ECB Craziness – This Won’t End Well

If you had asked economists ten years ago what 2016 would be like, it’s unlikely any would have guessed what a crazy, mixed-up financial world we find ourselves in today. Back then everyone still thought an “energy crisis” would involve an oil shortage, with the U.S. sending troops to some desolate desert halfway around the world just to secure our oil supply. Nobody foresaw that our problem today would be too much oil; there’s so much we’re running out of places to store it.

In 2006 the big economic fear was runaway inflation, remember that? The fear was that hyperinflation was going to make a loaf of bread cost fifty dollars. With our central bank, the Fed, adding trillions to its balance sheet, the dollar would become worthless. What that gloomy scenario didn’t account for was other central banks around the world pumping out even more cash and the dollar emerging as one of the strongest currencies on the planet. Inflation today is so low it barely registers. Instead we’re facing a problem that is in many ways worse, and that’s deflation. Instead of an environment of runaway prices, we’re living in a financial world where prices for goods and services, including basic raw materials, are collapsing, causing economies worldwide to shrink and GDPs to contract. Falling commodity prices are pushing small, export-dependent countries to the brink of solvency. Central banks are, literally, doing everything they can to drive inflation in order to combat falling prices. It’s truly bizarre.

Enter the ECB

It’s with that surreal backdrop that we have an announcement from the European Central Bank (ECB ) to dump even more money into the European economy in an effort to devalue its own currency, the euro, and get inflation going. Dumping cash into the economy hasn’t really worked for the ECB, so its solution is to do even more of what’s not working and hope for a better result. What could go wrong?

The Nature of Cash Savings

We should take a moment to point out here that it doesn’t cost central banks anything to hold cash these days. Banks are not throwing up new warehouses to store bundled bricks of cash being brought in by tractor trailers. It’s all just electronic blips and it costs the central bank nothing to hold onto it. But those electronic blips sitting in computer memory somewhere don’t do anything for the economy, so the ECB had to find a way to get those blips moving. Thus the directors of the ECB have decided to charge other banks more for holding those blips, and doing it in the form of negative interest rates.

If negative interest rates sound completely crazy to you, that’s because they are. So that means, as expected, the ECB decided to go all in and implement a steeper negative interest rate policy that charges banks more as they stuff more and more blips into their computers. It’s all quite insane and the only questions that we’re really facing today is just how far into the crazy the ECB will go and how long will they keep it up?

Why it’s Not Working

The idea is to get banks to lend out the money, instead of storing it (the blips, that is) in the central bank. Better to lend it out than pay the ECB to store it, right? That’s the theory—but it’s not working. Banks are losing money to negative interest rates and it turns out it’s handicapping their ability to lend money.

You Can’t Trust Your Wealth to this Madness

There was a time when any prudent investor kept up to thirty percent of his or her wealth in cash – just in case. But the insanity that’s going on in government banking systems today makes that standard obsolete. The concept of currency has become so abstracted that it’s not even paper anymore, just numbers on your computer screen. Your money is, literally, nothing.  As instability becomes the new norm, it makes increasing sense to convert some of that “nothing” into substance, and substantial protection.

If we’ve learned nothing else in the last decade, we’ve learned that the experts, and their guidance, can be astonishingly wrong.  Keeping a portion of your wealth, as well as investments you’ll be counting on for the future, in high quality liquid hard assets that are both bank- and expert-proof is more crucial now than ever.