Financial Crash: Not Only Bank Deposits, But Even Cash Is Jeopardized

April 18, 2019 — A barely noticed report published by the staff of the International Monetary Fund in February 2019 suggests that financial authorities are considering a devaluation of money in order to save the financial system from the impending collapse. The report, titled Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money proposes to depreciate physical money (and not only bank deposits) in order to allow an ample margin for negative rates.

To fill in the background: all financial officals and major players have been concerned for a long time about the imminence of a second, more devastating global financial crisis than in 2008. Recently, Italian Finance Minister Giovanni Tria stated at the Boao Forum in China that different from 2008, he fears a financial collapse will be triggered by an economic downturn and not the other way around. His concern reflects the risk that a pattern of corporate insolvencies produced by a recession will unleash a reverse-leverage mechanism in the derivatives sector. Particularly at risk is the bubble of CLOs, or Collateralized Loan Obligations which are securities with leveraged corporate debt as collateral.

The volume of CLOs has increased due to the fact that the banks have pushed the demand for high-yield returns, thus inflating the CLO market and often lowering the standard, i.e. the quality, of the debt they would buy. CLO volumes in 2018 are at (roughly) where volumes in collateralized debt obligations were in 2006, according to data from the Securities Industry and Financial Markets Association. Default rates on CLOs in 2018 are currently low, but they were low on CDOs in 2006, and we know what happened afterward.

Once the bubble bursts, central banks can no longer lower rates, unless they go deep into negative rates, which involves offering banks a guaranteed profit on the money they borrow. However, if central banks go deeper into negative rates, depositors will withdraw money from their account deposits and take the cash instead in order to avoid depreciation.

Therefore, to avoid disaster, negative rates must also be applied to physical money, the IMF study says. The authors take up a proposal by economist Willem Buiter in 2007 for “decoupling the value of cash from the value of electronic money and allowing cash to depreciate over time in terms of electronic money.”

After discussing the pros and the contras, the study concludes that “the system is technically feasible and would not require drastic changes to current mandates or operating frameworks of central banks.” However, “Communication would be central for a successful introduction of such a regime,” and the “necessary legal reforms” must be properly researched and carried out.

The authors claim that the system would be fully reversible, and that after “a sufficient normalization of economic conditions, it could be exited if so desired.” That is the theory. But reality could be very different. Discussing “decoupling” physical money from electronic money is a sign of utmost insanity and shows that the western financial elite will stop at nothing. It is long overdue to get rid of this parasitical financial system, beginning with a Glass-Steagall style separation of banks.