Brace for Negative Rates Now

Written by Jason Simpkins
Posted April 17, 2020

We've been warning about negative rates for years.

Well, it's taken a little bit longer than expected, but they're finally here.

Interest rates on short-term Treasury bills turned negative in late March, when one-month T-Bills were trading at a negative yield of minus-15 basis points.

So it's already happening, somewhat naturally as demand for the perceived safety of U.S. Treasuries surges. But negative rates aren't really going to go "mainstream" until the Fed mandates them.

And it will.

Make no mistake, the Fed is out of options. 

First, the central bank cut rates by 150 basis points to almost zero. And then it rolled out "QE Infinity," which means buying unlimited Treasury debt and mortgage-backed securities. 

Again, by pledging to buy up Treasuries and an infinite amount of bonds, the Fed is already driving yields through the floor. And in the process, it's generating so much liquidity that investors are actually willing to lend at negative rates. 

The next step then will be to take the Fed Funds rate negative, just as central banks in Europe have done.

The Riksbank of Sweden, the oldest central bank in the world, was the first to implement what’s now known as a negative policy rate, when it began charging banks to hold deposits in 2009.

Three years later, the central bank of Denmark became the first to bring its key policy rate below zero.

In 2014, the ECB went negative. And today, its main deposit rate continues to languish at a historic low of -0.5%

The Bank of Japan’s (BOJ) short-term interest rate target is minus-10 basis points.

Bond yields are negative in Germany, France, Denmark, and the Netherlands, too.

And in fact, the total value of European bonds carrying a negative yield has risen to $5.83 trillion from $4.5 trillion at the end of December.

Behold our future. 

Or maybe more aptly, our present.

As I said, the Treasury Bill market is already trading at negative yields. All that's left is for the Fed to make it official and start charging banks to deposit money overnight.

That will spur Treasuries deeper into negative territory, meaning in effect that investors, banks, and mutual funds will be paying the U.S. government to buy its debt. 

And on the face of it, that doesn't sound so bad, does it? Big borrowers like banks and hedge funds paying U.S. taxpayers interest for the privilege of holding Treasuries...

But it is bad. 

You know it's bad because six years of negative rates at the ECB have done nothing to reverse the bloc's financial fortunes. 

Indeed, the actual benefits to negative yields are murky at best, while the drawbacks are crystal clear.

For one thing, negative rates encourage banks to lend out money that they weren't comfortable lending in the first place.

That is, one reason a bank ends up with excess reserves is a lack of qualified borrowers.

Maybe the bank feels the people or businesses applying for loans won't be able to pay the money back. So it chooses to hold that money instead, keeping it on overnight deposit at the Fed.

Well, if the Fed charges that bank a fee for keeping its money on deposit, then that bank will be more inclined to take the added risk of lending to unqualified borrowers.

This was the genesis of the last financial crisis. U.S. banks issued a bunch of loans to unqualified borrowers who bought houses that they couldn't afford, and car companies did the same.

And that's not all. 

The second obvious problem with negative interest rates is that banks are forced to pass the added costs onto consumers.

That means in the not-so-distant future you may be paying a bank interest on the money in your checking and savings accounts. 

If that were to happen, depositors could pull their money out of the banking system altogether.

After all, why pay the bank to hold your money if you can just cash out and pile it all into a safe?

That could mean a run on banks and near-total evaporation of liquidity. 

Of course, I've seen economists argue that banks would be reluctant to pass those negative rates on for just that reason.

But anyone who says that is naive. 

These are the same banks that brought us ATM fees, monthly fees, check-cashing fees, minimum balance fees, and maintenance fees.

They'll do anything to protect their profits. And that includes charging consumers negative interest.

Again, we know this because we've already seen it happen in Europe.

More than 100 banks in Germany are already charging some customers negative interest rates.

And one-fifth of those banks don't even post that policy online.

In June 2018, a court had to rule that German banks could only apply negative interest rates to new customers, not existing ones. The court case involved Volksbank Reutlingen, which sought to impose a -0.5% interest on existing checking and many savings accounts exceeding €10,000, alongside normal fees.

There can be no doubt whatsoever that U.S. banks will do the same thing and I personally am not so confident in our court system or our Congress to believe they'll do the right thing and protect consumers.

No, time and again, when choosing between big banks and average Americans both of those entities have consistently sided with big banks.

So anyone who wants to dismiss negative rates as inconsequential is either an idiot or a banker.

Don't fall for the lie that negative rates mean banks will start paying you to borrow money. It's not true.

Savers and retirees living on a fixed income will be punished by negative rates, just as they have been by historically low rates that yield virtually nothing.

And that pain will only be exacerbated by higher inflation, which would also come as a result.

That's why now is the time to act. If you want to protect your capital you need to invest in gold — a true store of value. 

Gold isn't going to charge you money to hold it. Unless, of course, you have so much physical gold you literally need to rent warehouse space. But as I'm sure you know there are better ways. 

For example, Gerardo Del Real, the editor of Junior Mining Monthly, recently uncovered a market loophole known as "Tier 2 Gold."

This market loophole lets investors buy Tier 2 Gold for as little as $23, $15, or even $12 per ounce, as opposed to the $1,700 per ounce gold is currently trading for.

And if you think $1,700 is high for gold just wait until rates go negative. 

Trust me, now is the time to act.

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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