Well, in spite of the US’ best efforts, it seems Europe may win the race to the bottom.
While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15.
“The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist atBarclays Capital inLondon, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.”
Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight. The Fed rejected cutting its deposit rate from 0.25 percent last year. With Europe’s debt crisis damping inflation pressures and curbing growth, the ECB may feel the benefits outweigh the negatives.
Okay, some clarity may be needed for some people unfamiliar. Consider central banks as banks for your bank. What they do for us, like providing savings accounts and lending money, the central banks to for them. Indeed, it is the interest rates the central banks set which dictates to our banks their interest rates for loans and savings accounts.
So, why would the central banks lower the interest rates? This is an effort to stimulate spending. It works two ways. 1) Interest rates on your loans are low, so it encourages you to borrow money. 2) Interest rates paid to your savings accounts are low, so it discourages you to save money.
For the longest time, the US led to world in low interest rates, but, Europe would have none of finishing second behind the US. And, so now, they’re contemplating zero interest rates and lower. But, that’s the European Central Bank. If the interest rates for your bank is zero, then what can you expect for an interest rate on your savings account? Someone has to pay for keeping track of the money, right? So, you’ll end up paying to have a savings account……. how cool!!! OTOH, what can you expect as interest rates if you take out a loan? No, no one is ever going to pay you to borrow money……… I think. Well, I suspect. I don’t know in this insane world, anymore. But, seriously, I suspect they won’t pay you to borrow money. If they do, and I stop blogging, you know what I’ll be doing.
Now, all of this is a good notion to stimulate spending, and it does work …… to a point. That is to say, if interest rates are at 5% and then it lowers to 4%, that stimulates borrowing and spending. But, we’re not talking about going from 5 to 4 percent. We’re in the 0.25% range and talking about going lower. The difference is so negligible, it won’t make any difference to the consumers …. spenders.
I haven’t had a savings account for years. Why? Because it’s senseless to put it there. There’s no return. OTOH, I haven’t taken out a loan for anything in years, as well. Why? Because I don’t have the money to pay back a loan. The job market is down and jobs are scarce. If the business I work for suddenly closes, I can’t repay the loan. It’s not like I could walk next door and get a job there.
But, what if this works?
Everyone should pray that it doesn’t. The central banks of this world, in various manners, in an effort to stimulate economies, have been printing money like mad. $Trillions!!! Year in, year out. To say our money supply is bloated is a gross understatement. If the decrease in interest rates has the desired effect and people suddenly go out and start spending, the flood gates will open, and we’ll all be swamped with the money. We will then have a merciless and rampant inflation. A jobless inflation run. Because of the globalization of banking and industry, there will be no country safe from it.
But, why this insanity?
This is nothing but an abject refusal to address reality. The reason why economies are not moving is because no one has any money. Interest rates are, and have been for years, so low that any spending stimulated by the cuts have long since past. The problems are, through constraints of our governments, we’re no longer industrializing. It’s best to think of economies a growing living things. Once they stop growing, they start to deteriorate. There is no point in which one can say ….. “finally, we’ve reached where we want to be and can stop!!!” It doesn’t work like that. Once you stop, atrophy sets in. This is what we’re seeing in Europe and the US and many other places in the world. Atrophy. Regulations, taxes, fees, fines, and a general disdain for industry as government policy is the cause of this.
The interest rates and the desire for higher inflation are the results of attempts to finance our governments. Europe’s economic crisis occurred because of government debt. Governments are financed from taxes. They need the churn to finance the governments. In a similar manner, the US’ economic crisis was because our banks didn’t have the churn they needed. And, in order to finance our huge debt, we need inflation, so the money we borrow today isn’t worth as much when we have to pay it back tomorrow.
But, all of this causes impoverishment of the people. Imagine a world where no one can save any money. Our governments,and our central banks are part of our governance, are now for the governments, themselves, rather than for the people, much less, by or of the people.
Yes, this is just Europe. But, because it is Europe, it will come to the US. We’re strange that way. And, when it comes to the US, the entire globe will be infected with this insane stupidity. True, we’re a small part of the globe, but, economically speaking, the weight of the US and European economies combined cannot help but crush the rest of the world.