BY: MATT BYRON
Recently, the international banking world has been turned upside down with the concept of negative interest rates. The fact that this terms starts with the word “negative” makes it sound ominous. The fact that this is unprecedented and not understood also scares lot of people.
I’m intrigued by the concept, so for the benefit of my own personal investments I wanted to collect my observations and formulate my own macroeconomic theory.
First, my premises:
Technological innovation is leading the world to abundance. Machines make it possible for us to grow crops and manufacture vast quantities of goods, with very little human labor. The end result is a leisure society which squanders it’s time on Facebook and watching television. Going forward, goods will continue to become better, cheaper, and faster than ever before. We will live in a world of even greater abundance.
The world needs a currency system because it facilitates specialization. For example, if a farmer wants to barter for a new computer the transaction would be very cumbersome. Afterall, how would a bushel of corn help the computer company which needs silicone? Bartering is crude and archaic. Therefore, it behoves humanity to have a monetary system.
Banks need governments to enforce laws and preserve order in society. Therefore, banks will always look after the interests of governments.
Central banks create money from nothing. Some people bicker about GPD, national deficits, or nations going bankrupt. But these issues are moot. Money is contrived and unlimited. Don’t be fooled by the ivy league MBA’s, expensive suites, esoteric vocabulary, and pretty charts. Money is just a giant game run by central banks.
Society accepts money as being something of value, without ever questions it’s creation. Money will continue to have value, as long as the majority of the populations believes in it.
The war on cash has commenced. Banks around the world are reducing the size of their largest printed bills. Governments around the world are equating cash payments with terrorism. It’s likely that in 5 or 10 years, physical cash will be completely eliminated from society.
Governments around the world are notorious for squandering resources. Because they waste so much capital, they drive demand for goods and services that wouldn’t be need otherwise.
Central banks are currently buying and will continue buying assets around the world to prop up investment prices. This is currently occurring in Japan and Europe.
So where does that bring us? Our society has an excess manufacturing capacity and an abundance of resources. So it behoves people to delay their purchases, which points to deflation. But if everyone in the world delays their purchasing, then the entire world financial economy would grind to a halt – which is bad. The central banks and governments of the world intend to remain relevant – that’s their goal.
Therefore, I foresee a confluence of key events. First, physical cash will become illegal. Holding physical cash is the easiest way to avoid the losses from negative interest rates on bank deposits. All money will be digital and you will be taxed ( by the bank or government) on your savings and income each year. We will see negative interest rates to levels we cannot fathom. Banks might lend at -3%, -5%, or even -10%. Those same banks might charge you -5%, -7%, -12% or more on your deposits. When all the money in the world is digital, you’ll have no choice but to pay for depositing you money.
Concurrently asset prices will rise, as central banks continue buying all the world’s assets. Bank of Japan already owns 52% of the entire Japanese ETF market. Central banks will drive up equities and real estate prices will increase. Central banks will corner every market.
Imagine a world, where your mortgage interest rate is -5%! It sounds absurd right? But just as absurd is the fact that money is contrived out of thin air by the banks. Therefore it’s possible.
Even though prices will increase, the governments will continue taxing real estate, equities and other assets. This taxation will keep keep governments in power and help them appear to still be relevant.
As we see a surplus in the unemployed labor force, social welfare programs will be expanded. More money will be available for student loans, having a child, buying a house, or government health care. Every person on the face of the earth might receive a basic life income of $500 or $1,000 per week. Keep in mind this is a digital currency, so you won’t be able to save it long (banks and the government will tax it every week). By dumping helicopter money on the public, the governments of the world will be spurring unneeded consumption (through boondoggles likes: wars, infrastructure projects, healthcare and college education financing). Additional boondoggles will include bailing out failed banks, corporations, and state governments.
Ultimately, we’re entering the ultimate era of leisure and free money. During this time we’ll see a “recession” every 7-10 years, created by the central bank, just to make it appear the marketplace is “free” and that money is “real”.
That’s just my theory…
I am NOT an investment professional. This blog is NOT intended to offer financial advice.