On June 5th, the European Central Bank made modern Central Banking history by providing the world with its first announcement of what they call a negative interest rate. For those who may be scratching their heads at the concept of a negative interest rate, we offer the following layman's definition:
It is a commission that is charged every month for holding too many Euros in the wrong place.
In the mind of the clever central banker, a negative interest rate provides a simple disincentive to hoard Euros. In his or her mind, the way to invigorate the European economy is to force Euros into circulation by turning them into a sort of hot potato, though at -0.10% the analogy is more akin to a potato emanating scarcely enough heat to melt a pat of butter.
Following the infallible logic of the central banker, the banks will take the money and lend it, as putting 100% of deposits at risk via a loan in a terribly disjointed economic zone is clearly a better alternative that loosing a guaranteed 0.10% annually by parking it overnight at the ECB.
This would be a brilliant solution were the simple hoarding of Euros the only thing ailing the Euro system. Unfortunately for the ECB and indeed, Euro holders in general, the problem with the Euro is that it is dying a strange death at the hands of deflation and strangulating the European economy in the process. Following this set of facts, it would hold that the safer bet for those who find themselves holding excess Euros would be to pay down higher rate liabilities in lieu of holding Euros overnight at the cannibalistic ECB, whose actions, while for the moment are foreseen to be a non-event, will ultimately lead to an implosion of the 15 year old Euro currency.
What is lost on the European central bank is that they are managing a debt-based currency that looks like money but smells something much different. While charging a commission on bank deposits in hopes of getting currency flowing again may seem a good idea, the dynamics of the debt-based currency make this strategy akin to economic suicide.