.

Financial Times commented on this banking phenomena in puzzlement, which I quote in detail because I cannot say it better then they do:

“The Bank of Japan policy now combines negative short-term interest rates with annual asset purchases of Y80tn, equivalent to 16 per cent of gross domestic product, driving down interest rates across the yield curve.” 

How can negative interest rates be possible?  Who would buy a bond that seems to lock in a loss?  Financial Times tells us the Japanese central bank is already purchasing financial assets equal to 16% of the GDP of Japan!  If the FED were to match this ratio in a new Quantitative Easing scheme, this would equal about $3 trillion per year of “stimulus” or about three times Ben Bernanke’s enormous  $80 billion per month purchase of government paper, trash real estate paper and mortgage-backed securities that supposedly ended in October 2014. (US Commerce Bureau of Economic Analysis)

About half of Bernanke’s QE purchases were to bail out 24 or more banks’ bad real estate debts carried over from the 2004-8 housing boom-and-bust.  See Wikipedia

Another FT story explains the impact of Japan’s (and Bernanke’s) acts in a story,  “The process of going negative has profound implications for investors”, Financial Times, London, Feb 12, 2016.  Fund flows favor Treasuries over equities,   “Investors buying negative yielding bonds — entailing a guaranteed loss if held to maturity — can still make a profit, by selling their holdings at a higher price and a lower yield, so long as someone else thinks central banks keep pushing further below zero. Rather than play in negative territory, a more likely outcome is that investors extend into longer-dated maturities sporting positive yields.” and “A sharp acceleration from the prior five trading days and the fifth consecutive week funds have recorded redemptions, according to fund flows tracked by EPFR. The shift has lifted outflows over the past two months to roughly $55bn…Investors instead sought out the safety of bond funds buying US government paper, with $15bn shifting into the asset class over the last eight weeks. Treasuries have rallied sharply as fears of recession have kindled, with yields sliding to near the lowest level in a year…This cycle the narrative has been that central banks have got the ball, know what they’re doing and can keep the game going as long as they want,” he says. “But humans have not found a way to abolish cycles.” 

 Last week Jamie Diamond, billionaire president of bailed out JP Morgan Chase Bank, made public show of the purchase of $26 million of his own fizzling JP Morgan stock.  Diamond’s action was reminiscent of the tale of a former president of First National City Bank (now Citibank) who, in 1929, marched to the floor of the New York Stock Exchange with cash in hand, followed by other Wall Street tycoons and news reporters.  As a show to the public to quell their fears, he purchased a large block of his own stock.  It did not work; the market went on to crash in 1929!

Conclusion:  Worth repeating, the world central banking cabal is separating the saving class from its reward for a life’s work, the income we compound on our savings. We all know this is true, for we earn virtually nothing in interest on our accounts at, say, Wells Fargo.  We also know we must have a return, for the purchasing power of our savings always declines, not withstanding the “there is not enough inflation” line we get from Central banks.  Middle class savers have been deprived of any meaningful interest on their life savings and have been lured into buying, holding, and depending upon long term US Treasury bonds and notes that the banks avoid like AIDS.  Most holders of some 4 or 5 trillions of dollars invested in mutual funds that invested in US Gov Bonds are oblivious to the risk because the scheming exposed in this story has been hidden from us.

The biggest unanswered question is which is more dangerous: the stock market, the still overblown real estate market, or USUSG bonds where our IRAs and pensions are invested?- cec


1 comment so far

Robert Tartell
February 19th, 2016

On Feb. 12, in the WSJ, Takachi Nakamichi, discussing Japan Fed chief Kuroda , wrote. “Last summer he invoked a fairy tale to describe his task.
‘If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal’
—Bank of Japan Gov. Haruhiko Kuroda
“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,’” Mr. Kuroda said in June last year. “Yes, what we need is a positive attitude and conviction.”
This is the kind of horrific magical thinking that uselessly sacrificed the flower of Japanese youth in WWII: the idea of the kamikaze, hurling planes against a vast American armada. It did create momentary shock and awe- each hit killed an average of 600 Americans. But hits were few, and the fleet not slowed a bit, and in the end the mainland was being hammered by naval gunfire and carrier bombing with no response and starving citizens forced to eat bees. Haruhiko Kuroda is just the man, with his NIRP madness, which discourages any foreign investment (“The engine of investment is savings,”(Samuelson, Economics) and leaves only massive fiat creation and monetization of debt, another form of madness.