Care to make a guess about what’s caused the “tipping point” for gold? Is it the margin squeeze on banks created by negative interest rates? Banks are a bad business to be in these days. If they hold excess reserves on deposit at a central bank overnight, they have to pay interest (at least in Japan, Europe and Switzerland). That wouldn’t be a problem if they simply passed the charge on to depositors in the form of negative rates on your savings.
So why haven’t they?
It’s becoming clear to policy makers that negative rates actually promote the hoarding of physical cash. If you have to pay the bank to store your money, you may as well keep it at home. That way you’re only losing purchasing power through whatever the prevailing rate of inflation.
If the banks passed on negative rates to depositors it could lead to capital flight from the banks. They’d have less money to lend and less capital to hold in reserve. Credit would get tighter, defeating the purpose of negative rates in the first place.
What’s more, negative rates – from the ivory tower of the central banker – assume that borrowers are just waiting to borrow money for some worthy project, provided the cost of credit is cheaper. But surely that’s not the case with rates as low as they already are.
Banks are holding back for an obvious reason: there are very few decent projects to lend to. If they want to expand lending, they have to take on more risk. And more risk puts the whole balance sheet at risk.
Is it all sounding familiar? Central banks intend one thing. They cause another – more lending, more risk, bigger losses and system instability. The move in gold shouldn’t surprise anyone now.
But it does make the next chapter in our story more interesting and more dangerous. If withdrawing your cash from the system threatens the banks, then cash itself must be attacked. That’s what you’re seeing from monetary officials all over the world, and their cronies in the media who shill for them.
It may happen sooner than you think
The game is afoot in the eurozone to abolish the €500 note. This from MarketWatch:
- The likelihood that the valuable bill could soon be struck out of the euro family may be rising after Benoît Coeuré, a member of the European Central Bank’s executive board, told French daily Le Parisien that arguments for keeping the €500 bill are becoming “less and less convincing.” “We are actively considering the question and will take a decision shortly,” he said in the interview. “The competent authorities increasingly suspect that they are being used for illegal purposes, an argument that we can no longer ignore given the importance of the fight against money laundering and terrorist financing.” The issue of big notes has been discussed for years, and some bankers and economists have called for a ban on the €500 note (worth about $567) in the name of fighting organized crime and terrorism.
Ah yes. The “competent authorities”. I assume he’s referring to the police and not, say, the European Central Bank itself.
It’s hard to believe it’s a coincidence that the push to ban big notes – the first step in banning all of them or creating digital legal tender that doesn’t have a negative rate – comes just as the banking sector finds itself squeezed and the global debt bubble looks like popping. Keep your head down and find something solid to put in your pocket.
Category: Central Banks