Zombies are in charge of the European economy - and that should worry you!
This might be the only article we'll ever publish which comes with a legally binding disclaimer:
Europeans and Swisss citizens (the most totalitarian stae in the West), are not allowed to read this article! No exceptions. If you read it anyway you forego any right to sue its author(s). EU & Swiss citizens: this is what you get - and, frankly, deserve - for letting your rights get trampled every time a politician deems fit, forgive me for not wanting part of that.
This article is written for the few who still enjoy free Speech - God Bless America! If you're not one of blessed-few, instead please go to Swiss Idiots (this site is completely unaffiliated with us!)
Negative interest rates are a cancer that is slowly eating away at our economy will inevitably cause a recession. The Fed will be unable to do anything, the U.S. currently has its own problems, but, more importantly, the fallout from Europe (and Switzerland's) negative-interest policy will be monstrous. Like nothing I've seen (and I'm not young anymore).
Negative interest rates have been in vogue all over Europe for the past couple of years. Let's make one thing clear right away: the focus on negative interest rates proves (at least to those who think things through) that economists, by and large, are a bunch of idiotic people. Worse: in Europe, everything is politics. These people aren't in their positions because they are smart, but because they have the right papers and have done as they were told.
There is, potentially, a larger debate concerning how much economic policy can actually do in the first place - let's leave that for another day and (generously) assume that economic policy does indeed have a major impact on how economies prosper (or fail). There would be much more to say - about issues at the edge of the topic - but negative interest rates are bad enough!
That negative interest rates don't work is something that every smart 8-year old can probably see. It takes the brain-power of the average 12-year old to see that they actually hurt. Why? Because by that age they will have learned that - at least in practice - you can't have -x% of something (for the young readers amongst you: you can have 20% 2%, 0.2% of something - all positive numbers). Central bankers - with their golden parachutes (which I only condemn when undeserved - as in this instance) aren't quite through K12 yet (for non-US readers, that's primary school) Scary, and super-short, version of this article.
Their reasoning? If low interest rates, are good, lower is better but we've reached 0% so we'll have to make them negative. Really! I wish it was a joke... because it would be funny if the world economy didn't slowly - but surely - go to pieces. I'm not saying this to stir-up panic - hopefully, over the longer term this event will be seen as insignificant in terms of stock prices (and some people made good money during the Great Recession!). I do it in order to wake-up as many (adults only!) as quickly as possible. However, there IS a real chance of repeating 1929-1939.
The reasoning behind low interest rates is simple, and to some extent, well established in practice. But many things - as every investor knows - don't work when you put a negative sign in front of them. In a nutshell: by lowering rates, the Fed, the ECB, and their equivalents make it less worthwile (for everyone, but especially banks) to hoard cash and more worthwile make loans (or buy a new car). Obviously, there's a lot more to it but that's the basic idea. One could argue that the following is also true of low rates, but again - if I had more time to write and to code. The pain inflicted on individuals, is offset by the fact that it's easier for businesses to get loans (big and small - both), which stimulates the economy and stimulates employment. Ever wondered about the dual-mandate of the Fed? That was the (ultra-short) explanation - they are interconnected. But enough Economics 101... you know all this already!
The problem is that none of the above really works with negative rates... it produces exactly the opposite effect.
On a sidenote, there's also a bit - and I do mean a bit, as in very, little, tiny piece - of good news. The world's economy isn't looking more fragile by the day in spite of coordinated efforts of central banks but in spite of it! Personally, I find that quite remarkable. Central bankers have caused recessions in good times, let alone in times like these (a trade war with China, systemic problems of all kinds in the EU, which nobody discusses anymore because they're so 'démodé' (out of fashion, for all the French challanged)
Put simply, the issue with negative interest rates is that, as a direct result, nobody wants any money in the first place. If that isn't a recipe for disaster I don't know what is. In Europe and Switzerland financial institutions have been doing everything in their power to unload money - and charge the account owners even more than usual. Unfortunately they're not unloading it to you and me. Their reasoning is simple but sound: the less money we have on the balance sheet, the less it'll cost us. Private individuals don't have that luxury, they just see their balance sheets shrink every month (and people who are bleeding money generally don't go on shopping sprees). Businesses are somewhere in the middle, but if you can postpone projects and investments requiring capital you'll probably do so.
The inevitable result of this situation should be obvious to anyone smart enough to attend the (mandatory) public schools. If banks are unwilling to 'touch' money, they won't be lending it and, if they were lending it there would be no one wanting a loan. What you end up with is stagflation... if you're lucky!
On a sidenote concerning Switzerland: speaking from personal experience, that little country punches way above its weight when it comes to the daftness of its politicians and central bank. The country is going downhill faster than you can read this, but politicians - and the average Swiss who has never had an independent thought in his life - have convinced themselves that they are doing great. It wouldn't be worth mentioning if not for the fact that people in other countries have a fairy-tale conception of that country. It may take a while but mark my words when I say that Switzerland is in free fall (and the pilot is sleeping soundly). Point in case: on another short-sighted decision, the incredibly smart Mr. Jordan of the Swiss central bank decided to peg the exchange rate of the Swiss Franc to the Euro (by printing money). Last time I checked currency manipulation was illegal. It really stretches belief that, smack in the middle of western Europe, we have a country who is openly and officially manipulating its currency and for some reason that's OK with everyone. Obviously, he followed the orders of the exporter-lobby, not realizing - or not caring - that his actions are hurting every single citizen. Worse: he doesn't seem to realize the tremendous value of calling a reserve-currency your own (especially for a small, isnignificant, country like Switzerland). Jordan alone has done more harm to Switzerland than his (sleazy) predecessors combined. Could someone please arrest him?
Back to the topic at hand: what we - in Western society - should really be asking ourselves is: how is it possible that we pay those people (central bankers, lets leave politics and bureaucracy for a separate rant) a lot of our money - and invest them with a lot of power - when all they do is taking utterly hare-brained decisions (such as negative interest rates) which directly (the shrinking account balance) and indirectly (the economy going downhill) hurt our well-being? We should be taking to the streets, asking for their resignation... but instead "we" bury our heads in the sand, pretending that it's none of our concern. Every last one of the current central bankers in Europe (and beyond if you're in a critical mood) should have been fired ages ago - without a golden parachute! The fact that President Trump has been calling for negative interest rates in the US is worrying to say the least. In his defense: he isn't a banker (or economist). As for Jerome Powell: I wish we had a Powell in Europe... but that's setting the bar really low!
I just wish people, especially bankers - made an effort to think beyond the reach of their noses, because that's all you need. Let's be honest: economic policy ain't rocket science and while everyone makes mistakes, a lot of people (not only the bankers and politicians) are beyond hope. There's a lot to complain about the state of politics and society in the West (and especially Europe) but demanding that those in charge realize how damaging their policies are (negative interest rates aren't the only problem - just the most dangerous) shouldn't be too much to ask. If you're conspiracy-minded, you have to wonder if there's a hidden agenda to provoke a massive, worldwide, recession through economic policy. Alas, I'm afraid it's just plain stupidity! People like Draghi and Jordan are unable to see the big picture.
Riddle me this: if people (sensu lato) are penalized for having money and nobody wants more money than he needs, how in the world is this - going to stimulate the economy? The Gods Know... Stagflation is precisely what's happening (and has been for a while) in Italy, Spain, etc. At this rate, the European Union will soon be a footnote in history books.
The kind of Quantitative Easing that is happening in Europe is equally idiotic. If you inject money into an economy which is being penalized for owning money you're just accelerating the decline. I'd ask "WTF are they thinking" but the problem is: not enough. The result of these combined measures will, very likely, be a crisis like no one alive has seen before (at least for Europe - how much the US is affected is hard to say, suffice to say it will be too.) The great recession will not be great for long.
European politicians and their banker-friends remind me of a blind and deaf man who talks a lot, and very loudly, about what he has seen and heard! The Chinese on the other hand are, and always have been shrewd opportunists - which is why I support this, very dangerous (for the economy) attempt at taming them through a Trade War. Unfortunately it couldn't come at a less opportune time.
Finally, it seems, some sanity is arriving: as I was writing the draft of this post, some (at least that much) economists were voicing concerns about negative interest rates. Whether those concerns were the same as mine, I honestly don't know. All I know is this: if banks don't want to touch money (which is a fact) - and businesses neither, (or as little as possible) and private individuals (consumers) are punished for having money in their accounts - getting poorer every month - the economy is sure to go downhill.
This kind of economic policy creates an, inevitable, vicious circle. Dimwits are ruining the economy, and that means you and me! It is time we take back our rights, our governments, our democracies and our economies. The only way to do this, is by (loudly) voicing our discontent. Trust me, if enough people speal out, higher ups will have to take notice. As long as I'm a lonely voice, this madness - and the destruction of wealth that comes with it - will continue.
Expect the worst and hope for the best. Good Luck!