JP Morgan Manager Robert Michele - "People Have More Confidence in Gold than Bank Deposits"

JP Morgan Asset Manager Robert Michele was interviewed recently on CNBC. The topic was the strong move up being made by gold. Mr. Michele made a statement that may seem surprising at first. He says "people have more confidence in gold than bank deposits"  Below are some quotes from the article and then some added comments.
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"With the meltdown in stocks sending investors scurrying to safety in gold, JPMorgan Asset Management's Robert Michele said Thursday it's a matter of faith in the metal, or the lack thereof in other assets.

"Gold at $1,200 an ounce, what does that tell you?" he asked rhetorically in a CNBC "Squawk Box" interview. "It tells you that in a flight to quality and a safe haven, people have more confidence in gold than in bank deposits or paper money. I think things have gotten out of control."                . . . . . . .

Click here to read the full article or watch the interview

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My added comments: This article suggests that the reason for the move higher in gold is volatile markets and a lower US dollar. No doubt those are probably part of the reason. However, I would suggest that all the talk about eliminating cash and potential negative interest rates from some monetary officials is also a factor. 

This blog does not have an audience like a mainstream media publication has, but I do hear from people from all over the world. Also, in doing research for articles here I visit all kinds of sites where I read readers comments on various articles. I probably read hundreds of such comments per month. (As an example scroll down in this old article on gold and read the three comments posted. All three exhibit distrust in the current system). This article only had three comments, but I see hundreds of similar comments each month looking at various articles. I follow Jim Rickards twitter feed. Here is a recent comment by Jim about elites being disconnected from the real world (note the responses). This gives me some feel for how the average person is feeling along with emails I get and people we know in our circle of friends, etc.

In an earlier blog article I suggested that I think some monetary officials are out of touch with the intensity of distrust that is building up in the general public with the present system. It manifests itself more visibly in the US political campaign as we see very intense anger being expressed by those voting for both Donald Trump and Bernie Sanders. Even those voting for Ted Cruz, Marco Rubio, and Ben Carson are very unhappy and do not believe those running things care about their concerns or can be trusted to address them.

All I can do here is report what I see and observe. From all the feedback I get and see on various sites, it appears that many people simply have lost trust in the system and it won't take too much in terms of more economic problems to send them looking for ways to reduce exposure to the system. I can't blame them. We have monetary officials seriously talking about taking cash out of the system at the same time they talk about charging interest on money held in banks. People feel instinctively that something has to be wrong for these kinds of ideas to be floated by monetary officials. Whether its true or not, people feel that its an admission that the policies that have been implemented (zero rates, negative rates, QE, etc) are starting to fail and officials are desperate. 

If they feel they have to shut off access to cash (people think getting rid of $100 bills is just the first step) and try to force people to spend their savings by using negative interest rates, there is a feeling that this signals a lack of confidence by monetary officials in their own policies. As we have mentioned here on the blog, confidence is critical to any monetary system. When too many people lose confidence they start looking for a way out. It appears to me that part of the recent demand for gold may be due to this kind of feeling (Jim Rickards agrees in the article linked just below). 

This suggests to me that if we were to actually get a real new major crisis worse than 2008 (like Jim Rickards has forecasted), we are likely to see demand for both gold and silver explode higher. The supply of these metals cannot possibly meet demand like that. Right now precious metals make up less than 3% of all investment. If demand increased so that precious metals made up 5% to 10% it would suck all the available metal on the earth up very quickly. The easy way  to see if this is happening is to simply watch the price. If gold starts to move sharply higher later this year (and silver follows), you have your answer and it means we need to watch events very closely. If gold were to drop sharply in price it is likely telling us a major deflation event is underway.
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Added note: Here is recent related article on gold by Jim Rickards. Here is quote from this article:

"For the first time since 2008, it looks like central banks are losing control of the global financial system. Gold does not have a central bank. Gold always inspires confidence because it is scarce, tested by time and has no credit risk."


Additional Added note: We have this recent tweet (see screen print below) from Willem Middelkoop on gold.

 

willem middelkoop‏@wmiddelkoop

Fact: Chinese/Russian central banks each bought over 20 tons in a month. US investors bought more than 40 tons in just two working days. #GLD

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Note to Readers-Friday March 4th

Friday March 4th we will have an article covering a recent discussion (captured on video) on the potential for the SDR to be used as the new global reserve currency for the world. The discussion included both a current IMF official who works with SDRs right now and the former head of the SDR Division at the IMF (Dr. Warren Coats) who we have contract with by email. Dr. Coats even provided a great quote for our article that readers will want to see.

In the discussion it is clear that these officials do not see an imminent crisis coming at this time even though they do point out that the conditions for one in the future do exist. 

Please watch for it and let others know about it as you will not get this kind of direct information from official experts like this very often. It will answer many questions I see from readers and in other discussion forums all over the world about the potential for the SDR as a replacement global reserve currency for the US dollar. It directly addresses the two big questions we follow here on this blog:

1) Will we get another major financial crisis worse than 2008?

2) If we do, will the SDR used at the IMF be used in a new way to address the crisis?

Jim Rickards work on this is invaluable (they mention his book in the video) and now we have direct information on both these important questions from both a current and former IMF official on what we can reasonably expect.

Christine Lagarde Calls for International Tax System That "Works for Everybody"

In a recent speech at the Arab Fiscal Forum, IMF Managing Director Christine Lagarde called for an international tax system that "works for everybody." She goes into some detail as to how she thinks such a system should work. Below are some quotes from the speech and then a few added comments.
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"Today, I would like to take Adam Smith into our modern time and talk about two ingredients of taxation for successful 21^st-century economies.

The first one is the ability of countries to generate robust government revenue. This is, of course, the lifeblood of modern states. This is what allows governments to provide public goods that support strong and durable growth.

The policeman on the beat, the nurse who is attending to a patient, the teacher who is inspiring young minds, the scientist who is conducting cutting-edge basic research: these are only some of the people who could not do their work without reliable government income."

. . . . .

"The second ingredient of successful 21^st-century economies is international taxation. This is an essential means by which governments mobilize their revenues in a globalized economy.

Recent headlines about Google, Starbucks, or Ikea have underlined that an international tax system needs to work for everybody. We need a system that discourages the artificial shifting of profits and assets to low-tax locations. And we need a system that discourages overly aggressive tax competition among countries.

In other words, we need a tax system in which ordinary citizens are convinced that multinational companies and wealthy individuals are contributing a fair share to the public purse, to the common good."

. . . . .

Conclusion

"Before we engage in these discussions, let me conclude by returning to Adam Smith, who wrote in the Wealth of Nations:

“Political economy…proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people…and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”

My main message today is this: creating successful 21^st-century economies requires robust government revenues and an international tax system that works for everybody. These ingredients are essential for growth, fairness, and development.

They provide the fertile ground for the prosperity of nations. And we at the IMF are ready to play our part for the benefit of our membership."

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My added comments: This speech talks about a concept that many will view as being an attempt to "globalize" taxes. Critics will assert that this is a threat to individual national sovereignty while the concept would likely appeal to supporters of US Presidential candidate Bernie Sanders.

In practical terms, the US Congress is not likely to move forward with this concept in the US so long as the Republicans control the US House of Representatives. It's hard enough to get any kind of agreement on US tax reform much less some kind of international tax system. 

This concept (an international tax system) is not likely to impact global monetary system change like we watch for here any time soon unless we do get another major financial crisis which results in solutions being implemented at a global level rather than at a national level. This is something that is more likely to evolve gradually over time, if at all.

The G20 meeting just held in China confirms that nothing major in terms of global policy action is on the horizon any time soon. Here are quotes from this ABC News article on the G20 meeting:

"Finance officials of the world's biggest economies promised Saturday to use "all tools" to shore up sagging global growth and to avoid devaluing their currencies to boost exports, but made no pledges of joint action."

. . . . . 

"Companies and investors were looking to the Shanghai meeting for reassurance and action. But leaders from the United States, China, Europe and elsewhere had tried to squelch expectations that it would produce specific growth plans."

In addition the G20 meeting made it clear that policy makers do not think we are headed into a major crisis any time soon. In fact, US Treasury Secretary Jack Lew stated that directly in this Reuters article covering the G20. Here is the quote:

"Talking about further stimulus just distracts from the real tasks at hand," Germany's Minister of Finance Wolfgang Schaeuble said, rebuffing a recommendation from the International Monetary Fund (IMF) that the G20 should start planning now for a coordinated stimulus program. "We, therefore, do not agree on a G20 fiscal stimulus package as some argue, in case outlook risks materialize."

Lew (US Treasury Secretary) had a similar message, saying there was a great deal of economic uncertainty at present but no crisis. "It would not be reasonable to expect a crisis response in an environment that is not a crisis," he said told reporters.

This is what we have been reporting here on the blog. The sources I talk with who work in the system do not indicate to me they see an imminent financial crisis coming. 
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On Friday March 4th we will have an article covering a recent discussion (captured on video) on the potential for the SDR to be used as the new global reserve currency for the world. The discussion included both a current IMF official who works with SDRs right now and the former head of the SDR Division at the IMF (Dr. Warren Coats) who we have contact with by email. Dr. Coats even provided a great quote for our article that readers will want to see.

In the discussion it is clear that these officials do not see an imminent crisis coming at this time even though they do point out that the conditions for one in the future do exist. 

Please watch for it and let others know about it as you will not get this kind of direct information from official experts like this very often. It will answer many questions I see from readers and in other discussion forums all over the world about the potential for the SDR as a replacement global reserve currency for the US dollar. Jim Rickards work on this is invaluable (they mention his book in the video) and now we will have direct information from both a current and former IMF official on what we can reasonably expect.

A New and Improved Blockchain?

Last summer we were happy to publish an in depth look at the Bitcoin/Blockchain technology written by one of the leading payment systems experts in the world. Interestingly, since that time the concerns about the technology that our expert pointed to have surfaced in the Bitcoin community. 

Now we learn that the latest iteration of block-chain being endorsed by the large institutions in the banking industry is based on a "new version of the block-chain technology." Could that be because of the limitations from the size of the original block-chain mentioned by our expert? Whatever the reason, below are the latest articles from Wired on the move towards a new version of block-chain (but not Bitcoin) by major industry players.

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IBM and Microsoft Will Let You Roll Your Own Blockchain


"In late December, several big-name companies from across both the tech and financial industries—including IBM, JP Morgan, Wells Fargo, and the London Stock Exchange—unveiled a new open source software project based on the blockchain, the global online ledger that underpins the bitcoin digital currency. The project aims to build blockchain-like software that can more efficiently, reliably, and openly track the exchange of financial assets, including stocks, bonds, futures, houses, and car titles. And considering the names involved—particularly the Depository Trust & Clearing Corporation, or DTCC, which oversees Wall Street’s stock settlement system—it’s an enormously significant undertaking.

Unlike the blockchain itself, the Hyperledger software isn’t battle-tested. In fact, it’s still being built. But on Tuesday, IBM unveiled a new cloud computing service that lets anyone kick the proverbial tires on this fledgling technology."

. . . . .

"Last year, researchers under Krishna began building an alternative to the blockchain. And after Krishna and others helped bootstrap the Hyperledger project—which operates under the aegis of the not-for-profit Linux Foundation—IBM donated its code to this open source effort. Others have donated additional code, but it appears that IBM’s contribution will serve as the foundation of the project."

Why Wall Street Is Embracing the Blockchain—Its Biggest Threat

This article is about a push to use "blockchain-like" technology to settle stock trades. Please note the use of the term "blockchain-like" throughout the article. Despite the enthusiasm for this idea, the article also says this about it:

"Some view this kind of talk with skepticism. Galper says that the stock loan market isn’t as broken as Byrne would have us believe, and that the idea of issuing stock over the blockchain is still hard to judge. Certainly, the blockchain doesn’t operate fast enough today to drive the high-speed trading of the public stock market."

Tech and Banking Giants Ditch Bitcoin for Their Own Blockchain

"SEVERAL MAJOR COMPANIES from across both the technology and financial industries—including IBM, Intel, and Cisco as well as the London Stock Exchange Group and big-name banks JP Morgan, Wells Fargo, and State Street—have joined forces to create an alternative to the blockchain, the global online ledger that underpins the bitcoin digital currency."

. . . . .

"It’s notable, however, that IBM and its cohorts are creating a new distributed ledger—rather than embracing the blockchain itself. In backing a new project, they can exert more control over how it’s built and how it is used. "
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My added comments: My take in reading these articles is that these big industry players are basically just co-opting the general idea behind the block-chain technology that is used to power Bitcoin (a distributed ledger), but not much of anything else. It seems clear they are working on a new and different version of the technology to be used for a variety of purposes, but not for any kind of alternative currency. 

I suspect that the size limitations of the original block-chain technology are the reason why a new version is needed (the so called hyper-ledger). Whether the other potential problems with the technology pointed out by our expert here will be overcome remains to be seen. But it is clear that major players are moving forward with this "new and improved" version of block-chain technology. As for Bitcoin advocates who saw that technology as some kind of way to bypass the existing system, it looks like the system plans to move forward without Bitcoin or the original block-chain technology. As we noted in our article here, Bitcoin will likely continue to exist for a small niche of users, but is unlikely to ever be adopted as a mainstream currency alternative. The original block-chain technology supporting it simply cannot handle a mass number of users or transactions needed to for widespread adoption by the general public.


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Added notes: A couple of interesting related tweets from Willem Middelkoop here and here. See screen prints below.

willem middelkoop‏@wmiddelkoop

China's PBOC: A digital currency will co-exist with cash for quite a long time before it finally replaces cash. http://m.english.caixin.com/m/2016-02-15/100909181.html …

willem middelkoop‏@wmiddelkoop

As promised. It ain't Bitcoin folks!!Chinese Central bank explains Digital currency controlled by the central bank,

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Direct link to interview with PBOC Governor Zhou Xiaochuan and below are some key Q&A's on a digital currency future at the PBOC (China). I will do a separate blog article later on this interview:

The digital yuan

The PBOC held a seminar on digital currency on January 20, saying that the central bank will try to launch its own digital currency as soon as possible. What are the considerations behind this?

The PBOC has studied digital currencies for a long time. History shows that currency has evolved abreast of technological advances and development of economic activities. The evolution from early-stage physical currency and commodity currency to the later credit currency was a result adapting to the development of commercial society. Paper money, as the last generation currency, lacks high-tech support, and it is an irresistible trend that paper money will be replaced by new products and new technologies with greater security and lower costs. With the rapid development of the Internet and the significant changes in the global payment systems, it is necessary to establish the issuance and circulation system of digital currency, which will help build the financial infrastructure and improve the quality and efficiency of the economy.

How can a digital currency replace paper money? There are several ideas. One is to make digital currency anonymous, like paper money which is transacted anonymously, and this anonymity will determine the technology. But paper money is not designed to be anonymous. It is anonymous because no real-name technology can ensure the convenience of a large amount of small-value transactions. Some people assume that it would be better for digital currency to be transacted anonymously in the future because the government may fail to protect people's privacy regarding wealth and the use of wealth, which should definitely be protected.

From the central bank's perspective, a digital currency should be designed in a way that can best protect people's privacy, but we also need to pay attention to social security and social order. We need to keep some necessary investigative instruments readily available to deal with criminal activities. A balance needs to be struck between protecting privacy and cracking down on illegal activities. Different preferences between these two motives will lead to different technological orientations for digital currency.

What is the central bank's thinking on the issuance and management of a digital currency? Will it be different from the digital currency in the market right now?

Many countries around the world acknowledge that the digital or electronic currency issuance framework led by central banks might be different from the current private sector practice.

There are several principles underlying the central bank digital currency issuance framework. The first is convenience and security. Second, as mentioned earlier, a balance needs to be struck between protecting privacy and maintaining social order and cracking down on illegal activities, especially preserving necessary tools to fight money laundering and terrorism financing activities. Third, it should be conducive to the efficient operation and transmission of monetary policies. Fourth, the control over monetary sovereignty should be maintained. Digital currency can be converted freely but its convertibility will also be controlled. We think, therefore, as a legal tender, digital currency must be issued by the central bank. The issuance, circulation and transaction of digital currency will follow the same management principles of traditional currency.

Is there any timetable for the launch of digital currency? Will a digital currency replace paper money?

We do not have a timetable yet. China has the world's largest population and is a huge economy. It will only take several months for a small country to replace an old version of paper money with a new one. But it has taken about 10 years for China to do the same thing. So a digital currency will co-exist with cash for quite a long time before it finally replaces cash. The cost for cash transactions will gradually increase in the later stages. For instance, banks do not charge any fees for counting large amounts of coins now, but in the future they may charge their clients for the service. With the transaction costs of paper money rising, people will be motivated to opt more for digital money. But digital currency and cash will coexist for a long time.

A Blast from the Past -- C-SPAN Debate Panel on the US Federal Reserve

Recently we featured an interview here on the blog with Dr. Warren Coats. Dr. Coats had a long career at the IMF and is regarded as a leading expert in the world on monetary systems having consulted with many central banks in establishing currencies over the years. 

I happened to discover a fascinating debate that was covered on C-SPAN back in 2009 on whether or not the US Federal Reserve should be abolished. Dr. Coats was one of the four panelists who participated in this debate. He and another panelist argued the position that the Fed should not be abolished. It is a lengthy debate (there are six YouTube segments that cover it) but well worth your time if you have interest in the issues we cover here. There is a lot of good discussion and debate and you will be better informed if you take time to listen regardless of which side you may agree with. 

Below is the video for the first segment. You can watch that and the find the other segments on YouTube or just go directly to the links further below to see the whole debate.
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Above is the first segment, below are links to the other five segments

Segment 2 of 6

Segment 3 of 6

Segment 4 of 6

Segment 5 of 6

Segment 6 of 6

Added comments: This topic has kind of been set aside since 2009 because we have managed to avoid another major financial crisis so far and therefore public concern has quieted down somewhat. However, as we can see from the current US political environment, there is still a lot of discontent lurking beneath the surface about how things are being run. Bernie Sanders campaign is being fueled by a lot of people with significant distrust in the current banking system including the US Federal Reserve. 

Interestingly, supporters of people like Rand Paul and Ted Cruz share similar distrust in the banking system even as they completely disagree on the role of government etc. with followers of Bernie Sanders. Donald Trump supporters seem to be just distrustful of everything about the current system and think it is being poorly administered. The point being that we can see that a majority of voters this year are unhappy with the status quo and those running it. Just imagine how they are going to feel if they get blindsided by another major financial crisis worse than 2008 like Jim Rickards is expecting. 

What I see in doing research for this blog is that the US Fed is really setup to take the fall for another big crisis if we do get one. Both political parties are likely to jump on them along with perhaps the IMF and the BIS. We can therefore assume they will move heaven and earth to try and prevent one, especially during the 2016 election year.

Even though this debate on the Fed was held way back in 2009, it covers a lot of issues that could quickly resurface in the public mind if we do get another major crisis any time soon. I found this to be a very interesting and informative debate and well worth the time to listen to. 

Added note: While this debate was about whether or not to abolish the Federal Reserve, these days we have Federal Reserve Presidents calling for the breakup of big banks here and here.
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Note to Readers

On Friday March 4th we will publish an important new presentation on the future role of SDRs done by a current and former IMF official that are experts on this topic. Dr. Warren Coats who we have interviewed here on the blog is one of the speakers and he provided us a quote for our article that readers will want to see.

Are we Headed Towards a Massive Deflation Event?

Most blog articles here are by design fairly brief articles that touch on articles or events that relate to the kind of major monetary system change we watch for here. It's simply not possible to do in depth on these issues in most blog articles.

 

In this case we have an hour long discussion on video between Mike Maloney and Jim Dent on the topic of a coming reset to the system that they both see coming. This discussion is worthwhile to listen to because while they agree on a coming major deflation event, they debate the issue of whether or not precious metals will be viewed by the public as a safe haven during such an event. 

It's a theoretical discussion/debate, but both of them are well versed in the arguments for their point of view and present historical data and logical reasoning to support their views. We don't claim here to be able to predict future events, but we do present a variety of views that we see when we feel they are well presented as is the case with this video.

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Covered in this discussion:

- a look back into the history of boom and bust cycles that lead to major sea change events

- both participants see a massive deflation cycle coming in the next five years (by 2020)

- an explanation of why the see this coming based on demographics in the developed nations and historical precedents

- a debate on whether or not precious metals will be viewed as a "safe haven" asset in a deflation event (interestingly both eventually see much higher gold prices even if they fall during the deflation event)

- could the US end up like Japan with a decade or two of low growth instead of a  major crisis event that clears debt from the system so a reset can begin?

- practical suggestions for the average person to prepare for a major deflation event should we experience one

As an additional footnote, many precious metals advocates agree with the idea of a coming crisis based on too much debt in existence. The debate they would have with Harry Dent is that they believe the central banks of the world would be proactive to take action in advance of a major deflation event (even more QE and helicopter money for example). They feel these actions would create high inflation or even hyperinflation causing the value of precious metals to go sharply higher instead of falling as Harry Dent expects. Harry Dent explains his side of that debate in this video discussion.

At the end of the day most all of those expecting another big crisis agree that what will cause such a crisis is a world over extended with too much debt and related derivatives products (too much additional leverage in the system). They all pretty much expect some kind of debt liquidation phase and another round of an inflation phase. Where they differ is on the timing and order of those events and how central banks might respond to the crisis (or if they can respond to the crisis). Of course the alternative view is that no crisis is forthcoming any time soon.

Our suggestion here is to take the potential for another major crisis at some point in the next five years seriously, stay informed, and develop a backup plan to deal with such a crisis if one arrives. This will vary for each person and family depending on their situation.

Jim Rickards on Where Negative Interest Rates are Leading

Jim has a new article out that pretty much says what we have said here on the blog about negative interest rates. Below are some quotes from his article and then a few added comments.

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"The currency wars are intensifying. Out of desperation, more central banks, including Japan, are running headlong into negative interest rate policy, or “NIRP.”

Negative interest rate policy by the world’s central banks is getting out of control. The latest cut was from the central bank of Sweden, the Riksbank. Interest rates in Sweden were already negative, but the Riksbank cut them even further, from minus 0.35% to minus 0.50%.

The Riksbank has joined the European Central Bank, the Swiss National Bank and the Bank of Japan in this negative rate madness. It reminds me of the limbo dance craze of the 1960s.

Dancers had to lean backward and shimmy under a stick held by two other dancers. It was a contest, and the winner was the one who got under the lowest stick without falling over backward. The musical refrain was, “How low can you go?”

Central banks are engaged in a similar contest, but they may all end up as losers. They want inflation, but negative rates feed deflationary expectations. This causes consumers to hold onto cash in the expectation that goods will get even cheaper.

Stress is rising throughout the global financial market as investors start questioning the negative consequences of central bank policies.

Who knows what lies at the end of NIRP policy — or even if it’s reversible?" . . . . 

Click here to read the full artricle on The Daily Reckoning

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My added comments: Please note that Jim calls the use of negative interest rates an act of "desperation." Stephen Roach used the same word in his recent article.  We said the following in this recent blog article:

"According to this CNBC article, negative interest rates employed in Europe were a failure because they instilled a lack of confidence in the system by the public. Of course they do. It's basically looked upon as officials waving a white flag of surrender. Everything else we tried failed so now we are going to punish savings and force you to spend or invest. It looks very desperate to most people."

Jim goes on in this new article to suggest that all the talk now about negative interest rates in the US is to set the stage for potentially using them later on in 2017 or 2018. The point readers here need to take from all this is that we cannot just accept at face value statements that the economy is on the mend or that we are headed towards recovery. It is crystal clear from our monetary officials that even they don't have confidence in any statements they make to that effect because they are constantly talking about all these radical policy alternatives to try and improve economic conditions. If they were confident about the economy, we wouldn't be hearing all this talk about potential negative interest rates. It's really that simple. 

Unfortunately, we simply cannot trust our monetary officials on this important issue and are forced to stay alert and informed at all times. On top of that we need to have some kind of backup plan in mind in case we do get another major crisis. It would be great if we could just trust that those in positions of monetary authority will handle things while we just concentrate on our own situation. But they are making it clear that they don't have much faith in their own policies, so why should we? Implementing negative interest rates is the ultimate admission of total failure by monetary policy makers and readers here should view it in that light.

Stephen Roach: Central Banking Goes Negative

In a new article appearing on the Project Syndicate web site, economist Stephen Roach talks about the move towards negative interest rates around the world. Below are some quotes from his article and then a few added comments.

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"In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis."


"The adoption of negative interest rates – initially launched in Europe in 2014 and now embraced in Japan – represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand – primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets. But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation – in effect, urging banks to make new loans regardless of the demand for such funds."

. . . . . . 

"The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” – the uneconomic loans made to insolvent Japanese borrowers in the 1990s. Central banking, having lost its way, is in crisis. Can the world economy be far behind?"

Please click here to read the full article on Project Syndicate

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My added comments: In a recent blog article I suggested that the move to negative interest rates is seen by most people as the central bankers waving a white flag of surrender and as an act of desperation. Here is the quote from this recent article:

" According to this CNBC article, negative interest rates employed in Europe were a failure because they instilled a lack of confidence in the system by the public. Of course they do. It's basically looked upon as officials waving a white flag of surrender. Everything else we tried failed so now we are going to punish savings and force you to spend or invest. It looks very desperate to most people."

It appears that Stephen Roach agrees in this new article. He goes a lot further than I did and says this will "only compound the risk of financial instability and set the stage for the next crisis."

By now it should be obvious to anyone who follows this blog regularly why we encourage people to stay alert and informed. It should also be clear why we talk about watching for signs of another major crisis and why people should have a plan in mind to deal with one if it happens. It's not because we are predicting such a crisis or even know when we might get one again. It's because monetary officials are behaving in ways that suggest we have to be on the alert. They issue warning after warning about the potential for asset bubbles bursting (due to their own easy money QE policies building up the bubbles in the first place). They are talking about bail-ins, eliminating cash, forcing everyone into a digital monetary system so they can control capital flows if need be (such as during a crisis, remember Greece), and imposing negative interest rates because everything else they have tried is failing to get desired results.

Here we have actually gone the extra mile to try and show that despite all the many warnings and weird proposals being floated by monetary officials that we do believe there are tools to deal with systemic problems should they arise (we listed some in this article). We think that people need to be aware of those tools along with the warnings about potential crisis. But it's getting harder and harder to make that case when we constantly see more officials talking about things like negative interest rates as Stephen Roach points out in this article (hint: Stephen Roach is not a fear merchant, he is a highly respected economist who is simply expressing what a lot of people are feeling right now including Dr. Michael Ivanovitch and former Dallas Fed President Robert McTeer). We can add on former BIS Chief Ecnomist William White whose interview we recently covered here. Minneapolis Fed President Neel Kashkari wants to break up big banks to "avoid a meltdown". We could make a much longer list.

As always, we state here that do not know if we are going to get another major crisis or not. We talk about the potential for one only because so many current and former monetary officials talk about it and because respected analysts like Jim Rickards are forecasting one. If we don't get a crisis, that's great news. However, to ignore all these respected voices and just assume we will never get another major crisis is foolish in our view here. It is the same as owning a $500,000 beach front home and watching a potential hurricane move towards it while making no effort to protect it and also owning no insurance policy on it. Taking those actions is not fear, it's just common sense.