Thoughts on negative interest rates: Fed Chairman Janet Yellen said negative interest rates are still on the table. If the U.S. Treasury and Federal Reserve go to negative interest rates on deposits, they would be penalizing saving. The results in America could be disaster. Savers are already penalized by artificially low interest rates. But imagine if you had to PAY interest on the money you have saved in your bank account, in your money market fund, on the money in your ATM account, on the cash in your brokerage account, on your T-bills.
Already, if truth be know, our deposits are legally a loan from you to your bank or broker, for which the bank or broker normally pays interest to you. If instead, you have to pay the banks to hold your money, that alone could cause a major run on the banks, as it has done in America before, and in Greece recently. People would be incented to withdraw their money and hold it or spend it. The government, as it always does, would call a bank “holiday” and close the banks to stop the run, as it has done before in America and as was recently done in Greece.
Can’t happen you say? Yes it could. Cash dollar bills could be eliminated, as already proposed elsewhere. All transactions could be required to occur by credit or debit card. There is already a move afoot to do that. The governments use the excuse that this is required to prevent money laundering and illegal drug cartels. A fee could be charged on ALL financial transactions on your debt and credit cards. Many cards already charge fees on international transactions. And, most already charge an annual fee for use of the card. The institutional processes are already in place. If these fees exceed the amount of interest earned on your deposit, then you would be loaning them money and paying them to borrow your money, i.e. negative interest rates.
Think of it like a Costco membership card. Today, you can buy an annual executive membership card from Costco that gives you the privilege of shopping at Costco stores, and that card pays you annually more than the cost of the annual executive membership card IF you spend more than about $700 per year. Essentially, this little card game gives you a discount for shopping at Costco if you spend over a certain amount. But, what if the discount became a fee instead? Would you still buy the Costco executive membership card if Costco sent you a big bill each year instead of a check? I think not.
In the larger national budget context, investors in the U.S. Treasury’s T-bills, notes and bonds would be paying interest TO the U.S. Treasury instead of the U.S. Treasury paying interest to its investors (e.g. your money market funds, your bank, ETFs, China and rest of the world). In that case, the U.S. government would have incentive to go further and further into debt, for example to roll over or recall bonds currently paying about 2.6% TO bond holders and instead issue in their place Treasury bonds which require by law that the bond-holder pays the government 1%. Reminder, at this moment, U.S. T-bills pay investors near zero% interest.
But it gets worse. The U.S. dollar is the world’s most widely held reserve currency. There are trillions upon trillions of U.S. dollars in the central banks of all nations. If negative interest rates on U.S. dollar deposits are allowed, it would cause a rapid Weimar-Republic-like run on the dollar (not only on the banks). There would be a rapid and massive inflation (loss of value) spiral downward on the value of the dollar in international foreign exchange markets. Imagine a banana from Costa Rica or a loaf of bread costing $100, a barrel of oil costing $10,000, gasoline costing $100 a gallon.
Negative interest rates would also crash the prices of all U.S. dollar denominated bonds, not only Treasury securities. What price would you pay for a security that guaranteed that you must pay by law 2% per year to the buyer of that security?
Help me out. I can think of only three events that would prevent this negative interest rate scenario from occurring:
First, of course, if negative interest rates are prohibited.
Second, the U.S. dollar (or an alternative the U.S. dollar) becomes instantly and by surprise the new world currency, that is, the ONLY reserve currency on the planet, with availability only for a limited time for pre-determined exchange rates for old U.S. dollars and all other old currency. Countries have done this before, but only within single countries.
Third is a major war, which would drive more money into U.S. dollars, a so-called flight to safety.
Can anyone think of other alternatives?
If we have negative interest rates, we would be paying the government to push us further into debt. How is that not slavery? And, if you refuse to pay your share, there is debtors prison for impeding a federal officer in the prosecution of official business.