Wealth Accumulation Is Becoming Impossible

B Keith Weiner – Re-Blogged From Gold Eagle

We talk a lot about the falling interest rate, the too-low interest rate, the near-zero interest rate, the zero interest rate, and the negative interest rate. Hat Tip to Switzerland, where Credit Suisse is now going to pay depositors -0.85%. That is, if you lend your francs to this bank, they take some of them every year. Almost 1% of them.

A bank deposit comes with a risk. But instead of compensating you for the risk, the bank pays you nothing. So it’s a return-free risk. And worse than that, a negative rate means that you are paying the bank in order to take the risk of lending to them.

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Keep Your Wealth from Falling Into The Negative Interest Rate Vortex

By Stefan Gleason – Re-Blogged From Gold Eagle

The world is in the midst of one of the strangest asset bubbles of all time. Instead of being fueled by the hope of bigger and bigger gains, it is being driven by a resignation to incurring lower and lower… and ultimately negative, yields on capital.

This summer, the global inventory of bonds yielding less than zero reached a record $13 trillion.

Negative yielding instruments are concentrated mainly in Europe and Japan, where they have spread from sovereign to corporate issuances. Now even some “junk”-rated bonds are teetering around 0%.

War on Cash Turns to $20, $50, and $100 Bills

Re-Blogged From Money Metals News

Harvard professor and economist Ken Rogoff is once again leading the chorus of high-level academics and officials who declare cash is only for criminals. He made his case in a recent Wall Street Journal editorial called the “Sinister Side of Cash.” The solution, he declares, is to simply get rid of anything but the smallest bank notes.

In his vision, drug dealers, human traffickers, and tax cheats are everywhere, but they are reliant on cash. Our benevolent central planners can largely incapacitate them by ridding society of anything larger than a $10 bill.

Kingpins won’t know what to do when a single-engine Cessna full of cocaine requires a Boeing 747 full of $1s, $5s, and $10s to make payment.

Rogoff seems to blame cash, not bad people, for facilitating criminal activity. He writes;
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Three Big Stories NOT Being Covered #2 – The Yield Curve

By Andy Sutton & Graham Mehl – Re-Blogged From http://www.Gold-Eagle.com

It occurred to us as we were laying out the contents of this article that we should probably not assume certain things. This publication has a wide readership, from corporate CEOs to high school students. The former are looking for analysis, the latter to become educated. The topic we are going to tackle in this second installment is a complex one, so some introduction is in order. Therefore, this piece will consist of two parts: an opening introduction, a primer if you will, followed by the analysis. If you are well-versed in interest rates, bonds, bond yields, and debt, you can probably skip the primer, although we’ve been surprised at the number of people who have subscribed to the misconceptions stated therein.

The topic we are going to tackle is the negative US yield curve. It is being talked about a little in the media, but not nearly enough and without anything in the way of background. If you have taken finance classes you can understand it, but if you haven’t, then you’re out of luck. We reject that out of hand. This is a topic that affects everyone, so understanding will not be limited to the Wharton MBA types. Without further delay, we begin.

Part I – The Primer

Andy will handle this portion because he’s got the knack for making this stuff understandable in less than ten thousand words. We’ll both handle the second portion of the piece. As most of you realize, there is a debt problem in the world. It’s why many of you started reading this column and others like it. The debt problem exists at all levels – global, federal, state, municipal, and personal. While these are all separate in nature, they are linked as well, which makes it complicated. What I’m going to describe to you is how this situation is, minus any manipulation, just so you can get a sense of what is going on. Let’s begin with interest rates.

Interest rates are set basically in two ways – by policy fiat and by various financial markets. For example, when you hear about the not-so-USFed raising interest rates, they are mostly talking about what is known as the Fed Funds Rate, which is the rate banks charge each other for overnight loans. When you hear the term ‘interest rates’ on the news along with the ‘fed’, this is most commonly what is being referred to. There are some other lesser interest rates that are set by the not-so-USFed, but they don’t fall within the scope of this article.

Next we have interest rates that consumers deal with such as credit card rates, the Prime Rate, mortgage rates, auto loan rates, and so forth. Of these, the Prime Rate, credit card rates, and auto loan rates are set by the banks. For example, the Prime Rate has historically been 3% higher than the target for the aforementioned Fed Funds Rate. Mortgage rates have traditionally been different in that they have been determined by the bond market, specifically, the 10-Year USTreasury Note. I’ll get to that in a bit.

So when we talk about interest rates, we’re talking about the cost of borrowing money (debt). If you borrow for a car, a house, a yacht, or an iPhone, it costs money to borrow money. Let’s say you purchase $5000 worth of merchandise on your credit card. Your interest rate is equivalent to the national average of 15.07%. If you don’t pay your $5000 in purchases off before the due date on the card, the interest will start piling up. The cost of borrowing that $5000 will be $753.50 per year as long as the balance remains at $5000. As you pay down the balance, the cost of borrowing in dollars falls even though your rate remains the same because the balance is dropping.

Now, let’s take what we’ve learned above and apply it to the USGovt, which has a voracious appetite for debt because it loves to spend more than it takes in. In many ways, the government is no different than the USConsumer. Both spend more than they bring in and both must borrow the difference. The only difference is that the government gets a better deal on interest rates than you do. The USGovt issues debt instruments called ‘Bills’, ‘Notes’, or ‘Bonds’. Bills are debt instruments that mature in less than one year, Notes mature in 1-10 years, and Bonds mature in greater than 10 years. It sells these instruments to raise the money to fund its deficit spending. And, much like your credit card, the government has to pay interest on the bonds it issues.

So in concept, the government doesn’t have a credit card like the consumer, but the end result is the same. Both parties end up owing a bunch of money to creditors – at interest. The government sells notes and bonds of various durations – periods of time. These durations run from 1 month to 30 years. If you purchase a 1-month T-bill you’ll receive a certain rate of interest. As of 7/29/2016, that rate is calculated to be .19%. While T-Bills are handled differently than other types of Treasury Notes and Bonds insofar as interest is determined, those differences lie outside the scope of the article. If you are curious how T-Bill rates are determined, here is a good place to start. It is important to note, however, that the .19% interest rate published for 30-day T-Bills is the annualized rate. In other words, if you bought 12 30-day T-Bills and held them until maturity, you’d end up with .19% interest. A common misconception is that the published rate is for a single 30-day T-Bill.

Oddly, and I’ll take a walk down a short rabbit trail here, the concept of annualization is one that is used elsewhere and has led to a great misunderstanding by many. If you’ve been paying attention the past few days there has been talk of the recent GDP report for the United States. It was reported as 1.2% for the most recent quarter. That would lead many to think that means the economy grew at a 4.8% annualized rate during the last quarter. It’s actually the opposite. The rate of growth that is stated is already annualized. So, put another way, the USEconomy grew .3% in the last quarter. They multiplied it by 4 to get the annualized rate, which is what is published. The quick lesson here is that it is always good to understand the terms of magnitude that you’re dealing with when presented with numeric data.

Getting back to government debt, let’s take a look at the various durations available. In addition to the 30-day T-Bill, there are 13-week (3-month), 26-week (6-month), and 52-week (1-Year) T-Bills. The next several durations are called ‘notes’ since their maturities lie between 1 and 10 years. In this group are the 2-year, 3-year, 5-year, and 10-year Notes. Then there are 20-year and 30-year Bonds. They are called Bonds because their maturities are greater than 10 years. As one would expect, when you invest (pledge) your money to a borrower for a longer period of time, a greater amount of interest is generally expected – to compensate the buyer for time-risk. Whereas 30 days is a very short period of time (although these days a lot can change in a month), 30 years is so long that everything – including the maps – can change in that duration. So it would make sense that if you’re asking someone to lend you money for that long, that you’d compensate them appropriately.

Consequently, on any given day, Treasury debt instruments (Bills, Notes, and Bonds) are bought and sold and as such, the yield or interest rate changes. The concatenation of the yields for debt instruments across all maturities can be charted, resulting in what is called the yield curve. The yield curve changes daily as rates change due to bond prices. A general rule of thumb is that bond prices are inverse to bond yields (interest rates). So as bond prices go up, rates go down and vice versa.

Part II – The Analysis

Looking at our example rate of a 30-day T-Bill from above, we see that as of 7/29/16, the calculated interest rate on such instruments is .19% per year. This rate is similar in nature to what a credit union or ‘premium’ checking account would pay. It is a joke. When you consider the government’s admitted level of price inflation is around 2%, you’re losing money on T-Bills. When you look at your own rate of price inflation (most people we talk to report around 4% since the first of 2016), you’re even further in the hole. The problem is not the T-Bills. If it were, we’d just advise that people think strongly before buying T-Bills. No, the problem here is that the negative interest rates stretch across MOST maturities when using the CPI and ALL maturities when using the rate of price inflation reported by most consumers, at least the ones we talk to. We’ll admit we have not conducted a scientific sampling as should be done; we’re just going by what the average Joe is reporting back. That has proven more than sufficient for illustrative purposes in the past. We’re not generating mathematical models here; we’re making a point.

Take the rate for the 30-year bond as of 7/29/2016. It is 2.18%. This rate is annualized. You get payments every six months for 30 years. Now, a caveat. If you happened to buy this 30-year bond when prices were a lot lower, your yield is higher. The 2.18% represents the yield for someone who bought the bond on 7/29/16. For example, if you bought the same bond on 1/4/16, your yield would be 2.98%. That’s a .80% difference. You’ll also hear the term ‘basis points’. A basis point or a ‘bp’ is simply .01%. So .80% would be 80 basis points and so forth. So you might hear someone say “Yields on the 30-year bond have dropped 80 bps (basis points) since the first of the year.”

If we take a look at the various Consumer Price Index measurements, it becomes quite confusing very quickly. There are pages of different series depending on urban vs. rural, the size of the city, type of good, etc. Here’s an example. At any rate, the Bureau of Labor Statistics, which is responsible for compiling these figures states that the headline rate of inflation (CPI-U, all items) has risen 1.0% in the past year, but .2% in the past month. The ‘core’ rate, which is the CPI-U rate minus food and energy, because these are deemed to be more volatile, is up 2.3% in the past year. Since the media and government insist on using the core, so will we.

The World Has Changed

It doesn’t take a mathematician to figure out that while the 30-year bond has flirted with positive territory, the rest of the yield curve is firmly negative when core price inflation is deducted from the yield. There has been an old adage in the investment community for many decades now – buy stocks when you’re young, then sell the stocks to purchase bonds when you get closer to retirement and live off the interest. Given that the interest is eaten up by price inflation, one of the main pillars of traditional ‘flat earth’ investing is destroyed. But nobody is admitting it! Investment advisors and brokers are STILL pushing seniors to buy bonds; instead they are now hoping to make money by the price of the bonds going up rather than just sitting on the bond and collecting interest. Obviously, this subtle change can have enormous consequences for the investor without the investor even realizing it. The investor has been exposed to a whole new risk spectrum and little in the way of disclosure is taking place whether it is the advisor, the media, or the government.

Secondly, for those investors who do realize what is going on, they are forced to make a tough decision: buy bonds and hope to make money via arbitrage or abandon the bond strategy, if even partially, in favor of staying in the equity markets where there is historically more risk. Reducing risk was the whole point of moving from stocks to bonds as one progressed into retirement in the first place. Now these same people are basically being forced back into the equity markets in search of returns. If you look back at the beginning of 2008, the 30-year bond was paying 4.35% interest; nearly double what it is right now. Our point is simple; before the last major financial blowout, most seniors were still in their traditional risk profile – fewer stocks and more bonds and fixed income to mitigate risk. When the fall of 2008 came around, money poured from stocks into bonds, driving up the price of bonds and the yields down. So our seniors had a little of their cake and got to eat it as well. They had purchased their bonds at comparatively lower prices and got decent yields. Then as money poured into bonds after Lehman and through the end of 2008, they maintained their yields AND had the option of selling their bonds at a profit as well if they desired the safety of cash.

Fast forward to today where many seniors are hunting returns in the stock market. Another 2008 type event would have dramatically different results this time around just because of the way investors are positioned. The ones who are in bonds would have (and have had) the opportunity of selling their bonds at higher prices. Bonds spiked after the Brexit vote back at the end of June and haven’t really given all that much back.

The bottom line here is the negative yield curve punishes savers and enables the USGovt to continue its profligate spending by providing it with better than prime rates when it should in fact be paying much higher rates due to its lack of spending control, the absolute enormity of the debt that must be repaid, and a complete and total lack of willingness on the part of ANYONE to give up anything. The American people want their freebies and the USGovt is more than happy to oblige in order to buy support. We have seen where this lack of responsibility and stewardship has gotten Europe, but hey, this is America and nothing bad can happen to us, right? This false reality is supported by the fact that when anything bad happens financially, there is a knee-jerk and immediate flight to the USDollar and USGovt debt. So much so that rates have been driven down to the point where USBond investors are actually paying Uncle Sam for the ‘privilege’ of owning government debt.

Some other Miscellanea Regarding the Yield Curve

Another characteristic of the yield curve that has been the subject of much study over the years is the shape of the curve. Is it flat, steep, inverted, humped, etc.? A great deal of research has been done over the decades relating to the shape of the yield curve, certain spreads, and how they portend the future for the USEconomy. What you’ll see from the charts below is that the yield curve is flattening and that generally means a great deal of uncertainty regarding the direction of the USEconomy, which isn’t surprising. The fact that anyone is willing to loan the USGovt money for 30 days let alone 30 years at a negative rate ought to say enough about what is going on and how out of kilter things really are.

Below is the yield curve as of 7/29/2016:

Also, the 20-year Bond generally yields around 200 bps (2%) more than the 30-day T-Bill. Today that is most definitely NOT the case with the spread being closer to 1.5%.

What we’re seeing above is a fairly ‘normal’ yield curve in terms of shape, but one that is completely negative. We’ve placed the horizontal line representing the Core CPI to illustrate this point. You can also see that the curve has flattened considerably, especially from 1-year and out when comparing the 7/1/2015 and 7/29/2016 curves.

This begs the question, why would investors, knowing what they do about the global state of affairs, tie up money at the longer durations? We don’t believe these are buy and hold folks, unless you’re talking about the not-so-USFed’s trading desk. Their role in all this hasn’t been discussed and is a topic for another day, but we’ll remind you again of their primary role – management of expectations, and basically holding this broken mess together as much as possible. Getting back to reasons for holding the longer maturities, speculation likely tops the list. Market actors expect crises to occur fairly regularly now, as has been the case. These same actors know that when a crisis hits, money flies into USTreasury debt, even the long end. Brexit is the most recent example of this. Money absolutely poured into the 10 and 30-year portions of the curve.

Frankly, gold is a much safer haven, but runs into the old argument that it doesn’t pay interest. Well people, neither do USTreasuries. They pay negative interest. So the question becomes would you rather own the debt instrument of an economically, financially, intellectually, and morally bankrupt entity intent on its own demise or own something that owes nobody, has been recognized as money for thousands of years and pays peace of mind as its ‘interest’? We happen to think this one is a no-brainer.

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Negative Interest Rates Aren’t Working Because They Haven’t Been Tried

By David Haggith – Re-Blogged From Great Recession Blog

The economics world is all a-chatter about how central banks and their member banks have moved interest rates beyond the zero bound to charging negative interest rates. There is just as much brainless talk about why this is accomplishing nothing. No one seems to notice that negative interest rates never actually happened!

Sounds preposterous? Think about it:

Think about it in terms of the central banks’ stated objective, which is lowering the rate at which banks loan out money. As the recession went on, central banks tried to drive interest on loans like mortgages lower and lower in order to entice people to buy things with loans in order to stimulate the economy. Because that didn’t stimulate the economy enough, central banks started saying they might have to go from lowering interest (for banks) to the zero bound (zero interest rate policy — ZIRP) to taking interest all the way negative (negative interest rate policy  — NIRP). Nope. Never happened anywhere.

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Negative Interest Rates Boost Gold Demand Overseas

By Frank Holmes – Re-Blogged From http://www.Gold-Eagle.com

Strengths

  • The best performing precious metal for the week was silver, up 2.87 percent. Investors own the most silver in exchange-traded products in seven months, boosting holdings from a three-year low, according to ZeroHedge. This rebound comes as hedge funds and other money managers hold a near-record bet on further price gains.
  • Physical gold ETF holdings have increased by over 270 tonnes since reaching their cycle-low in early January, reports TD Securities, coinciding with an 18 percent rally in the gold price. In contrast, only three tons of gold have been collected so far in India’s newly announced deposit plan. Macquarie raised its 2016 gold forecast for the precious metal by 4.8 percent, while Morgan Stanley announced its gold price outlook for the year up 8 percent to $1,173 per ounce.

One Big Reason a Global Stock Market Crash in 2016 Is More Likely Than Ever

By David Zeiler – Re-Blogged From http://www.wallstreetexaminer.com

With each passing day, the irresponsible behavior of the world’s central banks brings us closer to a full-blown global stock market crash in 2016.

We’re already in a bear market. On Thursday, the MSCI All-Country World Index fell 1.3%, giving it a 20% decline since last May.

Issues such as slowing economic growth in China, $5 trillion of emerging market debt, and rock-bottom oil prices have made investors increasingly skittish.

But now the world’s central banks have started to toss gasoline on the fire in the form of negative interest rates. The lower they go, the more likely they are to trigger a global stock market crash in 2016.

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Hang Onto Your Wallets

By Ellen Brown – Re-Blogged From http://www.Silver-Phoenix500.com

In uncertain times, “cash is king,” but central bankers are systematically moving to eliminate that option. Is it really about stimulating the economy? Or is there some deeper, darker threat afoot?

Remember those old ads showing a senior couple lounging on a warm beach, captioned “Let your money work for you”? Or the scene in Mary Poppins where young Michael is being advised to put his tuppence in the bank, so that it can compound into “all manner of private enterprise,” including “bonds, chattels, dividends, shares, shipyards, amalgamations . . . ”?

That may still work if you’re a Wall Street banker, but if you’re an ordinary saver with your money in the bank, you may soon be paying the bank to hold your funds rather than the reverse.

Four European central banks – the European Central Bank, the Swiss National Bank, Sweden’s Riksbank, and Denmark’s Nationalbank – have now imposed negative interest rates on the reserves they hold for commercial banks; and discussion has turned to whether it’s time to pass those costs on to consumers. The Bank of Japan and the Federal Reserve are still at ZIRP (Zero Interest Rate Policy), but several Fed officials have also begun calling for NIRP (negative rates).

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How the Great Depression 2.0 Will Soon Unfold

By Michael Pento – Re-Blogged From http://www.PentoPort.com

Those who place their faith in a sustainable economic recovery emanating through government fiat will soon be shocked. Colossal central bank counterfeiting and gargantuan government deficit spending has caused the major averages to climb back towards unchanged on the year. Zero interest rate and negative interest rate policies, along with unprecedented interest rate manipulations, have levitated global stock markets. But still, sustainable and robust GDP growth has been remarkably absent for the past 8 years.

Equity prices have now become massively disconnected from underlying economic activity, and the recession in corporate revenue and earnings growth is exacerbating this overvalued condition. Throw in the fact that earnings have been manipulated higher by Wall Street’s recent prowess in the art of financial engineering, and you get an extremely combustible cocktail.

I have been on record saying this will end in chaos and here is how I think it will unfold: Continue reading

Potato Sack Economics

By MN Gordon – Re-Blogged From David Stockman’s Contra Corner

Fiscal policy, as opposed to monetary policy, is more readily understood by the general populace. Income taxes, budget deficits, the national debt.  These are all tangible things the average working stiff can grasp a hold of, if they care to.

The consequences of ZIRP or QE, however, are less obvious to the casual observer.  They experience the wild booms and busts of central bank caused price distortions yet never connect the dots back to the Fed.  They may falsely condemn capitalism, and never scratch below the surface where the Fed’s money and credit games are lurking.

The industrious wage earner may also find that, despite working harder and harder, their lot in life never improves.  In fact, it may even regress.  Still, many won’t recognize heavy handed monetary policy as factors for their disappointment.

The recent college graduate, making a subsistence wage at a franchise coffee shop, buried under $50,000 in student loan debt, may be keenly aware that something is radically wrong.  How come the cost of school is at such disparity with the value it provides, they may ask?

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The War On Cash: Why Now?

Why are governments suddenly acting as if cash money is a bad thing that must be severely limited or eliminated?

Before we get to that, let’s distinguish between physical cash—currency and coins in your possession—and digital cash in the bank. The difference is self-evident: cash in hand cannot be confiscated by a “bail-in” (i.e. officially sanctioned theft) in which the government or bank expropriates a percentage of cash deposited in the bank.  Cash in hand cannot be chipped away by negative interest rates or fees like cash held in a bank.

Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks, i.e. a bank holiday.

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More Outlets Are Suggesting A Carry Tax On Physical Cash

By Graham Summers – Re-Blogged From http://www.Gold-Eagle.com

A Carry Tax… or tax on physical currency… is coming.

The Fed and other Central Banks literally took the nuclear option in dealing with the 2008 bust. Collectively, they’ve printed over $11 trillion and have cut interest rates to zero for nearly six years.

All of these efforts were focused on driving in trashing cash and forcing investors/ depositors into risk assets.

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Ben Bernanke Blogs

By Keith Weiner – Re-Blogged From http://www.Gold-Eagle.com

Ben Bernanke presided over the Federal Reserve for two terms, from 2006 through 2014. A year and half into his first term, he began driving the Federal Funds Rate down. By the end of his frantic interest episode, this key overnight lending benchmark had been crushed. It hit bottom, and it hasn’t sprung back in over 6 years since.

Everyone is harmed by zero interest policy. Who suffers the most is open to debate, but one obvious candidate is the retiree who lives on a fixed income. These are people who worked and saved their whole lives, and now they depend on interest to buy groceries and heat their homes. For them, zero interest is like breathing air without oxygen. They suffer a slow death by suffocation.

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Did The Fed Just Admit to Deep Uncertainty About Our Financial Security In Retirement?

By Daniel R. Amerman, CFA – Re-Blogged From http://danielamerman.com

Generally speaking, the chairperson of the Federal Reserve is treated by the mainstream financial media as being the very paragon of respectability. If the Fed says it – then the voice of economic authority has spoken, and we need to listen carefully.

Yet, recent comments by Janet Yellen have instead made her a source of “controversial” economic ideas, with some financial reporters and their editors apparently feeling a duty to protect their reading audience – and let them know this is not acceptable economic thinking, but rather is “far outside the mainstream.”

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Sub-Zero Interest Rates as an Endless Daylight Saving Time

By   – Re-Blogged From http://www.Mises.org

We all know about Milton Friedman’s money helicopter idiom and how President Obama’s architect in chief of Quantitative Easing used it to justify his “Great Monetary Experiment.” Less well known is Friedman’s idiom about daylight saving time, how he used this to illustrate the case for flexible exchange rates, and how it is now apparently justifying the plunge of money market rates in Europe to sub-zero levels.

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Unraveling the Mystery of Oil and the Swiss Franc

By Vitaliy Katsenelson – Re-Blogged From IMA Portfolio Management

I want to preface my article with a short excerpt from one of my favorite books, Antifragile, by Nassim Taleb:

A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief—right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.…The key here is that such a surprise will be a Black Swan event; but just for the turkey, not for the butcher….

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Global Banana Republic

By Bill Holter – Re-Blogged From http://www.milesfranklin.com/

In case you had not noticed, we live in a crazy upside down sort of world.  We could go into the social aspect of this but it would only make our collective blood pressures go up.  The same thing goes for politics, religion and let’s not forget an entire industry that used to pride itself on digging for the truth, the media.  Nothing, and I do mean NOTHING “is” really as it seems today.  Everything is spun, everything is either glossed over or not even discussed (reported on) and nothing is real anymore.  Somehow, I think Goebbels is blushing in his grave and Orwell kicking himself for not being outrageous enough when he wrote 1984.

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Could Zero/Negative Interest Rates Be The End Of The Fractional Banking System

With negative interest rates deposit holders might opt for paper money (notes) instead of digital money (digital wallet, bank account)! Which could bring down the fractional banking system because as we know of every $100 you deposit in the bank $90 is subsequently loaned on. US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals! Banks have no reserve requirement at all for deposits by companies! Go figure.

Anyway the Required Reserve Ratio of 10% means that only a fraction or $10 of the $100 you have deposited at the bank is available for cash withdrawal. Your $90 that is loaned

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