Back in October, I warned about several of the zany ideas that central bankers were ready to implement.
And one of them – negative interest rates – is getting closer to becoming a reality here in the United States.
Already, central banks in Switzerland, Sweden, and Denmark have implemented the strategy. And the European Central Bank’s deposit rate is -0.20%.
German government bonds have a negative yield. And as crazy as it sounds, investors are even paying (through negative interest rates) a profligate government like Italy for the privilege of owning their two-year bonds.
As Andrew Milligan, Head of Global Strategy for Standard Life Investments, told the Financial Times, “This is an Alice in Wonderland situation.”
The Fed Moving Toward Negative Rates
It looks more and more as if the United States will be going “down the rabbit hole” in the not-too-distant future if the economy sours.
On November 4, Fed Chair Janet Yellen said as much to a House of Representatives committee: “Potentially anything – including negative interest rates – would be on the table.”
On November 6, New York Fed President William Dudley said on CNBC, “Maybe we can use negative interest rates.”
Former Fed Chair Ben Bernanke also began laying the groundwork for negative rates. In an interview with Politico on October 21, he said the Fed could take interest rates below zero.
Finally, the dovish president of the Minneapolis Fed, Narayana Kocherlakota, projected negative interest rates in his latest projection of U.S. interest rates last month.
All in an effort to stimulate the economy… Getting people to buy things they really don’t need and digging themselves deeper into debt.
Negative Rates Haven’t Worked in Europe
The only problem with this “brilliant” idea is that negative interest rates in Europe haven’t stimulated the economy.
The only thing they’ve stimulated is the hoarding of cash by both individuals and businesses alike.
In Denmark, businesses have barely increased their investments. The same goes for private consumption.
But that hasn’t discouraged the academics behind the idea. They think the only problem is that rates are not negative enough at only -0.75% or so.
Stepping to the forefront with this argument is University of Michigan economics professor Miles Kimball.
He wants rates highly negative, at -4% or more.
Kimball is apparently a proponent of the “war of cash,” too. His views were espoused in a piece for the National Institute for Economic and Social Research that appeared on November 4.
He wants that big negative rate on cash. So every $100 deposited with the Fed by a bank would only return $96. Obviously, banks would quickly pass that along to their customers.
This is no more than legalized theft, thanks to the eggheads and your “friendly” banking system. Haven’t savers been punished enough already?
I can only envision governments jumping on this bandwagon to totally eliminate cash.
Rates on e-money could be kept slightly negative. But rates on cash could be hugely negative, maybe even reaching double digits. The value of cash would depreciate faster than people could spend it.
Other Negatives to Going Down the Rabbit Hole
Even if steeply negative rates on cash don’t happen, a negative rate of 4% or more would have drastic effects around the financial system.
Two immediately come to mind:
- Most, if not all, fixed income assets would have a negative yield. How are pension funds and insurance companies supposed to earn income to pay their policy holders or pensioners?
- Highly negative yields will make anything with a positive yield, such as equities, highly desirable. We may see the “mother of all stock market bubbles” if rates go highly negative.
Get ready for Alice in Wonderland, coming to U.S. financial markets…