Denmark Experiments With Negative Interest Rates

From Bloomberg:

Denmark Has Lessons for Draghi as Official Rates Go Negative
As Denmark experiments with official interest rates below zero, European Central Bank President Mario Draghi is getting a glimpse of how extreme monetary policy decisions play out in real life. Nationalbanken in Copenhagen, which lowered the rate it offers on certificates of deposit by a quarter of a percentage point to minus 0.2 percent on July 5, has become “a test case,” Paul Mortimer-Lee, global head of market economics at BNP Paribas SA in London, said in an interview. “We should take note when our knowledge of this stuff is scarce.”
Danish central bank Governor Nils Bernstein has gone one step further than Draghi in doing whatever it takes to meet his monetary policy goal. For Bernstein, it’s about deflecting a capital influx that threatens to strengthen the krone beyond the limits of its euro peg. For Draghi, negative rates would spur banks to lend. The ECB, which lowered its deposit rate to zero last month, will probably leave rates unchanged at its meeting tomorrow, according to a Bloomberg survey. “We’re living in extremely volatile times,” Jesper Berg, senior vice president at Nykredit A/S and a former Danish central bank department head who also worked at the ECB, said in an interview in Copenhagen. “Scenarios that were unthinkable just years and months ago are playing out in front of us.” Denmark is now finding out just what it means to have negative rates. After breaching the zero threshold last month, the bank’s arsenal of tools to stem krone appreciation is slowly being spent.
“The Danish central bank has at most one more rate cut at its disposal, and then that tool is used up,” Berg said. “From there on, it’s the foreign reserves. In principle, there’s no limit to how high these can go, but at some point a thing can get so big that that in itself becomes a risk.” While nations such as Singapore and Hong Kong already hold reserves larger than their economies, printing Danish kroner to buy foreign currency can lead to inflation in the longer term, said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “With all these measures, there are consequences, economic and political consequences,” Stannard said in an interview. “That is ultimately what will determine the sustainability of these policies.”

“By this stage in the crisis, investors are used to getting burnt if they don’t buy the safest paper, so that will continue to attract them to Denmark,” he said. According to Stannard at Morgan Stanley, “the pool of safe havens in Europe is shrinking. While we see the pressure within the euro zone continue to build, the safe havens will still gain support,” he said.
Demand for the krone is unlikely to abate any time soon, said Kasper Ullegaard, head of fixed income at Sampension AS. There’s a “great risk with this policy,” Mortimer-Lee at BNP Paribas said. “Basically, you’re taxing bank intermediation and at some stage you’re going to discourage bank intermediation and you impede the credit policy.” He warns that by making banking more expensive, the industry’s ability to provide credit to the economy is diminished. “There are costs associated with banking,” Mortimer-Lee said. “If you go too far and people start dis-intermediating, the position of the banking sector would be made more difficult, not easier, and that’s not where you want to go. You don’t want to make credit creation more difficult.”
My view:

Extreme measures in Denmark are a portal view into the future for both the Euro, Federal Reserve and many central banks around the world.

With stocks flat lining and bond yields plummeting where will investors go?

Cash is one destination.

But cash is essentially a zero return government bond of perpetual duration.

It can be devalued through central bank money printing, if the money printing overwhelms the shrinkage of private bank credit growth.

What will prevail?

Deflation as credit growth becomes credit contraction?

Or severe inflation as money printing goes into overdrive through central bank efforts as they refuse to accept the market message of credit contraction?

Some years ago I posed the question, will we see the Fed go negative in the article The Economist Has No Clothes

Other bloggers scoffed at the idea.

Soon we will see if other central bankers follow in Denmark's desperate footsteps.

On the bright side, gold continues to shine and from a technical analysis viewpoint, appears to be ready to make a big move soon, thanks in part by increasing purchases from Asian central banks.