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Welcome To The Currency War, Part 21: Japan Goes Negative; US To Return Fire In 2016

Well that didn’t take long. Two weeks of falling share prices and the European and Japanese central banks caved. First the ECB promised new stimulus — which the markets liked — and then the BoJ upped the ante with negative interest rates — which the markets loved. Here’s a quick summary from Bloomberg:

Central Banks Intensify Campaign for Negative Rates

In surprising markets by penalizing a portion of banks’ reserves, the Bank of Japan on Friday joined a growing club taking the once-anathema step of pushing some borrowing costs beneath zero.

“Negative rates are now very much the new normal,” said Gabriel Stein, an economist at Oxford Economics Ltd. in London. “We’ve seen they are possible and we’re going to see more.” Negative rates once “sounded illogical,” said Stein. “We now know what we thought was true isn’t.”

This is a resounding admission of failure. Over the past seven years the world’s central banks have cut interest rates to levels not seen since the Great Depression and flooded their banking systems with newly-created currency, while national governments have borrowed unprecedented sums (in the US case doubling the federal debt). Yet here we are in the early stages of a global deflationary collapse. Commodity prices have followed interest rates to historic lows, while growth is anemic and may soon be nonexistent.

The official response: More extreme versions of what has hasn’t worked. Here’s a JP Morgan chart published by Financial Times that shows just how sudden the trend towards negative interest rates has been:

NIRP Jan 16

Future historians will have a ball psychoanalyzing the people making these decisions, and their conclusion will almost certainly be some variant of the popular definition of insanity as repeating the same behavior while expecting a different result.

So what does this new stage of the Money Bubble mean? Many, many bad things.

This latest leg down in bond yields presents savers (the forgotten victims of the QE/NIRP experiment) with an even tougher set of choices. Previously they were advised to move out on the risk spectrum by loading up on junk bonds and high-dividend equities. Now, after the past few months’ carnage in those sectors, even the most oblivious retiree is likely to balk. But having said “no thanks” to the demonstrably dangerous options, what’s left? The answer is…very little. There is literally no way remaining for a regular person to generate historically normal levels of low-risk cash income.

Meanwhile, a NIRP world presents the US with a problem that perhaps only the Swiss can appreciate: As the other major countries aggressively devalue their currencies (the euro and yen are already down big versus the dollar), another round of lower interest rates and faster money printing will, other things being equal, raise the dollar’s exchange rate even further.

For a sense of what that might mean, recall that US corporate profits are already falling because of a too-strong dollar (see Brace for a ‘rare’ recession in corporate profits). Bump the dollar up another 10% versus the euro, yen and yuan, and US corporate profits might fall off a cliff. The inevitable result: Before the end of the year, the US will see no alternative but to open a new front in the currency war with negative interest rates of its own.

The big banks, meanwhile, are no longer feeling the central bank love. Where falling interest rates used to be good for lenders because they energized borrowers and widened loan spreads, ultra-low rates are making markets more volatile (and thus harder to profitably manipulate for bank trading desks) without bringing attractive new borrowers through the door. The result: falling profits at BofA, JP Morgan, Goldman, et al and tanking big-bank share prices.

As for gold, there are now $5 trillion of bonds and bank accounts that cost about the same amount to own as bullion stored in a super-safe vault — and which cost more than gold and silver coins stored at home. Compared with the 5%-6% cash flow advantage that bonds have traditionally enjoyed versus gold, NIRP can’t help but lead savers and conservative investors to reconsider their options. In other words, what would you rather trust: A bond issued by a government (Japan, the US, Europe — take your pick) that is wildly-overleveraged and acting ever-more-erratically, or a form of money that has never in three thousand years suffered from inflation or counterparty risk? At some point in the process, a critical mass of people will get this.

And no discussion of the unfolding financial mess would make complete sense if it left out the geopolitical backdrop. The Middle East is on fire and refugees are flooding the developed world, resurrecting old social pathologies (see Swedes storm occupied Stockholm train station, beat migrant children). Much of Latin America is sinking into chaos (see Caracas named as world’s most violent city and 21 of the 50 most violent cities are in Brazil). Seeing this, who in their right mind would spend thousands of dollars to visit Egypt or Rio or even Paris right now? The answer is far fewer than a decade ago.

So the old reliable economic drivers of expanding global trade and enthusiastic tourism are gone for a while, if not for decades. Central banks are, as a result, swimming against a current that is far faster — in water that is far deeper — than anything seen since at least the 1930s. And all they can do is pump a bit more air into their sadly-inadequate water wings.

36 thoughts on "Welcome To The Currency War, Part 21: Japan Goes Negative; US To Return Fire In 2016"

  1. I think negative interest rate are a BRILLIANT IDEA!!!! (Where can I borrow a million $ @ minus 7%?… in 10 years, I owe nothing!) What a spending spree I will enjoy.

    Meanwhile as we turn the national debt into neg-int-bonds, the debt will disappear!!! why didn’t we think of this before? Economic Da-Da beats economic Data.

    ps I’ll be buying gold with that million

  2. John Rubino is assuming there is a currency war. What if there isn’t? What if, instead, the money systems of the world are controlled by bankers who COOPERATE with each other by making constant adjustments to money supplies and debt levels? Remember, all “money” is created out of thin air when bankers issue loans. They charge interest for loaning money they never had! They own the central banks that keep “our” government s buried in debt so that taxes must be ruthlessly collected at gunpoint. The money systems of every country on earth (except Syria and Iran) are legalized counterfeiting, debt-enslavement scams owned by bankers. So why would these bankers, who already own almost everything, go to war against each other when cooperating is more profitable and keeps them in power? Look for the answer in John Rubino’s “currency war part 3,426”

    1. Yeah Right, if we cooperate, and not go to war,then its more efficient and everyone benefits….right…like the world behaves, like corporations behave, like traders behave…share the wealth…..KUMBAYA MY LORD, KUMBAYAAAAAaaaaaa

      1. In Jim Rickards’ book Currency Wars he shows that in the past, countries have always — in the end, and when up against it — done what was best for the domestic economy, not what was best for the world. Now, you could argue that “this time it’s different,” but I’m sure you know what kind of track record that slogan has had in the history of finance.

    2. Yes, there is probably ‘some’ cooperation. But not much. Look how the SwissNB surprised everyone out of the blue when they depegged.

      As the world reserve currency, we know the Fed routinely engages in ‘swaps’ to assist others (and the US as well).

      But we’ll always come first.

  3. The entire discussion of negative interest rates is a huge exercise in misdirection. It was not enough that the Fed has been providing trillions in interest-free money to the very banks that own it (through the creation of new national indebtedness), now they propose to
    pick the pockets of savers, who were already suffering negative real interest rates, with further insult. But the way this story is presented, the reader would think that he was going to be paid for borrowing money.
    As you close your savings account and move the money to a credit union, be sure to speak with the bank manager: “The lack of interest is mutual.”

  4. It’s too early to say what effect negative interest rates will have. It’s going to take some time. First of all, the negative rates are only slightly negative and they are only on some CB’s fund’s rates and newly issued short-term bonds. All other current bond holders are experiencing unrealized (paper) capital gains. Only when those bonds mature will those investors need to decide what to do with their principle, and that will take years.

    There is the suspicion that this is all about eliminating cash but I don’t think they’ll be able to do that. It would cause too many problems and blow back to be worth it. Relatively little of the world money supply is in physical currency so it just wouldn’t be practical. Furthermore, there is no need to eliminate cash to avoid bank runs. Banks can simply close. People will get pissed off either way.

    I also think the Fed WILL continue to raise its funds rate precisely to strengthen the dollar. Most of the world is heavily invested in US dollars and as US interest rates climb they will become even more so. The Fed cares about its banking system, not corporate profits.

    1. I really hope you are wrong on the interest rate raise by the FED part. On the issue of having a war on cash that has already started. Try going to your bank and withdraw 10k of YOUR money and see what happens.

  5. The problem to begin with is inflation. So banks are going to solve the problem with more inflation with negative interest rates? Talk about a crime against humanity? The only way to solve this problem is for people to wake up from the trance they are under. The issue at hand is control of the explanation. Like seductive vampires criminals employ clever protectors (media) to eliminate stake driving threats.

    This may help. Make a list of all representatives and MSM outlets. Forward indicting articles from sites like this along with your own thoughts. Consider if 10s if not hundreds of thousands of forward fighters got on board and overloaded those email servers. Also get phone numbers get on the horn and give them hell.

    1. This is a wild-ass guess. It’s not suppose to help the markets. I think it’s suppose to spur folks into borrowing more money, going deeper into debt, and with the borrowed money folks are suppose to feel better–about being deeper in debt. Go ahead, say it, that doesn’t make sense. I agree — neither does negative interest rates.

      It’s how Central banksters say, “We don’t have a clue what we are doing.”

      1. The next attempt if we go negative here in the US will be to eliminate cash, so you can’t ‘hoard’ your own savings without getting dinged for it.

        1. I don’t know many people sitting on much cash these days. I think going cashless is to prevent bank runs. This puts maximum control into the bankers hands. I also wonder if they could then deny Gold purchases?

          1. you are catching on. control the currency, you control the public. NO currency = total control. Can’t leave the country, can’t “save”, bank goes under you lose, piss off someone and they shut down your ‘currency card’.

          2. To prevent hording in emergency conditions, every family will have food rations. But good ole gold and silver will circumvent that.

          3. Hence after we go to a cash less society the next step will be to outlaw the private ownership of gold and silver. Every one will ONLY be able to use the government debit cards for anything.

          4. Exactly. That is what has happened through out history, as one system dies another rises to take its place.

            I think there could be a hole in the cashless idea. Drug lords and associates won’t like it. Congressmen need their bribes and they won’t go for it. Now I guess they could use Yuan or maybe gold.

          5. Hackers, if no one else is willing to step up to the plate, should quickly demonstrate the folly of a cashless society. It was just a month ago that in London, everyone got to ride on the Underground free when the Oyster card readers stopped functioning.(they may not have been hacked, but you get the idea) The idea that the entire country should routinely and collectively be robbed by hackers is not acceptable.

      2. The central bankers are anyhing but clueless- they are following orders of the banks which own them, who have been feasting on trillions they have been obtaining interest-free, and now they actually have the chutzpah to regard savers as “low hanging fruit” from whom to gouge billions more. It’s like Anopheles demanding the right to bite you.

    2. The whole idea is to drive savers to be spenders. If you are punished for keeping money in the bank, you will want to spend it and ‘pick up demand’. The drive will be for more debt/borrowing, because the entire system depends on growing debt.

      1. I suspect shortages will go hand and hand with this. Its like the ammo shortage its still going on, the price went way up and still seems to be shortages when I am sure there are no real shortages.

      2. I understand your point, but declaring war on savers flies in the face of economic orthodoxy: “Savings is the engine of investment.” (Economics, Samuelson)

  6. The faster they run towards punishing savers, the faster savers will run to gold.

    If the average peon understood how the money system works, they would have long ago burned the Central Banks, and tarred and feathered their occupants.

    Eventually they’ll wake up.

    1. Written by a peon……………funny how peons are telling the rest of us we’re the peons..When the system collapses you can only blame yourselves ….because you didn’t do anything about it either but sit on the fence like a bunch of parrots bitching about it.

        1. You can’t kiss someone’s ass if their head is so far up their ass you can’t see it. Insulting people because you think you’re above them brings insults. Typical white privilege behavior.

          1. I see you’ve been wholly indoctrinated into Democrat Party Hegemony and mythology.

            Did the Borg tell you to write that?

            Pull your own head out of your ass Dan. I don’t need a party to tell me how to think or what to say like you do.

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