Banks in Europe are facing an existential threat that could soon spread to the U.S., particularly if Donald Trump gropes his way toward zero interest rates. There will be few who would feel any sympathy if banks do begin to collapse.
And what’s more, the threats they face could finally turn the tides of favor among the general public from fiat to cryptocurrency, refugees of a failed experiment in ill-conceived monetary policy at the regulatory level.
As the European Central Bank persists with its zero percent to negative interest rate policy, the economic harm it could cause in the long run could be as significant as the harm it is doing to the banking sector in the short term.
But as we shall see in this article, none of these factors are likely to harm the cryptocurrency industry in the long-run: if only because of the old maxim: “Fool me once – shame on you. Fool me twice – shame on me.”
Our tolerance for a bailout was tested in 2008: it’s hard to see how one could be supported again.
Hindsight is 2020, and a recession may be too.
Tweeting Banks Into Oblivion
The septuagenarian currently squatting in the Oval Office admires Europe’s aggressive loosening of monetary policy, urging the Fed to follow suit via the preferred medium of modern White House communications, Twitter.
Trump’s tweet, targeting the “boneheads” at the Fed, could not have more clearly illuminated his zeal for no-more-than-zero percent interest rates:
The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet…..
— Donald J. Trump (@realDonaldTrump) September 11, 2019
Germany, Sweden, and Denmark all have negative interest rates. The perverse, but intended, incentive for the consumer is to spend their money as soon as they earn it. Saving it will only see it shrink. Both nominally and in real terms.
Part of Trump’s idea is to refinance government debt at those lower rates, which, analyst Dick Bove of Odeon Capital Group says:
“From a theoretical standpoint, obviously would be wonderful for the United States government over a period of years if it were to lengthen the maturities on debt that would have rates below 1%. It would certainly be beneficial to the United States government. Whether it would be beneficial to the United States economy is an open question.”
In fact, the idea is implausible as it would violate contractual relationships the Treasury Dept. has with investors. It is not refinancable debt.
Europe Opens the Doors for a Banking Emergency
The ECB’s low-to-negative interest rate policy is placing the banking sector in a precarious position, as it simultaneously causes systemic harm to the economy. Low interest rates are helping prop up otherwise unprofitable companies. The effect is the postponement of creative destruction. Once interest rates eventually rise, those companies will likely file for bankruptcy.
That misallocation of capital is hindering, not helping, Europe’s economic malaise. What is needed here is structural reform and active fiscal measures. Not bad monetary policy and zero interest rates.
Secondly, banking profits are falling as overnight yields with central banks become a cost, rather than a small profit, and as they are competing for business in a race to the bottom to offer customers the best rates possible. Margins are wafer-thin and profitability is declining as loans do not attract the same returns as they once did.
Thirdly, once economic growth returns – which people being encouraged to spend may well cause, as intended – interest rates will need to rise, but will be doing so in an environment where there is a real risk of inflation given the excessive consumer spending monetary policy has prompted. Rising rates will force the bankruptcy of stagnant companies propped up by low rates, leading to the risk of bank losses.
Those same banks will be stuck in long term low-interest loan agreements which they will find difficult to refinance, meaning their return to normalcy will be prolonged. The return to normalcy could lead to asset price falls, too, meaning loans become riskier.
Meanwhile, banks will have been forced to take greater risks with their capital, in search of higher returns. That too, could lead to losses.
The Cryptocurrency Solution
Those drawn to crypto in its earliest days were inspired by its distance from central bank or government control. It is easy to imagine that, in the event of a second banking crisis, a bailout would be political suicide. Without the post-Lehman Brothers bailout, a number of large, long-standing American financial institutions would possibly not have survived, causing a prolonged and severe economic contraction.
But the bailouts also caused immense public anger, and rightly so. Those who caused the meltdown were the first in line receiving government handouts to prevent them from collapsing under the weight of their own ineptitude.
The Occupy Wall Street movement was a direct, if delayed, response to them. The public’s tolerance for a second such episode would rightly be very slight. And now, of course, there is an alternative.
On Tuesday, visiting scholar at the Lee Kuan Yew School of Public Policy, Yuwa Hedrick-Wong, told attendees at the Forbes Global CEO Conference in Singapore:
“I’m a firm believer that zero interest rates, or negative interest rates (is) actually doing tremendous damage to the economy over the long term. We have to reverse that process. Normalization of interest rates has to be the top priority in managing the economy going forward. The addiction to cheap money… that’s the problem, not the solution.”
If zero interest rates create another banking crisis, the public distaste for another banking bailout could easily turn people toward crypto.
Breaking bitcoin is the term Crypto Briefing used in a recent article to describe the situation wherein people turn to cryptocurrency after finally learning governments, central banks, and the banks they deal with are not to be trusted.
Fixed supply cryptos such as bitcoin would also find appeal in such a scenario as a store of value. Another banking crisis would be a painful, but positive, development in the long run. As Twitter’s Jack Dorsey said about bitcoin as the world’s internet currency:
”The creation of it was very pure, and focused on a public good, rather than any other particular agenda. The fact that it’s meant to be deflationary, meant to incentivize savings instead of spending, I think is a net positive for the world and how we think about consuming. Because it is a scarce resource, it has a probability of always increasing in value, which makes you consider a lot more how you spend it.”
The prolonged reign of artificially low interest rates has caused a stock market bubble; over-leveraged households; no sign of a strong recovery from the 2008 disaster; and could cause enormous trouble for our legacy financial institutions.
Getting exposure to cryptocurrency before that house of cards falls might not be a bad idea.