What Would Negative Rates Mean for You?

It used to be that you worked hard, saved your money, and then when you retired, you lived off the interest of your savings. Today, global central bankers are changing the landscape, where already in 15 countries, the term negative interest rates is a reality. Japan is the latest country to do this, following Europe, […]

What Would Negative Rates Mean for You?

It used to be that you worked hard, saved your money, and then when you retired, you lived off the interest of your savings. Today, global central bankers are changing the landscape, where already in 15 countries, the term negative interest rates is a reality.

Japan is the latest country to do this, following Europe, as the largest economies to now have negative interest rates. And make no mistake, every other central banker, including the US Fed, & the Bank of Canada, is considering doing the same thing. So what does this mean for you?

Imagine that you have worked and saved all your life, and are now looking to retire, and live off your savings. If negative rates are imposed on us, instead of earning a decent return on your money from the bank, with negative rates, you would actually have to pay a penalty to leave your money in the bank. As bizarre as this sounds, it is exactly what is happening in over 15 countries today, and it is very likely coming to North America soon.

Why are these central banks doing this? Basically, the only solution that they have managed to come up with to reinvigorate an economy has been to lower interest rates, and pump over $12 trillion globally into assets.

The idea with low interest rates was that with rates low, businesses would borrow to expand their operations, while consumers would use low rates to borrow and buy homes, cars, and other big ticket items. All this borrowing and spending, theoretically, would create new jobs & grow the economy.

The only problem with the theory is it didn’t work; businesses didn’t like all the talk of increasing taxes, so they didn’t expand their business. In fact, most businesses cut and slashed jobs to avoid losses. Consumers also didn’t like all the increases in taxes and fees that governments were implementing, so they cut their debt load rather than increase it. So at the end of the day, all that stimulus that global governments piled on, didn’t achieve the desired results.

Even though negative rates didn’t work, these central bankers are now venturing below zero, and have introduced what a few years ago would have seemed unfathomable, negative rates.

Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective, and new limits need to be explored. They are a tax on deposits. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as Europe or Japan..

The logic is that with rates below zero, businesses and consumers will finally borrow. Are we going to see a scenario where your take out a mortgage, and instead of paying interest, you actually get paid?

As a consumer, are you going to leave your money in the bank and have to pay a penalty, or do you decide to make some purchases. For seniors, what do you do with your savings, leave it in the bank and lose money every year, or do you take it out and hide it in your back yard? In Japan, there has been a massive run on safes, as people are taking their cash out of the bank and keeping it at home.

To deter people form withdrawing their money and hoarding it, instead of spending it, central banks are now removing large denominated bills, such as the €500 in Europe, & the $100 in the US. They claim that they are doing this to fight terrorism, but it seems a little too much of a coincidence that they are doing it just as negative rates are being implemented.

By eliminating large bills, it will become very difficult to hoard cash easily.If banks add a small 0.25% fee on deposits, it means that if you had $500,000 and left it in the back for a year, at the end of the year you would only have $498,750. It would have cost you $1250 for the privilege of keeping your money in the bank. So the temptation would be to move your money out of the bank, but by eliminating large bills, you would need a lot more space to stash you cash.

Globally, there is now over $8.3 trillion of Government bonds that are paying 0% or less. There is $5.5 trillion that is paying negative yield, meaning that about one quarter of all global bondholders will end up paying their government custodians for the pleasure of parking their cash in the “safety” of government bonds.

These latest moves by central banks of negative rates, and eliminating cash all feed into the growing trend of a loss of confidence in government that will lead into a massive Sovereign Debt Crisis.

As all of these events play out, we will see more and more capital pull out of the perceived riskiest areas, and into the perceived safest areas. Ultimately, that means out of public investments (gov’t bonds), and into private investments (stocks, commodities, precious metals etc).

Stay tuned!

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