Deputy U.S. chief economist at UBS Securities LLC in New York. “Simply put, central bankers are uncertain about the efficacy of the tools they are using and are operating in an environment with more unknowns than knowns.”
November 4, 2014
Don Quixote is easily one of the most entertaining books of the Renaissance, if not all-time. And almost everyone’s heard of it, even if they haven’t read it.
You know the basic plot line—Alonso Quixano becomes fixated with the idea of chivalry and sets out to single-handedly resurrect knighthood.
His wanderings take him far across the land where he gets involved in comic adventures that are terribly inconvenient for the other characters.
He famously assaults a group of windmills, believing that they are cruel giants. He attacks a group of clergy, believing that they are holding an innocent woman captive.
All of this is based on Don Quixote’s completely delusional view of the world. And everyone else pays the price for it.
Miguel de Cervantes’ novel is brilliantly entertaining. But the modern-day monetary equivalent is not so much.
Central bankers today have an equally delusional view of the world. Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory.
Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.
On November 1st, the first European bank has passed along these negative interest rates to its retail customers.
So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.
We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.
And large investors are paying European governments negative interest on certain bonds.
Now we’re seeing this effect bleed over into retail banking.
It’s starting with higher net worth individuals (the average guy doesn’t have half a million euros laying around in the bank). But the trend here is pretty clear– financial repression is coming soon to a bank near you.
It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.
Bottom line: if you’re responsible with your money and set some aside for the future, you will be penalized. If you blow your savings and go into debt, you will be rewarded.
If we ask the question “cui bono” [who stands, or stood, to gain (from a crime, and so might have been responsible for it)?], the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.
On the ECB’s own website [http://www.ecb.europa.eu/home/html/faqinterestrates.en.html], they say that negative interest rates will “benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”
I’m not sure a more intellectually dishonest statement could be made; they’re essentially telling people that the path to prosperity is paved in debt and consumption, as opposed to savings and production.
These people either have no idea how economies grow and prosper, they’re outright liars, or they’re completely delusional.
I’m betting on the latter. Either way, this assault on windmills has only just begun.
As Don Quixote himself said, “Thou hast seen nothing yet.”
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