Actions have consequences. We all know this. It’s simply a part of life.
But it appears that life lesson has been lost on central bankers.
Central bankers have pushed interest rates to zero, and even into negative territory in parts of Europe for the first time in history.
Now, the first “chickens” are coming home to roost, and they’re laying eggs that are trickling down to the average person.
Universal Life Insurance Rates Up
The life insurance industry had a long history of not raising rates on life insurance policies that were sold to consumers years ago.
But now The Wall Street Journal reports that, in recent months, tens of thousands of policyholders have received an unwelcome surprise. The cost of their universal life policies are going up – in some cases, as high as 200% more. Even policyholders who bought their policies back in the 1980s are being affected.
Universal life policies combine the normal death benefit with a tax-advantaged savings account. As the WSJ reported, these policies accounted for a quarter of all life policies sold since the 1980s and over a third of the policies sold in the past decade.
The expectation is that this practice will spread to other types of insurance policies that have a clause allowing for increases.
The reason is simple, as I warned readers in November. With rates at zero or below, insurance companies can’t earn the investment income necessary to conduct business as normal. Pension funds are in the same boat.
And the problems just appearing from zero interest rates haven’t discouraged central bankers from now diving into negative interest rates…
A Negative Mortgage Rate?
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The European Central Bank now has its deposit rate at negative 0.3%.
Neighboring central banks in Switzerland, Sweden, and Denmark have interest rates even further into negative territory.
And the consequences are only beginning.
The Wall Street Journal reports a housing bubble is underway in those countries. The cost of a Danish apartment is up 8% in the first half of 2015 alone. Swedish apartments are up 16% in the past year.
The reason for the growing bubble is obvious. In Denmark, many homeowners now have mortgage loans with negative interest rates! Instead of principal plus interest, it’s now principal minus interest.
That can’t be good for banks’ bottom lines.
And obviously, insurance companies and pension funds in those countries have to be scrambling to make ends meet with rates negative.
The central bankers are being urged on by eggheads like University of Michigan economist Miles Kimball.
He’s the guy who wants negative 4% interest rates. So when you deposit $100 in cash into your bank account, your bank balance will read $96. Kimball wants you to spend that money, not save it.
Minus 4% may not be the limit for Kimball, either. As he told the WSJ, “There’s no limit to how deep [into the negative] we can go.”
That sound you hear is the sound of the biggest flock of chickens ever, coming home to roost. Funny, they sound a lot like black swans to me…