237 German Banks Now Charge Negative Interest Rates – When DeFi?

At a time when central banks demolished the concept of savings, and with looming inflation ready to prick the stock bubbles, how can you make your money work for you? While juggling economic stability with money supply, the Fed makes the little guy pay the cost.

Negative Interest Rates Erode the Very Concept of Banking

We live in the era of near-zero interest rates imposed by central banks, while they simultaneously increase the money supply, devaluing fiat currencies. This is happening in parallel to the digitization and tokenization of the economy. Unsurprisingly, out of many types of frictions this is bound to cause, one of them becomes clearer than ever. Why do commercial banks even exist?

If we take the Federal Reserve’s definition of commercial banks’ purpose, they are framed as vital cogs of the financial system:

“They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.”

The problem with this is that central banks of every nation set the conditions for borrowing and lending. In particular, the Fed sets the Fed funds rate—an interest rate set for commercial banks to lend to each other to fulfill the Fed’s reserve quota.

The Fed also sets the discount rate—interest rate set for commercial banks to borrow money from the Fed. In short, when a central bank pulls a lever, commercial banks react. The same holds true in the Eurozone.

Prone to saving money, just as American Millennials, Germans have a difficult time finding commercial banks that don’t charge negative interest rates. Verivox recently reported that 237 German banks charge people to keep the money in the bank, an uptick of 57 more since last March.

In spite of this, the European equivalent to the Fed—the European Central Bank (ECB)—recorded an increase of 6% of household deposits in Germany, the economic engine of the EU. No doubt, this was in large part due to prolonged lockdowns for a virus with less than half a percent mortality rate.

Effectively, this means that Germans face a guaranteed loss if they use the traditional financial system. How long will it be until the same becomes the reality for Americans, all to save the economy from getting “overheated” due to previous misdeeds by the Fed?

If There Were No Banks…

After the Federal Reserve’s definition of commercial banks, the education section poses valid questions:

“If there were no banks…

Where would you go to borrow money?

What would you do with your savings?

Would you be able to borrow (save) as much as you need, when you need it, in a form that would be convenient for you?

What risks might you face as a saver (borrower)?”

To best answer such questions is to imagine a financial system without commercial banks, but with one nationalized banks instead. This is quite easy to envision as there are no technical boundaries preventing banks from being nothing more than an app on your smartphone. Furthermore, CBDCs—Central Bank Digital Currencies—take care of much of the payment friction between all entities within the financial ecosystem.

In such a centralized and digitized system, which China is almost ready to deploy, it is difficult to make a case for the existence of commercial banks. The flavor of different logos and marketing approaches? Differently decorated buildings? Every critical financial lever is already in the hands of central banks.

At the same time, AI-boosted apps can assess the usage of your tokenized money, with robo advisors taking the lead. Keep in mind, with CBDCs, central banks would have total knowledge of who uses money for what purpose, just as Bill Gates seems to prefer. This has been the holy grail for Big Data, easily leveraged for every kind of social engineering imaginable.

DeFi as an Escape from Central Mismanagement and Control

As you can see, it is not difficult to figure out where trends are going. In the transitional period, commercial banks may continue to drag along as legacy mediators, incurring unnecessary costs on the end-clients. In the meantime, people will be penalized for trying to save money, while lockdowns prevent them from spending money.

Is this the way to live life? Michael Saylor of MicroStrategy would certainly disagree with such a passive approach:

Of course, Warren Buffett likened Bitcoin to “rat poison squared”, but becoming the most quoted living investor means that people can easily repurpose the offered wisdom. However, this particular piece of advice will never age. In fact, it has never been more applicable than to present divergence of centralized and decentralized finance.

In the foreseeable future, passive incomes of old will be more commonly found via high-interest yield farming through a variety of easily accessible DeFi protocols. Even WallStreetBets Redditors are set to form liquidity pools as an off-ramp into the stock market. The tokenized economy is inevitable, but one has to choose tokens as an entryway into financial freedom. Otherwise, your life itself could become a token of central control.

More and more, we are seeing the lack of boundaries between the biggest corporations and governmental institutions. Do you think this will positively impact society? Let us know in the comments below.