Thursday, July 05, 2012

They Might Need To Rethink That Whole Peg-to-the-Euro Thing In Denmark

Well, you have to give them credit over there on the Continent. They keep finding new ways to start bank runs.
For Europe, the outlook is bleaker. The ECB cut its key rate to 0.75%, moving below 1% for the first time in its history, and lowered its deposit rate to zero. The hope might be that banks that have stashed €790.9 billion ($989 billion) with the ECB would now deploy it elsewhere. But ECB President Mario Draghi noted it couldn't affect banks' lack of risk appetite, ameliorate their lack of capital or boost demand for credit.

The ECB's move also triggered a cut in Denmark, since the krone is pegged to the euro, and that took Danish deposit rates to an unprecedented minus 0.2%. In the long term, negative interest rates may lead to problems with the functioning of the banking system, as it is more attractive to hold cash physically rather than leave it in the bank.


Tim Eisele said...

The thing that's really bugging me, and that I frankly don't know what to make of, is that the banks and governments are creating money out of nowhere,and have been for some time, which is the thing that is supposed to lead to massive inflation - and yet, somehow, it isn't.

What the *hell* is going on? What is *happening* to all that money they are creating? Is it just getting squirreled away by panicky bankers as fast as they handwave it into existence? Are people getting enough richer in China and India that their incomes are absorbing the cash as fast as it comes off of the presses? Something else? Does anybody actually *know* what's happening to all that cash?

And more importantly, when or if it is going to *stop* being mysteriously absorbed, leading to a sudden, sharp, massive glut of cash?

K T Cat said...

Tim, as I understand it, your first explanation is right on. The velocity of money is the rate at which a dollar changes hands in a transaction. Inflation is governed by the money supply times the velocity. If the money is printed and then held by banks because:

* they no longer meet their reserve requirements without it or

* everything they might invest in sucks or

* possible borrowers are hunkered down wondering what the government is going to do next

then the velocity of money is quite low.

Another explanation is that without all this printed money, we'd have deflation as there is much more out there to buy then anyone has money for. It's all a matter of serious debate out on the econoblogs.