What you should know. The short summary is this: The Globalized Economic charade is an absolute failure. For the scheme to work each of the following targets would have to be met:
(1) An annual rate of inflation of no less than 7.5 percent.
(2) Interest rates under 4.5 percent.
(3) Wage growth no less than the rate of inflation.
(4) Static growth in government spending (less than 2.5 percent).
(5) Positive earnings in corporate equities and bank stocks with crude prices no less than $60 per bbl.
All of these would have to occur simultaneously and yet none ever have. The 2007-08 collapse would be the most conspicuous sign, thus far, of economic realities proving the schemes systemic flaws. What was Washington’s response? They didn’t scrap the plan and move in opposition to the scheme and its backers, no, the Government unleashed the Fed who then proceeded to injected an estimate 15 Trillion Dollars (at the very minimum) into the global banking system believing, apparently, that more stupidity would make stupid seem enlightened.
The result was predictable; an economic and monetary system that is now even further out of control. Instead of taking these funds and investing into expanding domestic production, the Banks invested the free money into global equities, bonds, commodities and various derivatives and now, with the implosion of the markets these sacred cows (Banks) are now teetering on yet another collapse.
For the first time in U.S. economic history this country is now importing deflation (one of the few, remaining, economic principals the system has not yet figured out how to manipulate) and for one simple reason: demand is falling at such an accelerating rate the money that flows back to the off-shore supply source, is evaporating and to overcome this condition over-supply is chasing what little demand-capacity (the ability to fund a known “demand”) that remains driving prices lower (deflation).
It’s important to remember that conditions affecting demand and over-supply occur in every market segment whether it be commodities, televisions, raw materials, equities, bonds or derivatives. Any form given value is subject to being diminished due to loss of support in underlying forces pressing its value upward and we know that when market forces disappear the search for equilibrium takes over and in these circumstances they are always downward.
Now then, on the subject of Negative Interest Rates. In simplest terms to expand money supply, with the hope of stimulating the economy, the Fed trends toward reducing Interest Rates; to slow the economy, conversely, Rates are pushed upward; this isn’t working.
Negative Interest Rates are a concept that is a bit hard for most to get their hands around. You may be thinking something along the lines that the Fed is going to pay you for borrowing money; not so. The concept of Negative Interest Rates is more of a Central Banking tool used for influencing what the Banking System does. For banks that hold deposits with the Fed they would then pay interest on their deposits for doing so and so, in a sense, you could say that the Fed is pressing the Banking System to push money out into the Market. To charge Depositors for holding funds on-deposit with a bank is not only counter-intuitive it would force a rapid withdrawal of funds from the Banking System; not a good idea.
Now, there is an issue with the Fed actually doing this Negative Interest scheme primarily because it is likely that the idea was never considered in 1913 when the Feds authorizing legislation was forced upon the American people and thus would require Congressional approval. In an election year this would be difficult to achieve.
Here’s what’s really happening as well as the consequent risks: The Fed understands that the global banking system, and by extension the global markets/economy, is drowning in U.S. Dollar denominated paper and this too is believed to be a key force in the emerging and rapidly accelerating deflationary spiral giving the appearance of a stagnant global economy. Much as inflation masks as economic growth, deflation also masks as economic collapse.
For the Banks there is a particularly potent risk that is not readily apparent; much of their asset base is tied up in the Markets in various forms of speculative paper that is, itself, devaluing right along with the Domestic and Global Markets. As those markets devalue so goes that asset-base of the Banks and so, if the Fed proceeds with the Negative Interest Rate approach it is highly predictable that the outcome will force rabid insolvency throughout the Banking/Financial System.
The difference, and I’m not aware of an historical event to match, in the current scheme is that this isn’t a failure of an economic cycle or even a change or non-response to an unknown condition, it is far more organic. It is an inevitable response to an economic system that, by design, is incapable of yielding to a condition or demand being imposed upon it for which it was never intended or even designed to address.
The consequence of all this is a severe element of uncertainty that is best, in metaphorical terms, described as following: Something, we know not what, is certain to occur, we know not when, with an effect we have no way of calculating however, we are absolutely certain that it will. What to do? Here’s a start:
(1) Do not let the Fed experiment with Negative Interest Rates.
(2) Force the banks back into the function of banking and out of market speculation and if they fail, let them fail, we must allow the system to perfect itself by allowing it to fail. The U.S. Treasury can easily restore a National Banking System, Savings & Loans can re-emerge and States Treasuries could enter into the banking markets and use this model as a tool to cut their own borrowing costs.
(3) Limit money supply to annual GDP levels plus 10 percent.
(4) Insist on a Constitutional Amendment prohibiting Pay-for-Play Lobbying and restrict campaign financing to voting-age contributions, by individuals only, limited to $100 per household and impose term limits to a maximum of two terms.
It is rarely the case that the Failure of a System is due to its design; it is more often the case that a System fails due to it not being operated in accordance with the intentions of its design.
Curtis C. Greco, Founder