A couple of weeks ago we wrote about the woes of Deutsche Bank, which appear to have gone quiet since then (for the time being, at least). What I didn’t mention about Deutsche Bank, however, is that, whilst it has multiple balance sheet issues, its core business model of being a bank is also under immense pressure as the result of the prevailing interest rate environment. Simplistically, it borrows money at zero and lends it out at zero, making no profit.
Any other business that charges its clients’ nil, trades goods at a zero profit margin, or produces something at cost and sells at a zero profit margin is going to be under pressure, I guess. This is all just another unintended consequence of low and/or negative interest rates.
We have highlighted numerous times, over recent months, the dangers to pension funds of such low-interest rates and locking into these rates forever, even if future liabilities will fall on paper. Now we are highlighting the danger to banks, in that their business models are broken and they may disappear. All of this has been created by the experts at the Central Banks who insist on interfering.
But, like any Government interference, this causes inefficiencies and unintended consequences. According to Dr Marc Faber, “by preventing the future prices of goods and services from rising too fast above the current prices, it constrains demand for current goods and services. The weak demand, in turn, leads companies to hire less and invest less in the development of new technologies, leaving the workforce under-utilised and productivity low”. Sound familiar?
In a sound economic system, “saving” should be encouraged and rewarded. According to renowned economist John Maynard Keynes, “the rate of interest is the reward for parting with liquidity for a specific period”. How then do we explain negative interest rates, which only benefit the heavily indebted? To penalise savings with negative returns is the equivalent of taxing money on which people have already paid taxes, a second time. Negative interest rates are crippling pension funds and banks and possibly assisting the global economy’s move to lower growth rates. It’s a funny old world we live in today!
The Curse of Negative Interest Rates