Do You Have Faith In The Banking System?

Over the last 8 years, the US has had basically no economic growth.  The government induced financial crisis of 2008, along with the way the government administered the aftermath has created a slow/no growth economy.  If you think the US is bad, you should see Japan or Europe.  It’s worse. .2% GDP in Japan.   .4% GDP in Germany.  In Q2, the US grew at .8%.  Supporters of the current policies will tell you that’s the new normal or that GDP isn’t a good statistic to measure economic activity.  They are wrong.

They have negative interest rates in Germany along with most of Europe.

Clearly, government stimulus has failed world wide to bring out economic activity.  Wonder why Brexit happened?

German people have lost faith in their banking system.  Demand for home safes is on the rise.  From a WSJ article written by Ulrike Dauer.

“Safe manufacturers are operating near their limits,” said Thies Hartmann, managing director of Hamburger Stahltresor GmbH, a family-owned safe retailer in Hamburg, which he says has grown 25% since 2014. He said deliveries take longer from safe makers, some of which are running three production shifts.

No one remembers, but back in the Depression of the 1930’s, people in the US lost faith in the banking system too.  They buried money in their back yards in mason jars or stuffed their mattresses with it.  The same is going on all over the world again.  We are in a deflationary spiral.  Deflation is more destabilizing than inflation.

It’s not just individual people that are hoarding paper cash.  German banks are hoarding it as well.  They aren’t lending, and are increasing the amount of cash they are keeping on their balance sheets. At the same time, they are looking at new regulations that will change capital ratios, forcing them to keep more cash on their books.

You might think that this would be an opportunity for Bitcoin.  But, it’s has not been.  People don’t want plastic credit cards, and cryptocurrency is out as well.  They want paper money.  I also think that the security breaches over the years have put enough fear into people that their preference is for fiat currency.

One might also think that given the historical track record over the past 8 years of government inefficiency, officials might change course on policy.  But, that isn’t happening.  They are digging their heels in.

Since there is no growth, there is no incentive to invest it or spend the cash they are hoarding.

There is a parallel to business.  Businesses can grow from three sources of capital.  People can grow their household wealth similarly.  In Germany, people don’t invest in stocks.  In America, many don’t invest in stocks.  Most people are limited because of IRS regulations when it comes to alternative asset classes.

What are your sources of growth capital?

  1.  Cash.  This is slow growth.  Cash is reinvested in the business from top line revenue.  In a household, this would be your salary.
  2. Debt.  If you can get someone to lend, you can borrow the money but it must be paid back.  Debt is a double edged sword.   In a household, this would be getting a loan from a bank to buy stuff.
  3. Sell Equity.  Fast growth.  But you need to get to a sustainable business otherwise see sources 1 or 2.  Downside is someone other than you has a claim on the cashflows of your business.  Households can’t really do this.

Only the very wealthy have been able to take advantage of low interest rates.  They have the ability to borrow and have relationships with banks.  0% interest rates have killed savers, and increased the income inequality that people worry about today.  The heavy hand of government regulation layered over the top of 0% interest rate policy has put a hard ceiling on any broad based economic growth.

It is going to take a lot to change the historical preferences and risk appetite of people.  Negative interest rates won’t do it.  My fear is contrary to popular economic opinion, we are headed to a negative short term interest rate situation in the US.  Much of it will be because of really bad regulatory policy, and poorly set up tax policy.