Mike Burnick: Remember the good old days when you opened a savings account at your local bank and were offered a free toaster in gratitude for your business?
Of course those days are long gone. After all, the global banking system practically went belly-up just a few years ago during the worst financial crisis since the Depression.
But last week, the European Central Bank (ECB) turned this quaint old bank business model completely upside down.
No free toaster … in fact, you’re lucky we even pay interest on your money anymore.
No wait, I’ve got a better idea; why don’t you pay us interest to keep your money on deposit at this fine institution.
That’s exactly what ECB President Mario Draghi announced last week.
In its latest act of desperation to get the European economy moving again, the ECB cut interest rates to negative 0.1 percent. You read that right. Member banks must now pay the ECB for the privilege of keeping excess reserves on deposit at the central bank.
|Real interest rates always had a very close, inverse correlation with the price of gold.|
After years of mostly empty promises to “do whatever it takes,” Draghi finally took action, cutting the benchmark ECB interest rate to record lows and for the first time ever, introducing negative deposit rates.
He explained the move is necessary to get Europe’s banks lending again in hopes of jump-starting an economy that remains perilously close to recession. Instead of lending more, Europe’s barely solvent banks will most likely just raise fees to customers in order to make up for the ECB’s interest charges.
The likely result: more capital flight out of Europe, but that’s not the end of this story. In a classic display of central bank hubris, Draghi declared “we aren’t finished here.”
Following in the footsteps of the Federal Reserve, Draghi laid out a game plan for quantitative easing, Euro-style, with the ECB discussing a Fed-style bond purchase program.
All around the world, central banks are more committed than ever to keep ultra-easy money policies in place as far as the eye can see, perhaps for years to come.
As the ECB gears up to launch QE-Euro, the Bank of Japan is busy buying 7 trillion yen of Japanese government bonds each and every month, as it has been doing since April 2013.
QE by the Bank of England has bloated its balance sheet to 24 percent of Britain’s gross domestic product.
Not to be outdone, the Fed’s own balance sheet at $4.3 trillion and counting accounts for 25 percent of U.S. GDP!