Thursday, 6 November 2014

It begins: German bank charging NEGATIVE interest to its customers

Guest post by Simon Black

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", the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.

Case in point: the British government just announced that they would pay down some of their debt that they racked up nine decades ago.

In 1927, then Chancellor of the Exchequer Winston Churchill issued a series of bonds to consolidate and refinance much of the debt that Britain had racked up from World War I and before.

This debt is still outstanding to this day. And the British government is just starting to pay it down— about $350 million worth.

Think about it—$350 million was a lot of money in 1927. Thanks to decades of inflation, it's practically a rounding error on government balance sheets today.

This is why they're all so desperate to create inflation... and why they'll stop at nothing to make it happen. (It remains to be seen whether they'll be successful, but they are willing to go down swinging...)

What's even more extraordinary is how they're trying to convince everyone why inflation is necessary... and why negative rates are a good thing.

On the ECB's own website, 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."

20100202-simonSimon Black is is an international investor, entrepreneur, permanent traveller, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.
This post first appeared at his website Sovereign Man.

[Pic, Picasso’s cover for Don Quixote, from Wikipedia under Creative Commons licence]


  1. It will be interesting to see where the money goes - I can't imagine rich people will leave the money in the bank. Watch for the prices of art and old cars to go up.

  2. It isn't the first time that banks have paid negative interest rates.
    The best known would have been during the 1972 - 1978 period in Switzerland.
    People, not resident in Switzerland were so concerned with the instability of their own currencies, and the inflation in other countries that they were willing to accept the penalty in order to be able to hold their money in a "safe" currency. Some would have come out well ahead of the game.

  3. Alwyn above and others; ;
    There was an article in the paper the other day, that the Swiss will be voting [ binding referendum] on whether to reintroduce Gold as State currency, at 30% of assets, i think . My Grand parents lived in Scotland and then Timaru. When they died ,my father said to me , Jesus there was money hidden everywhere, they absolutely did not trust banks. He said not just under the mattress, it was everywhere, he said it was literally a treasure hunt. He was able to send myself and my brothers to University with money found under the floor boards . They were not rich, my Grandfather a fisherman.
    Quantitative easing
    Japan is apparently continuing with Quantitative Easing, and Europe, and maybe Britain. If a Government circulates new money like this what is its backing. where does that value come from. Is this literally printing money , and if so please let us not do it. Or is it as the famous peter quixote said. " you don't see nothing yet "

  4. Gold currency and Don Quixote :
    In the time of Miguel Cervantes 1547 to 1621 . Money was powerful, and debt was long lasting.
    Cervantes wrote about the man of la Mancha Cervantes, he was the writer of Don Quixote, or Don Quijote and to me is more interesting than Quixote himself. Spain was powerful, but ruled by King, the Catholic Church and the land wealthy.
    These were days when to owe another person or the State money was never forgiven till it was paid off.
    Sometimes from jail you would have to implore your relatives to help with the ransom, and often they did; and this happened to Cervantes himself ..
    We have to remember that just around the last corner was the inquisition.
    He [ Cervantes ] joined the Spanish navy to fight the Turks and was injured badly. He was captured and behaved exceptionally bravely. He was released by the Turks after his family paid a price, but not before he had become a thorn in the Turk’s side.He had a propensity, it is said, to being able to get on with Turk guards
    Cervantes had that strange Christian heroism about him which he invites on his subject Quixote, and which continues though to the Spanish civil War.
    The Republican on his horse to war, crying out ‘ long live death’ .
    After that he became a tax collector and very efficient. Mainly in Southern Spain [ as we know it now ] and Cordoba
    It was a lonely job because he had to investigate crops in storage, to determine taxes.
    He stayed in Inns where his fellow drinkers would have despised him
    In a time when the Spaniards had massive Gold currency he became a tax collector in Castilia and south to Cordoba. In those days you had to make the measure or you were in big trouble.
    Cervantes had difficulty with money all his life , he received offers of bribes and refused, and he was a patriot of Spain, as it was then. There are no known images of him. His women are interesting, but it is vague, and that is another story


  5. The US has effectively been running negative interest rates on Treasuries for years. US inflation is around 3%, Long Term Treasuries yielding <1%. That's 2% negative interest there.

    Of course, these policies should be treated with even more scorn than the "homeopathy for Ebola" nonsense.


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