The Bank of Japan Just Postponed the Next Financial Crisis

The Bank of Japan (BoJ) stunned markets last Friday when it lowered interest rates to -0.1%. With rates already at zero, the BoJ joined the ranks of central banks that have pushed rates into negative territory.

If you’re shocked by any of this, you haven’t been paying attention to what’s going on. Even though markets act surprised, they really shouldn’t be. Anyone that’s following what central banks have been doing would’ve seen the writing on the wall.

If you’re still not sure what’s happening, here’s the short of it: central banks are laying the foundations for a financial crisis. Endless, low interest rates are pushing up asset prices. Those who realise what’s going on will exit quietly before the herd like markets realise. Asset prices will tank, ruining millions. Those that benefitted from the scam will resurface, buying up assets at a penny.

Don’t believe that? Well, look at how quickly the era of rising interest rates ended.

The false flag rate hike in US last December has proven nothing other than a token gesture. Some experts believed other central banks would follow in the Fed’s footsteps. They thought wrong. It wasn’t the first step in a global monetary policy reversal, as some believed. It was a timed, deflective tactic to ease concerns when global markets were suffering from self-doubt.

No, markets don’t like rate hikes, because it hurts asset prices. But, deep down, they like it when a central bank has enough confidence to lift rates. It reassures them that things are much better than they really are. Only, there’s one problem. Whatever stability was supposed to come about from the Fed’s move has gone out the window.

With the BoJ moving in the opposite direction, how long before the kingmaker at the Fed follows suit? Not long, you imagine.

You know exactly what happens next. Asset prices (namely stocks) will go up in Japan. The feel-good factor will spread around the world for a week at best. The Japanese yen will lose some of its value, which should please the BoJ. Meanwhile, Japan’s economy, which the BoJ have failed to stimulate for the better part of two decades, will receive an initial boost before fizzing out again.

It’s predictable, because it’s how it always goes.

What’s of real concern is that we now have two major central banks (BoJ and ECB) that have cut rates into negative territory. Of course, policymakers wouldn’t say there’s any reason to worry. They’ll claim rate cuts are necessary in boosting economic growth. But they’re wrong.

The idea behind negative rates is to discourage commercial banks from storing cash with the central bank. In other words, it gives the lenders a reason to borrow as much as heavenly possible.

In theory, lenders will loan said money out to businesses and individuals willy-nilly. Which, as central banks would claim, boosts economic growth through increased consumer spending.

In practice, things work a lot differently. As we’ve seen with the European experiment, theories often fail to match up with reality. Instead, you get juiced up asset prices at the expense of economic growth.

When you think about it, there’s a certain logic to that that’s hard to ignore. Why would investors store their cash with commercial banks if their returns are lower? They wouldn’t. They’d look for higher yields elsewhere like, say, stocks. Listen to what Citibank’s Steven Englander had to say on this (emphasis mine):

You can admire the policy boldness of the BoJ move into negative rates, and recognise its powerful asset market effects — positive for equities and negative for [the Japanese yen].

Experience in other countries that have entered into this territory should sober you up on the likely economic and inflation impact. No country that has gone into negative rates has experienced major shifts in its growth and inflation profile — minor, yes; major, no. As a consequence every dip into negative rates has been followed by additional moves.

Negative rates are a powerful inducement for cash to leave the banking system, but there is little evidence that investors take the cash and build steel plants with it. They buy foreign and financial assets, which is probably more than enough for the BoJ.’

The scariest thing about all this is where it leads. What is the end game here?

That two of the four most influential central banks in the world employ negative interest rates is a major concern. You have to wonder: how long until US and UK central banks, or even our very own RBA, follow suit?

I believe we’ll be seeing a lot more rate cutting, and just as many bond buying QE programs, this year.

As for the BoJ, expect to see it make further cuts to the cash rate. Its partner in crime, the ECB, has already signalled intentions to take their easing program much further. A decision to lower rates and expand QE could be made as early as March. In fact, European markets have priced in a 100% likelihood of 0.20% cut by the end of the year.

What chance then that the Fed, the real lynchpin in all this, keeps lifting rates from 0.25%? Slim to none.

As for the RBA, its sitting back idly waiting for the right to make its move as well. The (low) bar has been set by other banks and the RBA has got a lot of room to manoeuvre. Those who thought the days of 2% were the lowest rates would ever get have another thing coming.

Bank of Japan, central banks and the story of cash

There’s another point in all this that’s worth mentioning.

Clearly, some investors see the writing on the wall. They realise what the banks are doing. We know this because US gold prices had their best month in January in a year. Bullion is up 4.6% since the start of the year. That was in direct contrast with US stocks, which fell 7.4% in January.

Yet while investors may be cottoning onto what’s happening, they have little say in how it all unfolds.

At present, there’s a growing campaign against cash. Of course, the calls are largely coming from commercial banks, and their masters at the central banks. Norges Bank, the largest commercial bank in Norway, became the latest to support a ban on cash transactions last week.

Why is this happening? Because central banks can’t get away with negative interest rates in a world where cash exists. I wrote about this last week. And I want to share it with you here. It’s even more timely in light of this latest BoJ decision:

Cash is the only thing that can keep NIRP from becoming too negative.

Central banks wouldn’t risk lowering rates too far today because people could withdraw their money from any commercial bank they feared was insolvent.

But imagine that same scenario without physical cash to threaten a run on banks. Without the ability to take out cash, there’d be no leash to keep central banks from expanding NIRP.

What would that mean for you? Well, without cash, on top of this unrestrained NIRP, you’d have no say in what happens to your money. Banks could play around with negative rates all they like, and you wouldn’t be able to do anything about it. And if you can’t withdraw cash from a bank, you’re a slave to the bankers. It’s as simple as that. The prospect of NIRP would mean you’d either have to spend your money, or let negative rates eat away at it.

However, bankers can only realise the true potential of NIRP, and the wealth confiscation that goes with it, by eliminating cash.

Ultimately, this campaign against cash benefits bankers first and foremost. Using digital forms of payment might be convenient to us, but only in a world where physical cash still exists. In a world without cash, it becomes a bankers’ prison, and you become one its 22 million inmates.

It’s no exaggeration to call this movement one of the biggest scams of the 21st century. A cashless society is a world where there are no limits on what banks can do with your money. Their way becomes the only way. And yet we’re willingly sleepwalking into it.

It puts everything that’s happening in perspective, doesn’t it?

We’re heading towards a future of no cash. You’ll have no option but to store your money with banks. Negative interest rates will become commonplace. The banks’ ability to manipulate and inflate asset prices will continue as it always has. All the while, nothing will be done to fix the real economy.

That’s a future we can all look forward to.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Central bankers’ monetary manipulations are nothing new. Banning cash is the final frontier for them to maintain low interest rates as long as they want. Markets and Money’s Phillip J. Anderson reckons interest rates will remain at current record lows for years.

In his brand new report, ‘Why Interest Rates Could Stay Low for the 21st Century’, Phil warns that you won’t be able to rely on your savings to fund your retirement.

Inflation, stemming from low rates, will eat into your savings. Worse still, you won’t be able to count on savings funding your retirement. The regular return on term deposits has halved in the last four years alone.

But you have options…if you choose to act now.

Phil wants to show you the best way to invest in this low interest rate environment. He’s prepared a four-step strategy that could boost your portfolio and wealth. You’ll learn exactly where to park your cash over the coming decades. And you’ll see how this could lead to incredible profits. To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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