Posted Feb 4, 2016 by Martin Armstrong
The Federal Reserve is in a real crisis. Interest rates are falling negative around the world which by no means has succeeded in stimulating anything. Governments are dead broke and they keep raising taxes yet hope the central bank can compensate by lowering interest rates to negative. Between rising Taxes and declining interest rates, this toxic-mix is destroying pension funds and wiping out the elderly. There is nobody in government who has any common sense to see this is going to wipe out the economy – not stimulate anything.
The Federal Reserve has been talking to U.S. banks behind the curtain and asking them to consider that the Fed might have to do the same to stop the capital inflows. In its annual stress test, the Fed will assess the ability of big banks to survive a drop to negative rates on the three-month U.S. Treasury bill, which simply becomes prolonged.
The central bank announced the stress test for 2016 last week, commenting, “The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.”
The Fed pays 0.25% on excess reserves and that drives much of the capital inflow. Foreign banks have used their U.S. branches to get in on the game. They are shipping in cash from Europe and Asia, and they do not lend and park it at the Fed. Taking rates negative will only create a real financial crisis for as long as the Fed continues to pay 0.25% on excess reserves. A bank will be able to charge you to keep money there, so park it at the Fed and make a 100% riskless trade. This is the ultimate wet dream for Goldman Sachs especially.
Negative Interest Rates will flip investment and drive capital into the stock market just for yield. If pension funds do not dump government debt, they will go bankrupt. This is totally insane and even Social Security will collapse.