Posted on February 4, 2016 by Martin Armstrong
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.
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