 This is Mises Weekends with your host Jeff Deist. Ladies and gentlemen, welcome back once again to Mises Weekends. We are joined, I think, for the third time by one of our favorite guests, Patrick Barron. We're talking about interest rates and what's going on in Europe with so-called negative interest rates. Before we get into that, let me ask you something. Janet Yellen announced earlier this month that for only, I guess, the second time since 2006 the Fed would raise interest rates by a quarter point. I think it's somewhat laughable that the whole world is waiting with bated breath for these tiny little interest rate hikes. But give me your thoughts on Yellen's announcement and do you think, given the level of federal government debt, that they can aggressively raise rates over the next few years? Well, I don't think that they can aggressively raise rates. Now, whether they're forced to do that, that may be the case. And whether rates themselves just go up and the Fed has no control over it may also be the case. I think they want to hold down interest rates. And the raise of a very modest, announced one quarter of a percent does send a signal to the world that we may be getting to the end of this massive intervention or at least it isn't going to go on much longer. It's not going to keep going down and down. So I think it also, the increase in the rate of one quarter percent that Yellen announced is going to put pressure on the European Central Bank to end its negative interest rates scenario or its policies. And that's really what I'd like to talk about is that what is the thing that is being called a negative interest rate? And like a lot of things that we hear from the mainstream press and out of the Keynesian's mouth, I just call it a misuse of language. It is not an interest rate. And I think they do that for the same reason that they call, that we now call status policies, liberal policies is because they want to take one of liberalism's favorite terms and turn it around. And one of the favorite terms of real economics is the interest rate. Well, and if you look at an interest rate as being a thing that is vastly important to the economy, the interest rate has to be not manipulated. But by calling something a negative interest rate, it kind of gives the aura that, oh, look, it's really an interest rate. It just happens to be negative. And this really isn't the case. Sure. If they're not really interest rates, what are negative interest rates and what purpose do they serve the ECB or central bankers? It's hard to imagine what purpose they're serving, except the continuation of a Keynesian mindset. But what it is, it's really just a service charge. It's really that the central banks have decided that they're going to charge, it's a charge on bank reserves. So the ECB is a little different than the Fed, of course, because the customers that the European Central Bank deals with are not the actual banks directly. They are the national central banks of their members. So they deal with the Bank of France and the Bundesbank, for example, and the central bank in Greece. So what the ECB does is the euro reserves that are kept by these national central banks at the ECB, the ECB is charging as a service charge, and currently it's four-tenths of one percent. So a while back, I looked this up, it doesn't change. This doesn't change very often. I looked up what are the euros that are kept as reserves by the Bundesbank at the European Central Bank. Now the Bundesbank keeps most of the reserves in the entire system at the European Central Bank, and it's around 675 billion euros. So at four-tenths of one percent, that means that the ECB is charging the German banking system 2.7 billion euros a year. That's a charge to the German banking system. Well, that charge has got to be borne by somebody. And I suppose the Bundesbank could eat the charge and charge that fee against its capital, but eventually it has been deciding it's just going to have to pass that charge along to its customers who are the large German banks that we've heard of. So that's what's been called a negative interest rate, and it's really nothing of the kind. It's just a charge that the European Central Bank is charging the national central banks, and they are in turn charging their own customers. Now, so what do the Deutsche Banks, for example, what does it do? It gets charged by the Bundesbank, the central bank of Germany, so many millions of euros. Well, they have to either eat that charge, which they can do for a while, I suppose, but eventually they have to decide to charge their own customers for this. And this is where you start to say, well, what is the purpose of all this, and how can it possibly work? And I'm just saying it isn't working. So they are now charging their deposit customers because it is a deposit charge. They're passing that along to their largest deposit customers. But this has caused a backlash and it has had consequences. The immediate consequence was that these large depositors sought to pull their funds out of the banks because if they're going to be charged four tenths of one percent for money that they're just sitting in a checking account, well, this is costing them a lot of money. So they say, well, what can we do with the money? Maybe we can just invest it in something that's very safe. So they started investing it in very safe sovereign bonds, German sovereign bonds, or bonds of very safe corporations. And this is where the supposed interest rate went to a negative amount. But all it really meant was for a period of time, these large depositors' money was trapped in the banking system and they had to get it out. And the only way they could get that money out was to invest it in something else. So they decided they're going to buy a triple A bond. So that bond price started getting bid up close to 100. And then it went over 100 because these deposit customers saw that a small loss is preferable to a bigger loss. So that's how it got to be negative. So it looked like, well, some of these bonds were actually trading at above par for a brand new bond. That sounds like a contradiction in logic. Well, it's not really a contradiction in logic. It really just means that for a temporary period of time, these depositors had to figure out how they were going to get their money out of the banks and then store it someplace that they would not actually lose much money. So what they've been doing is some of these large depositors have actually been pulling their money out and trying to get cash for their money. Now it's not easy to do, but they are getting actual paper notes and they're starting to store these wherever they can find adequate storage facilities. Some I understand, some are actually building large storage facilities. So this is what I think it's a temporary phenomenon in that it's a logical thing from the Keynesian mindset of keep driving down the interest rate close to zero. And then, well, gee, let's drive it into a negative position. How do you do that? Well, you start charging for reserves. But this has had a backlash where we might actually see an actual run on banks where depositors come in and just say, give me the cash. I want my cash now and the banks aren't going to have the actual physical cash. So this is going to create some kind of crisis. And then from a practical standpoint, it really just isn't working. Because the Keynesians really wanted the banks to increase their lending, but they haven't been increasing their lending because this is really a tax on the banking system. So they've had to pass these charges along to their customers in some form. So it just plain hasn't worked. And I think for that reason and the fact that the Fed is starting to get its interest rate up, which is causing pressure on the fact that the Euro is trading against the dollar at one of its lowest rates ever, meaning that imports are costing the Europeans much more. All these things are going to point that, in my opinion, the European Central Bank and some of the other central banks such as the Bank of Japan, Switzerland, Denmark, Sweden, who all have negative interest rates are eventually going to be abandoning these. It's just a bad idea. But of course, the drive behind all this, at least ostensibly, if you spoke to a European Central Bank would be, well, we have to push the banks to push their excess cash into the economy. It's all driven by this mania that we have to create demand by any means necessary. But it doesn't sound like it's doing that because there's still something called human nature which wants to put away for a rainy day. And there's still something called human nature that worries about uncertainty. And so you get people literally doing what we would call proper warehousing of cash money, at least it sounds like. Right, that's what I would really call a run on the bank. I want my cash and I'm going to stick it under my mattress or in a vault someplace. So yeah, it's all the Keynesian mindset of aggregate demand is what really drives the economy, which is absolute nonsense. Savings drives the economy. And it's really savings that is the main contributor to the interest rate. And the interest rates are always positive. It's illogical that the interest rate can be negative. Talk some more about that, though, for people who may not understand that you and I would view that as axiomatic. But this idea that we always prefer present goods over future goods and thus the real or natural rate of interest is ever and always positive. Elaborate on that. Well, I gave a short talk to a business group in Wilmington, Delaware a couple of weeks ago about this. And I started out saying, OK, if we all hear that interest rates are negative, many of us would say, oh, does that mean that I can borrow $100,000 from my bank? And when I have to pay it back, the bank will say I only have to pay back $98,000. Gee, I'll take that. Give me the $100,000. I'll put $98,000 under my mattress and I've got $2,000 to spend. In fact, I'll borrow $100 million if you'll lend it to me. And so most people think that that is what the negative interest rate is. But an interest rate is really based upon the fact that some people have want to save money and some people want to borrow money. Jesus called this, the Austrian's called this time preference. It's an interesting concept, but it means that, for example, many of us, when we're younger, we have a demand for money now that we don't have. And I think most of our audience could understand that the number one need that most of us when we're younger have for money that we don't have is to buy a house. Now, if we had to save to buy a house for full value, it would be, we would not be able to buy a house perhaps until we're late middle age, maybe, where we'd have to be scraping and saving. Because in the meantime, we'd have to pay rent to somebody and it'd be a long time before we could actually buy our house. So we have a need for money. Some people have want to save their money. So the savers and the borrowers come together and the savers say, well, I'll lend you the money now, but the only way I will possibly lend it to you now rather than just keep it under my mattress is if you promise to pay me back something higher than that in the future. So we all kind of come together in this marketplace and that's what creates the interest rate is there is a pool of savings and there is demand for savings. This is in constant flux. So there really is never any just one interest rate. The interest rates are always in flux. There is sort of a natural interest rate based upon if people are saving a lot of money, then the interest rate, there's going to be a bigger pool of funds available. So people are going to accept a smaller and smaller interest in the future that they get back if people don't want to save much money because there's a big demand for housing. This is what happened with the baby boom generation. One of the reasons that the interest rate went very high in the in the 70s and 80s was because the baby boom generation were borrowing lots of money for houses. In addition to the fact that the Fed was printing money. But so that added on to it. The interest rate really has many components to it. And of course, one of the components is the risk, you know, you may be a better risk than I am. So therefore someone may lend money to you at a slightly lower rate than they'll lend it to me because I'm a higher risk. And there's also the risk that by the time we get around actually paying the money back, there is a risk that the purchasing power of that money will have fallen. So all of this kind of gets bid into the end of the free market into the marketplace for the interest rate. But the interest rate can never be negative in that somehow I'm going to take my I'm going to find a saver. I'm going to take my hundred dollars and I'm going to give it to you, but you only have to pay me back 99. Just think about that. That doesn't make any sense to me as a saver. No, I'll just keep my hundred dollars in my wallet. Thank you very much. So it's just a contradiction in terms and like I say, it's like a lot of things that happen in modern the modern financial press. These terms start to get accepted and no one really questions on well, what did these things really mean? So this is why, you know, there is no there really is no such thing as a negative interest rate. What's interesting to me, Patrick, is that if banks were literally warehousing physical cash and safeguarding it for you, you might indeed pay them a fee to have that physical cash held at someplace safer than your house or under your mattress. But that's not what they're doing. This is just digital currency made up of blips. And in fact, if you want to go buy a used car that you found on Craigslist for $10,000 and you go to your local branch and ask them for $10,000 cash, they may not even have that much in the branch. So it's a fascinating time. Let me ask you this. Given this six month now, eight month experiment from the ECB with negative interest rates and given such low interest rates around the world and the economic instability causing a flight to safety, isn't all this at least in the short term good for U.S. Treasury jet wire? Why are we struggling at Treasury auctions to find buyers other than the Fed? Because from my perspective, U.S. Treasury debt looks like the least dirty shirt in the laundry right now. Yeah. You know, in the land of the blind, the one-eyed man is king, you know, I think, you know, fortunately for all of us Americans, the dollar is still the least worthless currency out there. You know, I mean, it seems like every central bank in the world is trying their darndest to destroy their currency, at least in the near future for some period of time, people are going to be looking to the dollar as well. The dollar is probably still the least bad currency. But eventually, this all has to stop. And I think, you know, I just listened this week to an interview that you yourself did with John Williams from Shadow of Stats a while back. And John, you know, made the point that the only real buyer of U.S. Treasury debt now is the Fed itself, that most of these big central banks like Japan and China, the Netherlands, or the European Central Bank and some of the other central banks in the world are actually not buying U.S. Treasury, they're not investing in U.S. debt because they've got more than enough dollars, more dollars than they really want, and they're starting to get worried. So this means that the Fed is just adding, just monetizing the debt. Now, again, for a while, this kind of goes on, but eventually people start worrying about it. And as John Williams said, this really, folks, this cannot go on forever. That we can just keep printing money and pretending as if everything is fine. There is a reality out there that the medium of exchange just has to have some sort of means to it. And the federal government, by just issuing debt that the Fed itself monetizes, is not really a means of providing for that debt, it's just paper. And this is how central banks eventually fail. And I think the central bank that is probably most likely to fail in the near future, in my humble opinion, is the European Central Bank because it is composed of sovereign nations who can decide just to get the heck out. And when they do that, there's nothing that's going to stop them. Whereas Americans, we are ruled by the almighty Fed and we can't get rid of our central bank without an act of Congress. But the French and the Germans and the Italians and the Spanish, they can decide just to leave the European system if they want. I think especially if one of the large economies, such as France, Italy or Germany, or Spain decided to get rid of the euro and re-institute their own currency, then it's all over for the European Central Bank. And then we find out that the ECB, as a fiat currency, is really not even worth the paper that it's printed on. Well, Pat, we're about out of time. I'll leave you with one last question. Give us your prediction in 2017. Will the Fed be able to go an entire year weaning itself off of QE? Or will it be forced once again, as John Williams suggests, to engage in further rounds of bond buying or worse from commercial banks to sort of keep this whole thing propped up? Well, I think it all depends upon, you know, John was, I think, the third person I'd heard say this in the last couple of weeks, that retail price inflation, consumer price inflation, is likely to take off in 2017. If that does happen, then I don't really see that the Fed would have any choice but to raise rates, because I think the public is going to demand that it just cannot stand another round of price inflation like we had in the 70s and 80s, that that's just got to stop. So I think that that is what's likely to happen. But if they can paper over that, or as John says, they use their statistics to fool us that prices really aren't going up, folks, you're just mistaken. You know, the price of beef really didn't rise and you weren't really forced to buy hamburger. If they can still fool us, then they might be able to continue this for a while longer. But eventually, I think the retail prices are going to start to rise before they can really get out of hand, the Fed is going to have to start raising rates. Now, this couldn't cause a recession. And a recession in the United States, as we Austrians know, is really nothing more than a correction, a necessary and inevitable correction to the fact that the structure of production in the American economy is in dislocation. And while it is getting back in equilibrium, there is going to be a certain amount of joblessness and business failures, but that is just really a recognition of reality. So all of this kind of gets tied together into Austrian economics. And the interest rate is a part of it, but it's a critical part of it. And I do think that if prices start to take off, as John does predict, I think the Fed is going to be forced to start inching the interest rate up a little bit more at a time throughout the year. Well, it's going to be a fascinating 2017 for monetary policy. We're going to have several hundred vacancies at the Fed fillable by the Trump administration. It's also going to be interesting to see whether Trump and his administration have a combative relationship with Janet Yellen and company. Pat Barron, thanks so much for your time. And ladies and gentlemen, have a great weekend. Be sure to subscribe via iTunes U, Stitcher and SoundCloud, or listen on Mises.org and YouTube.