Europe’s biggest economy is now in a full swing monetary deflation for the first time in our era.
More than 200 banks have now introduced penalty interest rates on retail deposits, some from the first euro, to cover costs incurred by ECB’s negative interest rate for bank deposits. Even mobile Bank N26 has introduced penalty interest rates from €50,000 according to local media.
A comparison website says “144 banks have published negative interest rates for private customers on their website or in their online price list.
13 banks charge fees for the overnight money account, which is usually free. This creates an actual negative interest rate.
According to media reports, some banks and savings banks charge negative interest rates, but do not publish them online.”
Almost all German banks, including the biggest Deutsche Bank, now charge -0.5% for deposits of €100,000 or more. That means such depositors have to pay the bank €500 euros a year for holding and using their money.
Numerous banks have also introduced yearly charges for current accounts, which effectively amounts to negative interest rates if regular deposits are being made.
What’s more, Germany itself has entered deflation, with the inflation rate now standing at -0.2%.
The massive money printing by the European Central Bank (ECB), which now owns some 66% of the Eurozone GDP, seems to have had little effect in Germany.
The reason is perhaps because of something peculiar, with it a bit unclear what exactly has gone on in the German banking sector.
This sharp drop of about $1 trillion in private sector lending coincides somewhat with the introduction of the euro, the official German re-unification, as well as a bit later the dot com crash.
It’s never recovered and the increase has been slow proportionally speaking, with Germans continuing to choose savings over borrowing:
German saving rates have fallen this past half century, save for the recent spike during the current unusual circumstances.
However, last year’s negative interest rates cost German savers €27 billion in real terms after adjusting for inflation, according to a calculation by DZ Bank.
Some half a trillion can be saved by Germans per quarter from their disposable income, with many choosing to not invest in stocks as they perceive them to be risky.
Effective Monetary Contraction and Regressive Taxation
The monetary tightening by the banks as can be seen in the above picture, combined with high saving rates, is one explanation for this monetary deflation we are seeing in the country.
Another potential explanation is the incentives are just wrong where ordinary Germans are concerned.
Capital gain taxes are 25%, with those that make more in capital gains usually not paying a higher tax rate.
This is a general Western problem with income taxes for example stopping at the somewhat middle class income of circa $40,000, above which a flat tax rate of 45%-50% is applied.
The same applies to capital gains where someone who makes a billion in capital gains pays the same tax rate as someone who makes $10,000.
This in effect amounts to regressive taxation because those that have less proportionally pay more to the commons, and the less they have, the more they pay proportionally.
You add inflation, which is the most regressive tax of them all because it applies even to bread, and this capital gains or income tax becomes more regressive with each passing year.
That’s because the income of $40,000 say in the 90s is not the same income of $40,000 as of today. Back then you could buy two nice houses in very nice locations with that much. Now, you probably wouldn’t get a mortgage for a normal house.
Yet the rate of taxation on this $40,000 has not changed even though what $40,000 means has changed considerably.
We can see above wages in Germany have grown nicely, from €2,500 two decades ago, to €4,000.
In effect however wages have not grown at all. If we take a simple 2% a year inflation, without even adding its cumulative nature, over the past two decades we have had 40% inflation. Wages here have increased by about 40%. Meaning they have not increased in real term.
What has happened during these past two decades however is that taxes have increased on ordinary income and by a lot.
Let’s say for simplicity income taxes on those earning $2,500 a year are 20%. Those same people that were earning $2,500 a year, are now earning $4,000, but in this income bracket taxes are 40%.
That means taxes have increased by 20% without any change on real earnings. Something that no one would vote for, and thus something that has been done by stealth for the above is not obvious unless you actually look at the data.
Those that were in the 90s earning above €40,000 were already somewhat rich, and thus because of that they have not paid any further taxes unlike those below them.
As the masses are being taxed more, they have less disposable income compared to the 90s, and because of that banks are lending less to them.
The disposable income appears to have grown nicely as well, but if we account for that 40% inflation, it has not grown at all.
What has happened instead is a reshuffling of wealth, especially as far as how much the government takes and from whom is concerned.
In effect, over the past two decades taxes have been reduced on the upper-middle and upper classes, and have been increased by a significant amount on the middle class and those lower.
Gradually over the past two decades this systemic overtaxation of the masses and no taxation of the rich has led to a plutocratic system whereby a billionaire now openly rules America.
While where Germany is concerned, the title of the longest ruling elected head of state is less of an honor, and more an indication of sclerotic democracy in a nation where there is very little, if indeed any, political competition.
Hence we get a situation where despite much money printing there is still deflation, with the reason probably being because those who receive this new money are not being taxed, while those that don’t, are being taxed and at a higher rate.