One of the primary tenets of Austrian economic theory is that economies cannot be “managed,” that interference, be it deficit spending, regulations, taxing policies, central bank quantitative easing programs or negative interest rates, will send false signals that will distort decisions made by the private sector, the real driver of economic growth. The bigger the interference, the bigger the distortions.
Let’s take a look at negative interest rates, which are causing what the Financial Times calls a mutiny within the banking industry. And, happily for gold investors, negative interest rates are causing mainstream investors to look at gold.
Because of negative interest rates, Commerzbank, one of Germany’s largest banks, is talking about storing cash in vaults instead of depositing excess reserves with the European Central Bank. According to Bundesbank, Germany’s neutered central bank, which often disagrees with ECB policies, negative interest rates cost German banks €248 million last year.
In Japan, Tokyo’s largest financial group warned that it is considering leaving the 22-member club of primary dealers for Japanese sovereign debt because of negative interest rates. In Bavaria, Germany’s largest state, savings banks have openly discussed storing physical cash. Munich Re, one of the world’s leading reinsurance companies and based in Munich, Germany, is considering “experimenting” with holding at least €10 million in cash to see if it is practical.
Negative interest rates is an idea whose time should never have come. The goal is to force banks to lend more freely and thereby stimulating the economy. Negative interest rates are not working in Japan and are not likely to work in the eurozone.
Because of negative interest rates and the ECB’s quantitative easing program of buying right at €70 billion a month, German bonds now purchased guarantee buyers a loss if held to maturity. The purpose of saving is to grow capital with the interest earned. Now economic planners are driving investors to other vehicles, one of which is gold. Another is silver.
While commercial banks may not buy gold because it probably would not count as capital for reserve requirements, insurance companies such as Munich Re could buy gold. Negative interest rates could turn out to be really big for gold and silver.