Dumb and Dumber – From Negative Interest Rates to Helicopter Money

We’ve all run into someone who thinks that all it take to bring about prosperity is to give everyone a million dollars. If everyone is a millionaire, we’ll all be rich and be able to afford anything we want, or so the thinking goes. Any sound economist knows that wouldn’t be the case, however. If everyone were given a million dollars the increased amount of money chasing the existing stock of goods would merely result in a massive rise in prices. No one would be better off, at least not once prices were once again equilibrated. The concept of giving everyone a million dollars is so absurd that no one takes it seriously. That is, they don’t take it seriously when a million dollars is the proposed amount. When the amount is smaller, all of a sudden it becomes a viable and increasingly-discussed policy proposal: helicopter money.

German Response to Negative Interest Rates: Safe Deposit Boxes

Image: -JvL-

Image: -JvL-

The Japanese response to negative interest rates was to buy personal safes. The German response is to pull money out of bank accounts and stick it in safe deposit boxes. Both are perfectly understandable reactions to the prospect of having to pay interest to a bank for holding deposits. It is particularly interesting in Germany, where the Bundesbank a few years ago admitted that the average real rate of return on savings deposits has been negative for nearly the past 40 years. Now that nominal rates have turned negative too, the facade of savings accounts as a safe place to park money to earn a little bit of income has finally been ripped away.

A Brief Monetary History Of The United States: Part VII

Today we bring you Part VII of “A Brief Monetary History of the United States” from the Ron Paul Monetary Policy Anthology. The full series can be found at the following links:

  • Part I – Colonial Money and the Coinage Act of 1792
  • Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
  • Part III – Government Begins to Monopolize Currency
  • Part IV – The Legal Tender Cases and the “Crime of ’73”
  • Part V – The Rise of the Fed
  • Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
  • Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
  • Part VIII – The 1980s to the Great Recession and on to the Future

    Bretton Woods and Gold

    Mount Washington Hotel, site of the Bretton Woods Conference. Image: Richard Hicks

    Mount Washington Hotel, site of the Bretton Woods Conference. Image: Richard Hicks

    In the aftermath of World War II, the United States cemented its position as the world’s largest and most powerful economy. The new international monetary order created at Bretton Woods, New Hampshire in 1946 was based in part on the gold-exchange standard of the 1920s, only with the dollar as the sole international reserve currency—since it was as good as gold. All countries tied their currencies to the dollar at fixed exchange rates, with the dollar being defined as FDR had left it, at 1/35 ounce of gold (i.e. $35 per ounce of gold). While individuals in the United States were still unable to own gold or to redeem their dollars for gold, foreign governments were able to cash in their dollars to the U.S. government and receive gold in return, a process that became known as the “gold window.” While the United States would pyramid its dollar issue on top of its gold reserves, other countries were supposed to hold dollars, and not gold, as their primary foreign exchange holdings.

    Mortgage Shenanigans Returning

    Image: Violette79

    Image: Violette79

    In another ominous sign of a returning housing bubble, Bank of America is introducing a new mortgage that requires only a three percent down payment. The reason for doing so is to get around Federal Housing Administration (FHA) backing for mortgage loans, as banks have been penalized in recent years for errors in originating those loans. This new 3%-down mortgage will be targeted toward lower-income households. On the high end, we’ve already seen no down payment jumbo loans.

    The US Banking System as an Arm of US Foreign Policy

    The Russian government is readying a new issuance of foreign bonds and has invited non-Russian banks to participate in the bond auction. US banks would like to participate in the auction but have been warned by the State Department that this would violate the spirit, if not the letter, of US sanctions against Russia. Even though it wouldn’t be illegal for the banks to bid in the auction, the State Department is warning of “reputational risk” to those banks that do decide to participate. There must be stronger language that the State Department is using privately, in which they’re undoubtedly trying to make the banks an offer they can’t refuse.

    Japanese Starting to Hoard Cash in Response to Negative Interest Rates

    In response to the Bank of Japan’s introduction of negative interest rates, the Wall Street Journal reports that sales of personal safes to store hoarded cash are soaring. It’s an entirely predictable reaction to the introduction of negative interest rates. If you’re going to have to pay to store your money in a bank, why not just store it yourself?

    Why Breaking Up Big Banks Is No Solution

    Image: H. Sanchez

    Image: H. Sanchez

    Neel Kashkari used his first public speech as President of the Minneapolis Fed to argue in favor of breaking up big banks. Big banks are problematic for a number of reasons, not least of which is the fact that their size, reach, and systemic importance makes it incredibly difficult for the government to allow them to go bankrupt. While small regional banks go under with regularity, unwinding a Bank of America or Wells Fargo in an orderly manner would be very hard, if not impossible, therefore there is a strong incentive to bailout large banks. Kashkari knows this well, as he was one of the architects of the $700 billion bank bailout in 2008. While Kashkari seems to have changed his tune between then and now, his proposal to break up big banks is not the right solution.

    War on Cash: The Fix Is In

    Former Treasury Secretary Larry Summers has come out in favor of eliminating the $100 bill. Following on the European Central Bank’s decision to scrap the €500 note, it is clear that the international war on cash is about to intensify. In the United States the lowest coin denominations, the penny and nickel, are increasingly devalued by inflation and likely to be eliminated in the near future. With the highest denomination bills now facing scrutiny as well, cash is under attack from both ends. As usual, the opponents of cash trot out the usual bogeymen in attacking the use of cash. Summers refers to Luxemburg as one of the defenders of the €500 note, characterizing the country as one “giving comfort to tax evaders, money launderers, and other proponents of bank secrecy…” God forbid we peons should be allowed to keep our money safe from the greedy hands of government officials. The real purpose of the war on cash is not to combat criminals or terrorists but to ease the government’s ability to plunder its citizenry.

    Ron Paul: What Markets Are Telling Us

    What Markets Are Telling Us
    By Ron Paul

    Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity.