(CORY DOCTOROW) The world’s central banks, freaked out about huge leverage by financial institutions and borrowers and unwilling to engage in economic stimulus themselves, have been moving interest rates lower and lower, until now, many banks are offering negative interest rates, meaning that buying $100 worth of treasury bills today will return $99 in cash tomorrow — hoping that this will incentivize banks to issue enough loans to make up for politically impossible governmental fiscal stimulus.
Retail banks, who normally transfer much of their reserves into t-bills, are unwilling to lose money in the deal, and so they’re pondering the alternative: just literally piling up mountains of cash in their vaults, where at least they won’t have to pay for the privilege of loaning it to a government.
The logistics of storing millions in cash are formidable, from security and insurance to the fact that the European Central Bank has discontinued the €500 note, making the resulting piles of cash much, much bigger.
This isn’t just a story about the absurdity of vaults full of cash, though: record low interest rates are gutting the pensions of savers who thought they had enough for comfortable annuities but are discovering that interest rates are so low that annuities won’t even provide subsistence. This creates impossible dilemmas, like, “Do I just start living on my capital and hope I die before it runs out?” or “Do I rely on my working age children, who are themselves trying to save for sky-high property down payments and support their kids, to support me, too?”
Economists are way way late in the game acknowledging the need for more demand by calling for more fiscal spending.
But central banks ex the Fed act as if they can force business to take up the slack, as if banks can noodle them full of loans like geese and they will be forced to invest and hire as a result.
Second is that banks have to be leery of making any long-term loans now. Even though no end of ZIRP and negative interest rates is in sight, they know if the monetary authorities ever are in a position to increase interest rates, they will show losses on intermediate and long-term assets unless they have adjustable interest rates. And the losses will be biggest on the riskier loans, since credit spreads typically widen in a tightening cycle.
So it should come as no surprise that banks are starting to try to find ways to circumvent the central bankers’ nutty scheme. As we reported in March, some small Barvarian banks said earlier this year they were looking into keeping cash on premises rater than pay for parking deposits with the Bundesbank. Yesterday, Commerzbank saber-rattled that it might follow suit. . Japanese banks are also trying to slip the leash. From the Financial Times: