Chuck Bentley Answers: How Do I Prepare for Negative Interest Rates?

Dear Chuck,

Are we headed towards negative interest rates? If so, how in the world do I prepare for that? 

Rates Below Zero? 

Dear Rates Below Zero,

This is a great but very challenging question. With our federal funds rate (the cost for our banks and financial institutions to borrow money) essentially at zero right now, many are wondering if they will be forced to go below zero to keep the economy growing. I will try to give some insight to both of your questions.

It is important to understand that interest rates are a primary tool of a nation’s central bank to impact inflation levels, employment, spending, and investing. Interest rates are typically a reward/profit to lenders and a cost to borrowers. Negative interest rates seem to turn that upside down.

Chuck Bentley (Courtesy of Christian Economic Forum)

How Likely? 

To your first question about the probability of the U.S. going there, I have to answer: maybe. Negative rates have never happened in the U.S. but the goal would be to positively impact economic growth should it remain stalled.

Earlier this month, The Bank of England requested reports from the CEOs of commercial banks on their readiness for negative interest rates. The European Central Bank and the countries of Japan, Switzerland, Denmark, and Sweden have already cut key interest rates below zero. The hope is to encourage spending and boost a staggering economy. Commercial banks would pay fees to the Bank of England for money held in excess of required amounts. This would encourage banks to take more risk by lending to satisfy the government’s desire to fuel economic growth.

Banks are already suffering the fallout of Covid-19. Will this pressure them even more? Are IT systems prepared to handle a move this significant?

Last year, Wharton’s Itay Goldstein and Peter Conti-Brown along with Lisa Cook of Michigan State University discussed the subject. The three agreed that we are more likely to see negative rates than not.

Adam Baratta, author and co-owner of Advantage Gold, believes the U.S. will consider following the path of Japan because of the high levels of debt. Writing in the Great Devaluation, Baratta says:

Some are calling for America to copy Japan’s accomplishments. Before getting too excited, keep in mind that the Japanese stock market collapsed 30 years ago and still hasn’t gotten back to where it was then. These policies have failed. A central bank managed economy is nothing to leap for joy about. Through manipulation, Japan has been able to steadily cancel out their own debt at an incredible rate of $720 billion per year. They are accomplishing this feat by selling their debt to their own Central Bank. Negative interest rates allow the Japanese to roll over their debt at no cost, which allows the Central Bank of Japan to literally erase government debt. It also increases their balance sheets.

Negative rates turn economic orthodoxy inside out. Debts become assets and savings become liabilities. The goal of getting consumers to spend money has many unintended consequences such as creating ultra-low mortgage rates, effectively zero, and rapidly increasing the price of real estate.

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SOURCE: Christian Post, Chuck Bentley