“Central banks in Europe, and most recently in Japan, say they will lower interest rates on government issued debt to 0%, or below, called Negative Interest. This means that lenders pay borrowers to hold their cash. This idea is so outlandish as to defy understanding by normally thinking people. It is also totally destructive to savers whose nest egg is eaten up by bank fees and inflation while being deliberately deprived of earnings. We all know interest is the cost of using someone else’s savings. “Negative” means the depositor (lender) must pay a fee to the borrower bank to keep his money. It forces the saver to spend his savings!
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.
Can a Central Bank, like the Bank of Japan, or the US Federal Reserve system (FED) absolutely set the rate of interest your bank charges you, or that one business charges another for the use of capital? The answer is a Central Bank cannot control interest rates absolutely as they claim, for the market place is broad and determines the value of money. What central banks do is manipulate the interest paid on government paper by buying and bidding up (or selling down) prices. Most other public and private debt markets tend to follow along after US Treasury debt. Thus, the rates charged on all debt is affected.
The Japanese central bank (BOJ) says it will buy Japanese government debt in any amount necessary. This will flood the economy with newly printed Yen, even to the point of creating “negative interest rates.” This will assure the Japanese government of the financing of its deficits. The financial press rarely tell you straight out that the bank of Japan has a franchise from its government that allows it to print all the money required for these purchases, just as the FED does in the USA. By being willing to buy all of the newly issues of Government bills and notes, as well as any old issues that come to market, the BOJ bids up the price of government paper, which means a drop in yield or return. (Remember, when the price of a bonds goes up, the return goes down proportionally.) It has warned everyone to get our of their way, it will bid up prices until the return on bonds is driven down to zero or below. Only the Central bank can do this because it only has a franchise to print Yen acceptable to the Japanese government. Never mind that excess printing press money always causes inflation in the long run, and savers are irreparably diluted by inflation!
Japan is the latest to “go negative” but not the only one. 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.”
This writer does not know who owns the Bank of Japan, but in the USA we know that the major banks own the US central banks (Federal Reserve) that pretend to control the banks who own it! It is no stretch to assume that all actions by central banks reflect the best interest of their hidden owners, not for us savers. This incestuous relationship guarantees the rich member banks sure profits on printed money they borrow from savers, or from the FED itself, or from other banks through the FED. This unspoken scheme guarantees the wealth of banks, but will eventual destroy the wealth of the saving class.
Because the FED can (at least for a while) manipulate the value of US bonds, bills and notes upward, member banks have an incentive to jump on the band wagon as bond buyers. Your savings, for which you are paid almost no reward, is part of this bankers investment pool to buy longer term bonds that currently pay from 1% to 2.75%. You can figure out the bankers’ arithmetic by looking at a thing called the “Yield Curve” which shows the spread between short term and long term US paper.
“During seven years of bankers’ “accommodation” that supposedly ended in 1015, the US Central Bank (FED) bought hundreds of billions of dollars of defaulting, mortgage-backed securities from member 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, using depositors’ almost free funds to show a profit, without making loans. “Accommodation” is the quaint, central bank language for flooding the credit market with printing press money, and driving down short term interest rates and saver rates with it.
I was shown a statement by a retired lady, who in January earned only $2.17 on her bank savings account balance of $68,000.00, held by bank that accepted a $25 Billion taxpayer bail out in 2005! That adds up to be $26.04 earnings per year for her, about as close to zero % as you can get. But she was charged $35 for a two day late charge on a $600 Visa card balance at the same bank, wiping out a whole years interest, plus some.
Your banks may be willing to loan money to you on credit cards that require double digit interest plus fees, but big money center banks are not making many loans to small businessmen because they do not need to. Amazingly, negative interest rates are central bank policy in several European countries, including Germany, Sweden France, UK and Switzerland, and, are spreading.
The scheme makes banks billions on capital they borrow from savers that is not available to public investors, only to them. Lack of income from banks drives the savers into speculation. The public must buy long-term bonds (or other investments) in order to hope for a decent return. Most of us do this though mutual finds or hedge funds, resulting in true interest returns of only 2-3% annually or less. Many of these funds are managed by the very banks we are trying to get away from.
I have recently heard political promises by Bernie Sanders about “breaking up the big banks.” This can be accomplished in one bitter step, by nationalizing (never mind auditing) the Federal Reserve System and closing down almost all of its functions, as was done once before by president Andrew Jackson in 1836. (Secrets of the Federal Reserve)
Chuck Carlson
References:
“Fear & Loathing on Negative Yield Debt: Bond Trader’s Dream,” Lukanyo Mnyanda, bloomberg.com, 2/21/16:http://www.bloomberg.com/news/articles/2016-02-22/fear-and-loathing-of-negative-yield-debt-bond-trader-s-dilemma
“Monopoly Is Going Cashless, Could We Be Next?” Frank Holmes, Seeking Alpha,, 2/23/16: http://seekingalpha.com/article/3920366-monopoly-going-cashless-next?ifp=0
“Daily Treasury Yield Rate Curves,” U.S. Dept. of Treasury: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
