Deposit Rates Could Turn Negative in This Bizarro World

[platinumdude]

http://www.cutimes.com/2011/08/28/deposit-rates-could-turn-negative-in-this-bizarro

Some Big Bank Depositors Already Paying Just to Stash Cash

Forget the debate over whether or not a credit union should keep offering free checking accounts, there are signs credit unions may eventually have to decide whether or not to charge their members fees for holding deposits.

The reasons why they might have to take this step rests in the upside down finances that characterize the U.S. economy right now, where the costs of liquidity are so low as to almost be free, but the demand for loans and investment returns remain so soft they bring in almost no income.

The result, according to Dan Geller, executive vice president of Market Rates Insight, is that deposits in insured financial institutions, whether banks or credit unions, will likely become something of a hot potato, he said, using the term to represent something that might in another time be welcome and sought but in the near to medium term will become an expense and a regulatory problem.

Back in November, Geller predicted that a major bank would begin to charge depositors for deposit accounts of over a certain size and earlier in August, the Bank of New York Mellon sent a letter to institutional depositors informing them that the bank would begin to charge fees on deposits above $50 million.

And Geller believes that while the trend might have started with the BNY Mellon in a specialized niche of a relatively narrow market, it will spread to retail banking as well.

Issues that Geller believes will fuel the trend include the fact that banks and credit unions pay to insure deposits with the FDIC or the NCUSIF and Geller's belief that the price of liquidity is likely to continue to fall as the economic slump continues.

Geller noted that the Riksbank, Sweden's central bank, lowered its fund rate to negative 0.25% in 2009 in an effort to reduce the costs of liquidity to zero. Faced with free liquidity, Geller pointed out, “why would any bank opt to raise money in the retail market and pay for it?”

He said that the Bank of England and the Federal Reserve are both watching the Swedish experiment.
(snippet removed)...........................
But credit unions said they didn't have any plans to charge for deposits–at least not yet, though several said they had become very aware of the problems deposits were beginning to create.
(more at link)

[gunDriller]

zero interest rates give people the incentive to move fiat out of the bank, into something solid, e.g. PMs.

negative interest rates ?

the banks think they are the center of the universe & want us to pay for their health care.

[Horn]

Sounds like an offer the creditors can't refuse...(key music)

[Serpo]

Do you think this would be gold positive.....hahahaha

[osoab]

Wouldn't you say that we already have negative rates?

Rate of inflation vs rate of interest already is negative.

[AndreaGail]

and here i thought my .1% was bad...

[platinumdude]

This article is related. Not sure I think the feds can have a negative interest rate.

http://seekingalpha.com/article/290525-get-ready-for-negative-interest-rates-buy-bonds

Things may need to get materially worse first. But as growth grinds to a halt due to political inaction, the Fed will eventually realize that short rates are still too high at zero and it will adopt a negative interest rate policy. (much more on link)

[osoab]

We already had 1 month treasuries at negative. Back at the beginning of 2010.
One-month Treasury Bill Rates turn Negative (http://www.calculatedriskblog.com/2010/01/one-month-treasury-bill-rates-turn.html)


Treasury one-month bill rateshttp://images.intellitxt.com/ast/adTypes/mag-glass_10x10.gif (http://www.calculatedriskblog.com/2010/01/one-month-treasury-bill-rates-turn.html#) turned negative for the first time in 10 months, as issuance declines while investors seek the most easily-traded securities amid a renewal of risk aversion. From July 19, 2011
Negative Interest Rates and Euro Disintegration Fuel Gold's Historic Rally (http://seekingalpha.com/article/280247-negative-interest-rates-and-euro-disintegration-fuel-gold-s-historic-rally)

“Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further,” Bernanke added. What’s little recognized by the unsuspecting public is that with QE-2, the Fed ventured deep into new unexplored territory, by the slashing yield on the 1-year US T-bill a stunning -250-basis points, to a record low of (negative) 3.40-percent. The “real” rate of interest fell sharply as consumer and wholesale prices turned sharply higher, fueled by booming commodity prices. At the same time the Fed was slashing the real rate of interest by 250-bps, it was also pumping $600-billion of “high powered” money into the coffers of Wall Street’s Oligarchic banks and hedge funds, that in turn, pumped the ultra-cheap money into commodities, equities, and Gold and Silver.Just happened on Aug 4.
Negative 1 Month Treasury Yields Today (And So Much More) (http://greenewable.wordpress.com/2011/08/04/negative-1-month-treasury-yields-today-and-so-much-more/)

Today’s equity market selloff and concurrent treasury rally were dramatic and unexpected by many. The strain on the system was so dramatic today that the 1 month Treasury Bill, often used as a cash substitute actually sustained a negative yield for a moment, and was captured here in the Bloomberg screen below next to the “4W” in the US T-BILL YIELD/PRICE box. Surprisingly, among all of the FX surprises, the Canadian dollar is once again worth less than the US dollar.Just posted on Seeking Alpha
Get Ready For Negative Interest Rates - Buy Bonds (http://seekingalpha.com/article/290525-get-ready-for-negative-interest-rates-buy-bonds)

There was also a spell around late October of 2010 (http://gold-silver.us/forum/www.ft.com/cms/s/0/dfa5ee7c-e08e-11df-abc1-00144feabdc0.html) I couldn't get the link to work, came up on google.

[platinumdude]

Your last link is the one I posted up above. So if rates do go negative, then banks will most likely pay negative for deposits, and it's physical PMs to the moon and hoarding of paper dollars. But the part 2 on the seeking alpha article will discuss what he thinks will happen to stuff like gold.

[osoab]

Your last link is the one I posted up above. So if rates do go negative, then banks will most likely pay negative for deposits, and it's physical PMs to the moon and hoarding of paper dollars. But the part 2 on the seeking alpha article will discuss what he thinks will happen to stuff like gold.

Next to last one, I picked that up after I edited the post. Oops.

Just found this. Negative interest rates in Switzerland (http://gulzar05.blogspot.com/2011/08/negative-interest-rates-in-switzerland.html)

I don't expect much from the author on gold. I would expect him to say to put it into bank stocks since they would be getting paid to hold deposits, if it filtered to the retail level or smaller commercial area. You could see a mad rush to switch accounts to non interest bearing. That might be interesting. Everyone just holds their electronic digits in a on-demand account that does not accrue (or bleeds) interest.

I don't know about how much paper hoarding will occur. With the banks charging for deposits, I would assume the velocity of paper money to be brisk. One would have to spend cash to get necessities. Using a debit cards/checks would be the idiotic if the negative interest rates occur. So their might be a cash crunch. Might be a good time to stock up on extra to loan shark out.

[Twisted Titan]

Faced with free liquidity, Geller pointed out, “why would any bank opt to raise money in the retail market and pay for it?”



The same reason why a bank will charge interest something that was created out of thin air.



Why is one a shrewd bussines descion and the other foolish???

[gunDriller]

This article is related. Not sure I think the feds can have a negative interest rate.

http://seekingalpha.com/article/290525-get-ready-for-negative-interest-rates-buy-bonds

Things may need to get materially worse first. But as growth grinds to a halt due to political inaction, the Fed will eventually realize that short rates are still too high at zero and it will adopt a negative interest rate policy. (much more on link)

that should be good for sales of safes & other home security products.

maybe this is part of Obama's job-creation program ?

[mamboni]

We already had 1 month treasuries at negative. Back at the beginning of 2010.
One-month Treasury Bill Rates turn Negative (http://www.calculatedriskblog.com/2010/01/one-month-treasury-bill-rates-turn.html)
From July 19, 2011
Negative Interest Rates and Euro Disintegration Fuel Gold's Historic Rally (http://seekingalpha.com/article/280247-negative-interest-rates-and-euro-disintegration-fuel-gold-s-historic-rally)
Just happened on Aug 4.
Negative 1 Month Treasury Yields Today (And So Much More) (http://greenewable.wordpress.com/2011/08/04/negative-1-month-treasury-yields-today-and-so-much-more/)
Just posted on Seeking Alpha
Get Ready For Negative Interest Rates - Buy Bonds (http://seekingalpha.com/article/290525-get-ready-for-negative-interest-rates-buy-bonds)

There was also a spell around late October of 2010 (http://gold-silver.us/forum/www.ft.com/cms/s/0/dfa5ee7c-e08e-11df-abc1-00144feabdc0.html) I couldn't get the link to work, came up on google.

Here's an amazing paragraph (at least it is to me) from that link:

And there’s an unexpected side benefit to a yield curve that intersects the zero axis. Negative interest rates could turn our $14 trillion national debt into a source of income. $410 billion of annual interest expense could instead become interest income, providing revenue for fiscal stimulus and deficit reduction. What will the Tea Party say when US Debt is a profitable business? Buy bonds!

I'm trying to wrap my brain around this one. So basically, the national debt flips from a debt/obligation to a captial asset that generates interest income!?!?!? Sure, a negative interest rate would accomplish this, on paper. But how can it be possible in the real economy for consumption to equal production? Why would someone buy treasuries for negative interest; wouldn't he simply hold cash? It seems to me that negative interest rates will place capital destruction (the opposite of capital acumulation) on steroids, flood the economy with latent liquidity and destroy the dollar in a storm of hyperinflation. Cash will run to gold, massively.

[Shami-Amourae]

If they do this, don't expect cash to become king. They'll just put expiration dates on paper FRNs so you're forced to spend those quickly, or keep them in a casino bank.

[wrs]

Negative rates indicate a default and that the money is worthless if not spent. No one believes that they will have future value in such trash and yet money is supposed to preserve value. Therefore, if the govt money cannot preserve value, it will fail. No one wants their future value to be destroyed and that is what the govt is proposing to do.