Negative Interest Rates: They\’re Here

June 8, 2014

8

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

In 2012, I predicted that if the Federal Reserve couldn’t get the economy growing again, it would take interest rates into the negative zone.

Well, yesterday, the European Central Bank (ECB), the second-biggest central bank in the world, trumped the Fed and became the first major central bank to offer depositors negative interest rates.

What does “negative interest rates” mean?

Each night, major banks in the eurozone collectively deposit USD$1.0 trillion with the ECB. By cutting its overnight rate to negative, these banks will end up paying the ECB to hold their funds.

The ECB hopes that instead of getting a negative return on their money, the major banks in the eurozone will start lending their money out to borrowers, which will get the economy in the eurozone moving again.

This won’t work. Here’s why:

Preservation of capital is the most important thing for banks in the eurozone. If they can deposit their $1.0 trillion with the ECB, even if they have to pay for the safekeeping, it’s a more secure move than lending money to businesses that are still far too risky because the eurozone economy is far too weak. The government regulation of opening and running a business in the eurozone is overwhelming.
If the eurozone banks are getting a negative return on their money, how can they possibly pay savers a return on the money they have sitting in the bank? Yes, savers are punished once again with this latest central bank move.
Smaller countries like Sweden and Denmark tried negative interest rates during 2009 and 2012; they didn’t work in stimulating those economies.

Making it worse…

What is going on with world central banks since the Credit Crisis is unprecedented. Instead of letting economies follow their natural boom-and-bust cycles, central banks have intervened with nature and given money to too-big-to-fail companies, brought interest rates to artificially low levels, and printed trillions of dollars in new money to “smooth out the bust.”

In my opinion, what this has really done is: 1) brought the stock market to another bubble situation; 2) made the rich richer; 3) made the poor poorer; and 4) stimulated inflation in America.

Man shouldn’t interfere with nature—and in that nature I include the economic boom-and-bust cycles that have gone on for the last two thousand years. What the central banks are doing now…we will pay for big-time down the road.