The International Monetary Fund has been forced to change the calculation of its most important interest rate after aggressive monetary easing around the world threatened to turn it negative. Late on Friday, the IMF said it is introducing a floor of 0.05 percent for the interest rate on Special Drawing Rights, its own form of international currency.The IMF’s move illustrates the fear of DEFLATION how this will become even worse 2016-2020. The global economy is totally beyond the control of central banks and the IMF. Global financial conditions are now easier than they have ever been still even more than five years after the end of the Great Recession (2007-2009) as it is being called. We are currently still at the lowest interest rate level in its sixty-eight year history at the IMF.
The entire problem has been the banking industry. The wild high-flying banks would rather trade than lend and therein was the problem. As the economy turned down thanks to the bank’s leveraging the most dangerous market of all, real estate since it impacts the core economy, cutting rates did not stimulate borrowing nor lending. The banks took the money to cover losses and cut their rates to depositors wiping out the elderly. Liquidity has not come back and then add-on top of this FATCA, which has reduced global investment precisely at the time it was needed.
In 1985, I lived in London in Kensington. The pound fell to $1.03 and the Brits thought real estate would collapse for nobody saw an opportunity. Everything turned on foreign capital. I bought a car I paid $30,000 with the pound at near par, drove it around for 2 years and sold it for $40,000 because the Italians raised the price when the pound crashed. Then the pound went back to almost $2.
It was that international capital inflows that turned the economy. With government hunting international money flows for taxes, they have seriously impacted the world economy far beyond anything domestic myopic economists contemplate. You cannot raise taxes at a time like this. They are destroying the world economy faster than anyone thought possible. This will raise tensions, civil unrest, and opens the door for war. Southern Europe will blame the North and the idea that a new world order could be created with eliminating governments creating just one was a pipe-dream. They forgot about civil unrest and separatist movements against centralized planning that resulted in the collapse of Communism.
The SDR rate is what the IMF pays to its lending nations for the use of their funds. It then adds a margin to calculate the rate on its loans to Greece and other countries. The change will ensure lenders get a small positive return and fractionally raise costs to borrowers while setting in motion its own demise as capital eventually is needed as tax revenue declines.
After staying positive throughout the financial crisis, that SDR basket has NOW threatened to turn negative in recent weeks, as both the euro and yen rates have fallen below zero. They were affected by the European Central Bank’s move towards negative rates and continued easing by the Bank of Japan. These people cannot grasp how the economy really works for they are all deranged and drunk on their own power precisely as Hillary just said – government creates our very existence – it is the Financial God. Private business creates nothing in her own words.