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Ozarks 2020

Negative Interest Rate Policy

Introduction – Walking Backwards

 

Following the financial meltdown of 2008, the fundamental premise of central bank policy was simple: whatever ails the economy can be miraculously fixed with a cocktail of zero interest rate policy (ZIRP) and Quantitative Easing (QE). After nearly eight years of pursuing this unconventional and unfruitful premise - and trillions of dollar of new debt - central bankers around the world are now resorting to negative interest rate policy (NIRP).

The truth is, zero interest rates (ZIRP) and negative interest rates (NIRP) cannot fix what is broken; rather they have crushed savers, artificially pumped up stock markets and now threaten to drag the world financial system into a global recession. It is now appears to be just a matter of time before the US central bank mimics the central banks of Japan, the EU, Denmark, Sweden and Switzerland in setting negative interest rates. 

Forbes.com reports, “US. Former Fed chair Ben Bernanke said in a December 2015 interview that the Fed should consider negative rates to counter the next serious downturn. ‘I think negative rates are something the Fed will and probably should consider if the situation arises,’ he said. And Janet Yellen - who said in her confirmation testimony to Congress in 2013 that the potential for negative interest rates to cause disruption was significant - now says they are an option the Fed would consider.” [1]

 

Negative Rates = Negative Returns!

In many ways, ZIRP undermines the health of the body politic and the free market economy. It not only sucks away the lifeblood of capitalism – capital – but also destroys the morals, values, entrepreneurship, work ethic and thrift needed for successful free enterprise. 

We may, however, soon look back longingly on ZIRP as the good old days. From Europe a new, even more extreme approach to central bank interest rates is now rapidly spreading – less-than-zero, sub-zero or as it is becoming fashionable to call them, “negative” interest rates. 

Facing negative rates, someone opening a bank account of, say, $100 will expect to get back only $98 a year later....and, thanks to deliberate inflation, this might have only $96 of purchasing power compared to the original $100 a year earlier. 

Instead of increasing their nest egg, such depositors will lose roughly one fifth of the total purchasing power they put in their bank in five years – all in the name of ‘safety’ from volatile assets such as stocks, bonds, etc.

The European Central Bank (ECB) cut a key interest rate below zero in June 2014. Small central banks in Europe have occasionally used negative rates before, and in July Sweden again cut its deposit rate below zero. Denmark followed in September, and Switzerland in December. [2] 

Why take the 20 major bank depositor risks we ask in our 2014 book, Don't Bank On It! if your bank is paying you less than nothing and charging you just for the honor of having a bank account? 

Many are now closing their accounts if all the bank offers is risk and guaranteed loss. This is why commercial banks in Denmark have been reimbursing depositors for their negative rates, out of fear of losing customers. 

As Bloomberg's Jana Randow reports, “When banks absorb the costs themselves, it squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend.” 

Today's central banks tend to follow the views of the late British economist John Maynard Keynes, whose “paradox of thrift” holds that saving money in the bank is bad because it reduces the quantity and velocity of money in the economy. According to Keynesian macroeconomics, forcing savers to withdraw their money is good. The more and faster their money is spent, the more it stimulates economic growth. Both zero and negative interest rates, in this view, are merely useful kinds of financial repression to force bank savings back into consumer spending.

Central banks are also trying to increase inflation; in part to help devalue their own currencies so that their nations' exports are less expensive and more competitive in foreign markets. Zero or Below-Zero central bank interest rates are becoming a standard tactic in today's currency wars. 

Central banks also use deliberate inflation as an antidote to deflation, in which the currency increases in buying power. Inflation prompts people to hurry and spend their money if its value keeps declining. Deflation encourages people to keep their money because it will be even more valuable tomorrow than it is today. (Governments eagerly use inflation as a hidden regressive tax, as we explored in our book The Inflation Deception. [3]. 

Giant banks go along with central negative interest policies not only because they must, but also because they can. If depositors are willing to pay the banks for holding their money, instead of demanding interest on what are really customer loans to the bank, then banks will happily take their customers' money. 

And this shearing of compliant sheep is spreading rapidly to other parts of the economy. Governments and giant corporations such as Nestle have begun issuing bonds that pay less than zero interest – and customers are snapping these up. 

 

Conclusion – NIRP: A Dead-End Policy

“Negative Interest Rates Are a Dead End”, writes William Poole, a former president and CEO of the Federal Reserve Bank of St. Louis in Wall Street Journal. 

“It is terribly important that advocates of limited government understand what is at stake. If the U.S. economy stalls...we will hear desperate demands that the federal government ‘do something.’ The logical response will be calls for a return to near-zero or even negative interest rates, combined with fiscal ‘stimulus.’” [4]

“As with Japan, Western economies that pursue a long-term policy of low or negative interest rates can expect decades of low growth unless these ‘unorthodox’ monetary policies are rapidly abandoned. Meanwhile, a goal of some of the attendees at Davos and others has been to push the world toward a cashless society since an increase in cash holdings would limit the effectiveness of negative rates,” writes Tyler Durden at ZeroHedge.com, “Why Negative Interest Rates Will Fail”. [5]

“Like chemotherapy, negative interest rates are a harsh medicine,” writes Bloomberg Business reporter Peter Coy. As we cover in our latest book, We Have Seen The Future And It Looks Like Baltimore: American Dream vs. Progressive Dream, “When rates fall beyond a certain point,” warned the London-based Financial Times in February 2015, “hoarding physical cash becomes rational, as does sinking it into assets like gold or property....” 

Many seem unaware that in a crisis, today’s fiat currencies (including the U.S. dollar) might lose value faster than the promises of the politicians who printed them out of thin air. Never having lived under the stability of America’s historic gold standard, many simply do not understand that far more reliable wealth preservers exist than paper money. [6]

You don't have to listen hard to hear the ever louder and increasingly frequent warnings that NIRP is headed for the U.S. The evidence becomes more compelling each day. The world is headed toward debt explosion, fiat money creation, and negative interest rates – all central bank dead-ends. 

The truth is, after subtracting inflation and fees, most bank deposits are already forcing Americans to accept negative returns. The fact that the Fed is now considering officially going negative is extremely positive for gold. For over 35 years I have been warning fellow Americans that their best defense is to own some physical gold and silver as wealth insurance. 

Please take a few minutes to discuss how to best preserve your assets with Wes Peters at Swiss America. Call toll-free at (877) 864-1072 or email at [email protected].

 

Sources:

 

[1]  “Fed May Follow Japan's Path”, Forbes.com, February 9, 2016

http://www.forbes.com/sites/johnmauldin/2016/02/09/the-fed-may-follow-ja...

 

[2] “Less Than Zero: When Interest Rates Go Negative,” Bloomberg, December 18, 2014.  http://www.bloombergview.com/quicktake/negative-interest-rates 

 

[3] “The Inflation Deception: Six Ways Government Tricks Us...And Seven Ways to Stop It!” By Craig R. Smith and Lowell Ponte, November 2011, Idea Factory Press.  

 

[4] “Negative Interest Rates Are a Dead End”, Wall Street Journal, February 8, 2016

http://www.wsj.com/articles/negative-interest-rates-are-a-dead-end-14549...

 

[5] “Why Negative Interest Rates Will Fail”, Tyler Durden, ZeroHedge.com, Feburary 16, 2016

http://www.zerohedge.com/news/2016-02-16/why-negative-interest-rates-wil...

 

[6] “We Have Seen The Future And It Looks Like Baltimore: American Dream vs. Progressive Dream”, by Craig Smith and Lowell Ponte, October 2015, P2 Publishing