The biggest problem as I see it could be a break in confidence, one which is caused by the perception of “something else is better”. If banks actually start to charge for holding balances, depositors will have to make some sort of decision. They can move to another institution which blesses them with either no interest or less negative interest. They can also buy Treasury securities or even stocks …or any other number of assets. This would initially levitate markets even more because of the flow …but what happens when some “leakage” starts? What happens when some depositors decide to buy “stuff”, any kind of stuff as a form of savings? What happens if included in this stuff are commodities and other monies such as gold and silver?
This then brings the actual currency into question. If you cannot earn interest on anything then the comparisons of apples to apples will begin. The question will arise, which is better, a $20 bill or 6 pounds of copper? Which would you prefer twelve $100 bills or one ounce of gold? Can a painting really be worth $100 million? What does this say about the value of $100 million? These questions are being asked every day, all day, all around the planet…but there will be a difference. The difference being, more money will be forced to make these decisions. “More money” because of the Fed’s January 1st edict!
I am not here to tell you that I understand all of the ramifications or fallout, I do not. What I do know is banking, the way it has been done even after morphing over the last 20 years is changing. With this change will come consequences, some seen…some not. The financial system has never been as leveraged as it is today, this is a fact. Another fact is, leverage “forces” the actions of participants in ways they would not prefer during crisis. Leverage will force some who would like to buy…to sell. Leverage will cause a solvent someone today into insolvency tomorrow morning. Not to pick on JP Morgan (though they more than deserve it), they hold some $70 trillion worth of derivatives, so does Deutschebank, does this qualify as “leverage”? When the next panic comes, we are now too leveraged systemically for the current system to survive, but I digress.
The grand scheme problem as I see it is the “push-pull” effect. The central banks need to push money out and into the system. This would aid the real economy and bolster “asset” prices. Their catch 22 is they cannot make the decision “which” assets are levitated in value because they do not control which direction the money they have pushed will go. Ideally, the money will stay within the box and continue playing with other paper assets. Once the bleed into real assets really gets going, it will be noticed and attract other attention …and into other real assets. They must create more money and more liquidity to keep the paper game going, it is exactly this debt and liquidity creation which will end up making the decision to flee …to safer assets. In the end, the definition of “safer” will be not only what counts but the exact cause of the crisis. The central banks are collectively trying as hard as they can to reflate, if they get their wish they will lose their currencies…pretty simple! Regards, Bill Holter, Miles Franklin Associate writer
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