(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)
"Straight from the shoulder " by Toshio Masuda September 10, 2014
( Free of charge to the people I met)
WANTED: Very Charismatic Magician
In June the European Central Bank announced that it was lowering the interest rate to a level so low it shocked the market, and immediately began implementing it.
It lowered the policy rate to 0.15% from 0.25%, but what caught the markets off guard was the move to make the interest on central bank deposits by major banks -0.1%, which is in essence a penalty. By lowering the interest rate to zero percent and applying a de facto penalty to central bank deposits held by private banks, thereby forcing them to lend money, the ECB was attempting to activate the flow of money.
Unfortunately the opposite effect was obtained and bank lending did not grow. The only things that grew were commercial and household savings rates. Nevertheless, ECB Chief Draghi lowered the policy rate once again to 0.05% from 0.15% on September 4, and doubled the negative interest rate on central bank deposit by banks to -0.2% from -0.1%. Talk about repeating the same mistake twice.
The reason the Federal Reserve Board decided to end QE3 in October and start raising interest rates at the beginning of next year is because it recognized that the policy of extreme quantitative easing it had put in place after the collapse of Lehman Bros. had failed.
The return on short-term treasury notes in both Europe and the US is basically zero percent.
It's natural for households and businesses to think it's better to increase their holdings in cash, which carries no risk, if the return is going to be zero either way, which is why savings are growing for European and American businesses and households.
And if private-sector cash deposits are growing, then it's only natural for the circulation of money through the economy to slow down, since all that private-sector cash is lying dormant.
The Bank of Japan's outsized easing, to the tune of \270 trillion - twice the monetary base and 60% of GDP - makes it “the epitome of stupidity.” The cash will not start flowing (capital will not be activated) as long as the BOJ holds firm to a zero-interest policy, no matter how much cash it injects into the market.
Penalizing bank deposits in order to force banks to lend money just as businesses and households are shifting to cash deposits will not create more borrowing; credit-worthy businesses are already having to deal with too much cash.
The only businesses who want to borrow money are high-risk, low-credit ones.
The only thing the ECB's series of negative interest-rate policy moves will accomplish is force bad debt into the banks' hands.
There is a reason it's only this kind of self-destructive financial policy that the developed countries’ central banks will undertake:
Europe, the US, Japan, et al. can't stimulate real demand solely through policy, since they're all on the point of bankruptcy.
I always say "fiscal policy before financial policy," but administrations which do the right thing (i.e., restore fiscal health = raise taxes) will get pilloried by the voters, so their hands are tied.
That's why the only thing they can do is lower the value of the currency (purchasing power) by printing more of it and raise the list price for stocks and land, making it look like the economy is in good shape.
Vacuous politics, leaders who assert rights and ignore duties, that legalized casino called the marketplace…
The only possible destination for developed countries which fit this model is hell, and “it will be their own fault.”
Former Prime Minister Junichiro Koizumi ? a genius at pulling the wool over the voters' eyes if there ever was one ? succeeded in converting postal savings deposits, which were supposed to focus on security, to risk deposits in the name of privatizing the Post Office, and the voters are now complaining.
The only way developed countries can save themselves now is if they appoint magicians to be their leaders, get absolute majorities in their parliaments, and push through policies hated by the press and the voters. It's the only way to rescue the country!
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Written by Toshio Masuda