Saturday, February 13, 2016

Don't Save Money

... is the message central banks have been sending to the public for quite some time as they cut interest rates more and more. It's gotten to the point that Swiss and Japanese central banks now have negative interest rates - you lose money by saving it.

Central bank rates only directly apply to commercial banks who store money there, but those rates are used as reference points for the rates you and I receive on our bank accounts. As the central banks ease, that is, lower interest rates, our deposits earn less and less.

This is deliberate. It's an attempt to force us to spend whatever money we have to pump up the economy. It also stands traditional standards of behavior on their heads. In the past, you wanted to save for a rainy day, invest in your future, postpone today's pleasures for tomorrow's security. Well screw all that, say the central banks, get out there and buy that jet ski!

This is a lot more fun then saving your money for the future. Trust us.
In essence, the central banks are joining the fight for instant gratification. Yes, sober, educated economists and bankers want us to party on like there's no tomorrow.

Thrift is out of style, man. At least until this whole thing blows up.

Note: This was something that popped into my head as I was reading about Deutsche Bank. That massive, German financial institution is getting its brains beaten out in a variety of ways and I'm trying to understand what's going on. Loans to energy companies are failing as the price of oil drops, but on top of that, there's some perverse squeeze on bank profits being caused by lower and lower central bank rates. I don't fully grasp it yet.


WC Varones said...

Yes. It's frightening that the central banks' only solution to the crisis they created is to make everyone eat the seedcorn.

As to your question about banks and interest rates, most banks tend to be "asset sensitive" as opposed to "liability sensitive," meaning their loans are more subject to interest rate changes than their deposits, so rising rates increase their net interest margins.

More discussion on that here.

tim eisele said...

I think a big part of the problem is that most of the banks have gotten badly burned in three big bubbles in just 15 years (the tech stock bubble, the housing loan bubble, and the just-burst China/commodities/energy bubble). The group of investors who have been successfully pumping the bubbles and bailing before they crash are now sitting on the huge piles of cash that they created, and are trying to decide what to do next. If they just sit back and spend the money, that will trigger the major inflation that we have been expecting for some time, which will devalue the rest of their holdings. So instead, they are casting around looking for another investment area to pump it into. Which will create a new bubble. Until they settle on a new part of the economy to destroy, everyone else is just waiting, because before investing they want to know if they are onto a sound long-term investment, or yet another roller coaster ride on the Bubble Express.

K T Cat said...

Thanks for the comments!

Tim, from what little I do understand, there's a mathematics at work here that goes beyond the actions of the banks. The zero and negative interest rates by the central banks are killing bank profit margins.