June 27, 2012
It’s a sure sign fractional reserve banking is on the rocks. It looks like European Central Bank President Mario Draghi will cut ECB interest rates below zero.
In other words, instead of realizing a return by holding money in a bank – albeit at a miniscule 0.25% as the Fed currently does – the ECB will charge institutional customers to use their money.
But here’s the logic, according to Bloomberg:
If the deposit rate was cut to zero or lower, it would discourage banks from parking excess liquidity with the ECB overnight, potentially prompting them to lend the cash instead. Almost 800 billion euros ($1 trillion) is being deposited with the ECB each day.
On the other hand, a deposit rate cut could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.
In fact, the blood sucking vampire squid – otherwise known as Goldman Sachs – admits this scheme is nothing more than smoke and mirrors designed to boost short term confidence. “By demonstrating its willingness to play a part in sustaining the euro, the ECB may hope to boost confidence in the current fragile environment,” Goldman explains.
“Nothing like the smell of desperation in the morning,” remarks SilverDoctors.com.
Or something worse – a big flat red flag indicating that the bond market is dead in the water and the global economy is headed for uncharted territory.
Back in August of 2011, the usually prescient Zero Hedge made the following comment when the Bank of New York announced it would charge institutional clients to hold their money:
This is nothing short of outright terrorism to get everyone out of cash and into fiat-based ponzi products. Such as Short Term Bills. Indeed, as was reported earlier the 3 Month bill just hit zero. But you ain’t seen nothing yet. As Credit Suisse strategist Ira Jersey reports, courtesy of Bloomberg, “If this is true then we’re likely to see short-end interest rates actually go negative. By what degree depends on who else follows and how much money is involved.” Cue unpredictable consequences of a totally broken bond market. What happens next will likely make the market dislocations following Lehman like a breezy walk in the park.