Taking interest rates to less than zero would create a run on the banks.
What is the mission here, exactly? The central bankers are distorting markets to the point that the intent of their actions must be questioned. What are they trying to do?
Are they trying to force all money into the stock market or into the mattress? What central bankers are doing results in both responses, creating offsetting effects.
Central bankers hold hammers and everything is an interest rate nail. Lower rates didn’t work? So, lower rates some more. Well, the meat on the bone is gone. And so the ill formed logic continues. If low rates are good, then negative rates must be wonderful.
Via Bloomberg, citing Handelsblatt: ( a prediction)
ECB will reduce interest for cash deposits to minus 3% and the dollar [will] appreciate by 20%, reaching parity with euro in 2015
The old theories and the old (yes Janet) theoreticians plug away at the same plug. Myopia. They rely on lower rates to raise employment and create inflation. Well what if the real market is smarter than the central banks? What if the velocity of money plunges quicker than the stimulus (alleged stimulus) effect of lower rates can provide? Well, it has. (see chart). We haven’t heard much of Yellen speaking to the offsetting effects of the velocity of money plunge, nor have we heard many questions in this area.
Recall the Cypriot debacle a few years ago, and remember one of the solutions that nearly was implemented was to realize central banker theft from the saver. This is right on the radar screen, dead center.
The proposal back then was to sieze 10% of the savings deposits. Seems remarkable.
(To take one 10% cut seems drastic. The Federal Reserve would rather have 2% inflation with zero interest rates for a five year period. Do the math.) Luckily it never was implemented, but it gave us a window into the mindset of these central bankers. They believe they can take what is not theirs to take to give to those who over promised and squandered.
Imagine the lines, the rioting, the collapse. Everyone would be at the window, ala the “It’s a Wonderful Life” savings and loan run. I want my money and I will take it home.
Mattress stuffing and locked down consumers would result. The other reaction might be, “put it in the market”.
There may be new economic theories some day, theories that point to faked and forced low interest rates that are intended to be stimulus are in fact met by equal and opposite reactions that offset those interest rate stimulus efforts. People identify and react to the artificial nature of it all. They sit on their money and the velocity of money plummets.
If low rates slow the velocity of money, what would negative rates do? Don’t ask a central banker. He might say, theoretically, the lower the rates the stronger the stimulus.
Except, it doesn’t work anymore. Hey, why is that crowd in front of the bank?