It is one thing to be a small Northern European economy who's oil revenues have declined to the point where you must institute negative interest rates to keep your system going, but it is something else when the 3rd largest economy in the world does it because they have no other option. On Friday Jan. 29, Japan shocked everyone by announcing they are moving to negative interest rates in an attempt to fend off their deflationary recession. This move is the final consequence of more than 20 years of zero interest rates and continuous money printing, where the central bank now owns an estimated 55% of their stock markets, and nearly every sovereign and corporate bond that is still active.
But missing from Wall Street's Friday stock market euphoria is the fact that negative interest rates (or NIRP) are the end game, and not some miraculous solution to Japan's (or anyone's) problems. And in fact, what is really soon to happen is an explosion of problems that will make no one outside of the programmed sheep willing to keep their money in any bank, bond, or yen denominated asset.
In essence, NIRP is the dinner now being served on an international Capital Flight.
The negative interest rate is, in effect, a tax on financial assets, and not the BoJ’s intention. This could lead to an opposite outcome to that of the initial intention, whereby the country encourages companies and households to engage in capital outflow.
It is that last bullet point which is most important because it leads us to the most disturbing topic of all for Japan - the risk that NIRP backfires and leads to another "China", where the local citizens rush to park their assets offshore, resulting in a slow at first then rapidly accelerating capital outflow. This is how DB explains it:
If the negative interest rate continues for longer or goes deeper, commercial banks may have to set negative interest rates on deposits, which would expand not only the tax on commercial banks, but also on depositors (households and companies). This could lead to a ‘silent bank run’ via a shift of deposits to cash (banknotes), which in turn damages the sound banking system by enlarging the leakage of funds from the credit creation mechanism in the banking system. - Zerohedge
As with all Keynesian studied bankers who believe debt is a good thing, and savings are bad, NIRP is a form of coercion to force people into the alternatives of spend or lose your wealth over time through fee attrition. But unfortunately for the short-sighted BOJ, the Chinese people have already shown that there are alternatives far beyond those imagined by the bankers.
And that is, capital flight into something other than the Yen (or the Yuan).
For the rest of the Western bankers, NIRP also creates a problem for their ponzi schemes and speculative processes because it suddenly makes the long-standing carry trade function a losing proposition.
But wait, there's more!
In a new interview on Friday, Peter Schiff believes that the U.S. will follow the same path as Japan and have to not only retract their December rate hike, but they will even double down on lowering of interest rates into negative territory. Because while a strong dollar is good for a debtor nation, it is massively destructive to a system that relies on new debt to import goods.
Statistics as of 2011
So if the 3rd largest economy just jumped the shark and went NIRP on the world, and the largest economy (U.S.) is expected to do the same in the coming months, what assets and in what currency is anything worth owning to protect your wealth since capital flight is only relevant if you can move your money to a place that not only retains its value, but might even provide you a modicum return?
I think people here at Rogue Money know the answer, and is why V and others have been pushing so hard at this time in history for physical gold and silver ownership. Because these monetary constructs are immune to the wiles of banksters, and to the destructive capabilities of central banks.
And just remember, in a capital flight, bags fly free!