Don't let a Good Crisis Go To Waste?
Not only are they moving down the path of negative interest rates, but they don’t work.
And when they don't work, it seems like their immediate rationale is, “maybe we didn't make interest rates negative enough!”
To anyone watching the video above, this may seem insane, and it would raise the question, are we going towards a possible economic collapse as a result?
Why would any bank issue a loan if it would ultimately become an expense for them?
And is a subsistence economy even a possible scenario worth considering?
How do negative interest rates play a role in the money supply expansion and contraction of credit?
Why do central banks continue to pursue these failed policies?
Well, some experts such as Richard Werner, have suggested the central banks are intentionally failing.
While others, like Jeff Snider, have suggested the central banks are just simply incompetent.
In this negative interest rates video I discuss the following:
1. How negative interest rates affect the banking system leading to a collapse in the money supply.
2. How negative interest rates could affect the REPO MARKET leading to an economic collapse.
3. Are negative interest rates a result of central bank incompetence and stubbornness, or Is it all part of a master plan?
Regardless of the reason for negative interest rates, the one thing we know definitively is they are incredibly destructive.
Keep an open mind while watching this video. It might seem far fetched but realize this. It's not the first time economies have been rigged to fail and it won't be the last.
Negative interest rates. Are they part of a plan to create an intentional economic collapse?
Let's go over the money supply, credit creation contraction, and the economy.
Our simple real economy in the middle of the whiteboard. On the right-hand side, we have the farmer that produces cows, corn, cotton.
They produce so much stuff it allows other people in the economy to do things like being a bankster, a car salesman, and a construction worker.
The bank issues credit so people can buy homes and cars. If they issue less credit or no credit at all, most likely the construction worker, car salesman, and bankster all lose their jobs.
One person's spending is another's income.
So if they all lose their jobs, they're going to be spending less on cows, corn, cotton, means less income for the farmers.
To be clear, the farmers still have a source of income because they produce stuff that they trade amongst one another.
But in this economy, if credit goes to zero, there'd be a lot less income. The entire economy would move to a subsistence type of economy where everyone had to be a farmer. In other words, an economic collapse.
And there's this guy in the upper right-hand corner that's holding a sign saying “I love the keto diet and gold”.
Well, of course, that can be none other than Peter Schiff himself.
He's saying, “Wait, George, wait. I watched your video and you forgot a couple of key points.”
So I'm going to make sure that I'm extremely thorough in this video just for Peter Schiff himself.
So, first of all, in our current economy, it's very hard for prices to go down because of the minimum wage, a lot of different reasons. But if prices can't go down to create demand, there's a lot faster supply destruction.
And of course, the supply gives us the ability to consume. So if there's less supply happening, there's less consumption and less income.
So just to reiterate in our current economy, if we have a lot less credit, we have less production, less consumption income that leads us to an economic collapse.
And to make things really easy to understand, let's go for a quick thought experiment.
Let's say our current economy has 70 trillion worth of debt, 20 trillion worth of money supply. If we dropped the money supply down to $1,000, what would happen?
Of course, we would have an economic crisis. We'd go right back to a subsistence type of economy.
And I know I'm taking it to an extreme, but you can see how this would play out to a certain degree.
Even if the money supply went from 20 trillion down to 15 trillion, and we can see this playing out in Ray Dalio's charts that we've used in several videos lately of the longterm debt cycle.
At the end of the 100-year cycle, the debt goes down, so does the economy.
Also in Chris Cole's paper about The Dragon Portfolio. He shows at the end of this debt cycle, when a HAWK cycle comes in, especially if it's a deflationary deleveraging, it's extremely difficult on the economy, just like the 1930s.
How do negative interest rates play a role in the money supply, expansion, and contraction of credit?
We have a normal bank here. Their balance sheet on the asset side, they have loans, liabilities, deposits.
Well, let's say they're paying you 1% to park your money at the bank. That is a liability for them. They're paying you 1%.
Well, they use those deposits as reserves to lend out money where they're making 2%.
They're pocketing the spread, just basically borrowing a short lending loan. We all know how it works.
Now let's say the Federal Reserve drops the Fed Funds Rate to negative 5%. So the banks have to pay the Fed 5% for the Fed to hold their reserve. So they're losing money there.
They're also losing money if they issue loans at a negative interest rate.
What happens to the liability side of their balance sheet?
Generally, this is where they'd also have to pay customers to park their money. So they're losing money with the Fed. They're losing money on the loans and they'd be losing money with their depositors.
Obviously this business model doesn't work very long. But even if they stopped paying depositors, they took their rates down to zero, they still go bust.
They would have to charge their depositors more than they're paying people to borrow money from them.
And I know this gets crazy, but let's think this through.
So the depositors pay the bank 3% to hold their money. The bank makes a loan at a negative 2%, meaning the bank pays the borrower 2% to take money from them.
So the bank still makes the 1% spread. The difference is the balance sheet or the source of their income is completely switched.
In the first case, the bank makes income from loans and their expenses are deposits. In the second case, the bank's expenses are loans and their income deposit.
So if we think this through, why would any bank issue a loan if that was an expense for them?
We'd have fewer loans, which means less credit and debt, less credit, and debt means a reduction in the money supply.
What happens if the money supply contracts?
We have an economic collapse.
In other words, negative interest rates, inevitably over time will lead to an economic collapse.
Negative repo rates
This is where you really need to put your thinking cap on. We'll go very slowly. Trust me at the end of this step, you'll understand everything.
To start, repo is the backbone of the entire dollar funding market. It provides all the liquidity. It's the plumbing of the entire financial system. So if there's no repo, there's no economy.
So let's go over the basics. Day one entity A gives B treasuries as collateral. B gives A the money or the cash it needs. So A is the borrower, B is the lender.
On day two, B gives the treasuries or the collateral back to A, and A gives B more money than they borrowed. So principal plus interest. But if we have negative interest rates, look at what happens.
First and foremost, why on earth would B lend A the money in the first place if they actually had to pay to lend them money?
But let's just say the transaction went through. On day two, why would B give the treasuries back?
Think about that.
So let's just say that they get treasuries that are valued at a million dollars and they lend bank A or entity A, a million dollars in the first place.
And to swap the transaction, they've got to give back the treasuries that are worth a million dollars and get back, let's say 900,000. It doesn't even make sense.
Entity B would just keep the treasuries and sell them on the open market, but it gets even more bizarre.
Let's go to the right. And we have investor Ian. He is holding onto some treasuries, pristine collateral in the repo market and bank A needs treasuries because they sold treasury's short meaning they sold them into the market. Therefore, they have to borrow the treasuries to sell.
Stay with me on this one. I know it gets very bizarre, but just to reiterate. Investor Ian has treasuries that bank A needs because bank A has to sell them into the market.
So they go to investor Ian and say, “Listen Ian. We really need a favor. If you give us those treasuries, we'll let you borrow money at 2%.”
So of course, Ian says, “What are you talking about? Why on earth would I pay you for money that I don't even need for this awesome piece of collateral I have right here?”
But Ian starts to think about it.
And he says, “Wait a minute. I know those guys over at bank B and they really need money.
And in fact, they're willing to pay 3% for money, even more than the 2%, because they don't have pristine collateral. They have garbage, toxic sludge on their balance sheet, but they still need the cash. They need liquidity.
So if I give my treasuries to bank A and they let me borrow money at 2%, I can go ahead and lend the money to bank B at 3% and pocket the spread.”
You see how this adds additional liquidity to the repo market that wouldn't have been there otherwise.
If it was just bank A dealing with bank B, there would have been no deal because bank A needed treasuries, and bank B only had toxic sludge.
The main takeaway right here, as you have to understand in the repo market, it's not just entities needing to borrow money. It's also entities needing to borrow collateral.
Now let's insert negative interest rates
Instead of the bank allowing Ian to borrow money at 2%, they're now paying him 2% to borrow the money so they can get the treasuries they need to sell into the market.
Well, at this point, if he's making 2% on his money, why on earth would he re-lend the money, especially if he's lending it at a negative interest rate?
So again, let's think this through.
He's being paid 2% to borrow money.
So why would he pay someone, let's say 1% to borrow the same money when he only gets 1% net?
He wouldn't lend the other person the money at a negative 1%. He would just keep the money and give it back at the end of the repo transaction and pocket the entire 2%.
So again, this goes back to a situation where if you throw in negative interest rates, it's going to dramatically reduce the liquidity and the functionality of the repo market.
Oh, but wait, there is more.
It gets even more complicated and more bizarre than this.
If you need a refresher course on the repo market, I've got tons of videos. I'll put links in the description below, but taking it to the next level of insanity. And this is how the repo market works.
In fact, I'm just scratching the tip of the iceberg when it comes to complexity, but the next situation.
Investor Ian right here, but he doesn't have any collateral. He has no treasuries, but let's say he goes into a transaction with bank A that thinks he has the treasuries and their deal is a repo transaction from Monday to Friday.
And bank A is allowing investor Ian to borrow the money for the treasuries at 0%.
Well, what happens if Ian doesn't go through with the deal?
It's called a repo fail.
The charge or the fee to Ian would typically be the interest rate he would have paid for the money.
Well, if the interest rate is zero, let's not even get the negative yet, but if it's zero, there is no penalty for the fail.
So what investor Ian can do is not take delivery of the money or deliver the treasuries on Monday.
He can execute a fail, but he's got the contract that lasts all the way until Friday.
So let's say on Wednesday interest rates go from 0% up to 1%.
Well, now what Ian can do is execute the contract. So he borrows the money at 0% on Wednesday, gives bank B the money he borrowed from bank A.
He takes the treasuries from bank B and gives them to bank A as he pockets the spread on the difference with the money he borrowed at 0% and the money he lent at 1%.
And just think about how that would work with negative interest rates. The bottom line is it wouldn't work at all.
You can see that throwing negative interest rates into the repo market would be the exact same as taking all of the oil out of your car engine and replacing it with gravel.
It just wouldn't work.
Therefore, it would lead to a gradual repo market crash and an economic collapse.
Step number three, creative destruction
We know that negative interest rates can impact the banking system, so they lend less. This could create a reduction in the money supply and bring on economic collapse.
We also know that negative interest rates could freeze up the repo market and the repo market is the plumbing of the entire system.
If the repo market doesn't work, the whole house of cards comes crashing down. But we still need to answer the question are negative interest rates part of an actual plan to create an economic collapse?
Is this some form of perverse creative destruction?
To put the pieces of the puzzle together, let's start with a chart of the ECB and Japan going back to 2010, all the way to 2019.
On the left, we have a negative 1% interest rate, 0% interest rate in the middle, 1% on the top.
And of course, the ECB took their interest rates negative, their overnight rate. They took it negative 2014. The Bank of Japan took their rates negative around 2016. And you can see about the same time the European Central Bank took their rates even further negative.
Why on earth would they do this?
And before we go any further, I want to point out that just last week, the futures market, the Fed funds futures went negative.
That's not to say that the Fed funds rate currently is negative.
That is to say that the market is predicting that eventually, the Fed will take rates negative, just like the ECB and the BOJ, the Bank of Japan.
But look at the results this has produced in Europe and Japan. It's obvious that these policies don't work.
They haven't created inflation. They haven't created growth.
Anyone, a third-grader could look at this and tell, going back to 2014, that the negative interest rates didn't achieve their objectives.
So why on earth would these PhD economists continue to do the same thing over and over and over again and expect different results?
Jeff Snider comes to the conclusion that they're all completely incompetent, but Richard Werner comes to a different conclusion altogether.
It's not that they're incompetent, it's that the negative interest rates are an intentional destruction tool to create a new type of economy or centralize even more power around the central banks.
Let's go right to a clip of a documentary based on his book, The Princes of Yen.
Mr. [Fukei 00:17:48] also his mentor Mr. [Meeno 00:17:50] and his mentor, Mr. [Mikawa 00:17:52], and you've guessed it. These are some of The Princes Of The Yen that the book is all about. They have said on the record in the '80s, and also throughout the '90s, what is the goal of monetary policy? It is to change the economic structure. Now, how do you do that? Well, you need a crisis and that's really what they've done. They've raised the prices to change the economic-
Richard, we're just out of time. I have to cut you off. Thank you so much and we apologize.
And if you haven't seen that documentary on YouTube, I cannot suggest it enough!
Watch Princes Of The Yen By Richard Werner
But moving on what Werner believes is central banks in the past have created debt bubbles to destroy entire economies and they do so because they want to restructure or consolidate power.
He gives an example of the United States in the 1920s where the central banks and the banking system itself created these huge debt bubbles that brought us to the 1930s, where a lot more government control came into American society.
His hypothesis is the American public would have never ever agreed to having this much government control in their society if it wasn't for the collapse that the expansion of credit in the 1920s created.
Werner believes the exact same thing happened in the 1980s in Japan, 1990s Asia, and is happening now in all the developed economies.
They're trying to create these debt bubbles so when they burst and the recession comes on, or the depression, the powers that be can consolidate the power or they can change the country or the entire economy in a manner that they see fit.
So are negative interest rates a plan to bring on an economic collapse?
Well, that I don't know definitively. I don't think anyone does. But one thing I do know is that central banks have proven over and over and over again, they cannot create a better economy.
The only thing they can do is destroy an existing economy.