NIRP: (N)egative (I)nterest (R)ate (P)olicy!

• (N)egative (I)nterest (R)ate (P)olicy! 
  by Bill Holter, http://blog.milesfranklin.com/ 
  Negative interest rate policy (NIRP) has arrived to the U.S. for large deposits at commercial banks.  This is something we have already seen in Europe over the last few months and a sign (at least to me) that stress is again building.  As of January 1st, bank capital will be classified differently making some large and very mobile deposits at large banks a potential liability and thus not profitable.  This is being done because of the “mobility” of these deposits, the worry is the potential speed of flight capital if (when) it begins to run.
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  Let me explain what I mean by “stress” and you can decide which one fits the best if not a combination of “all of the above”.  First, the real economies of the Western world are again slowing and in many cases declining again.  Remember, this is happening even though fiscally, deficits are being run everywhere and monetarily, loose policy runs rampant.  As the real economy continues to slow, “more power” is being screamed from the helm to the engine room.  “More,” as in more debt, more liquidity and more of what created the problem in the first place.  This explanation is fairly obvious.
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  Two other and less obvious explanations for NIRP are “velocity” and “making preparations.”  Looking at velocity, it continues downward with no signs whatsoever of reversing.  Money is being printed by the trillions but it’s not making it onto the streets.  The money is piling up at banks who are hoarding the cash and making a “risk free” (really?) return by carrying the deposits at central banks.  This works well for the banks and the central banks themselves …but not so much for the real economy as actual “flowing” money feels tight and scarce.  As far as the real economy is concerned, credit policy is anything but loose.
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  The other aspect is that many large deposits (over the FDIC limits) are very “mobile”.  By this I mean they can move quickly.  So quickly in fact that back in 2008 there were “electronic” and overnight bank runs which no one saw …except the banks.  Banks “borrow low and lend high,” this is how they earn profits.  They traditionally borrowed via deposits and then turned around and lent these deposits out at a higher rate to earn a spread…banking 101 if you will.  But 2008 exposed a flaw in this model, as soon as even the whiff of a rumor of weakness at a bank would arise, this “hot money” would move to safer ground.  Whether this safer ground was another bank or even Treasury securities made no difference, the result was a bank(s) being left unfunded.  Their capital ran away and they were left with too many loans and assets (impaired?) carried by not enough capital.
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