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The Negative Interest Rate Bomb

The Negative Interest Rate Bomb

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Wednesday, 15 June 2016 06:57 AM Current | Bio | Archive


We’ve all had the experience of getting together with some of our buddies and, over a couple of beers, crafting a brilliant solution to one of the world’s problems. Sure it’s a crazy idea, but it just might work! 

Yet in the harsh light of day, it’s likely you realized your ingenious plan had some glaring downsides you’d failed to consider. Well, no harm done, right? It’s all just talk.

Now imagine you’re a central bank like the Bank of Japan, the European Central Bank—or our Federal Reserve. Despite their crucial role in determining the nation’s financial policy, and their tremendous power, central banks rarely get audited.  Few people understand what they do well enough to analyze – or criticize – their policies, and while central banks have guidance and an operating charter, there are very few laws that govern their actions.

This means when central banks get together and come up with a crazy idea, they can implement it with little to no oversight. The Federal Reserve doesn’t need to get permission from Congress or the president, and this lack of answerability is much the same in most industrialized countries. Unfortunately, this largely unchecked power also doesn’t tend to attract much notice because a headline like “Central Banks Pursuing Irrational Policies” doesn’t really garner a lot of attention.

That’s how we got into a situation where a crazy idea quickly got out of hand and is now spreading dangerously. The idea is a negative interest rates policy, sometimes referred to as NIRP, which has gone so far now there’s a danger of its creating a worldwide debt bomb. Bill Gross of Janus Capital expressed that dire feeling in this June 9th tweet:


 

  

 


Like all central bank intervention, negative interest rates were implemented with the best of intentions: to disincentivize storing cash in the bank.  NIRP would theoretically motivate banks and large institutional investors to lend out more money and, on the retail level, spur bank customers to spend rather than save—all with the aim of stimulating the economy.

That sounds great over a couple of drinks after work, but there are several serious downsides that are now becoming apparent. The most obvious is that it punishes the most fiscally responsible people, those of us who live below our means and save our money. Moreover, many institutional investors, like insurance companies and pension funds, are governed by charters that mandate they keep most of their money in government bonds, which is now locking in a guaranteed loss for retirees.

Over the years we’ve learned that crazy breeds more crazy in finance and that’s just what we’re seeing. Some European commercial banks are seriously considering stockpiling cash in their vaults rather than pay negative interest for depositing it in central banks – the banking equivalent of stuffing your cash in your mattress.

Furthermore, instead of NIRP making banks eager to lend, they’re forced to weigh taking on riskier debt to generate income, even as they’re still holding bad loans from the Great Recession – all while trying to find no-cost ways to store massive amounts of paper money. If you’re finding it hard to shed a tear for large commercial banks, remember that inevitably smaller banks and individual savers are the unintended casualties of bad monetary policies.

Even countries not (yet) fiddling with negative interest rates could become collateral casualties when the negative bond rate bomb finally goes off. Gone are the days when a far-off country’s bad financial decisions left you unscathed, as anyone who’s lived through last year’s August Crash, precipitated by China’s shock devaluations of the yuan can attest.

Hopefully the world will back away from the cliff before it’s too late, but don’t count on it.

Ironically, this is one of the few times smaller investors actually have a better means for protecting their cash wealth than institutional investors. Small investors can protect the buying power of their cash by investing in high quality gold and silver.

You can even roll them over to a properly structured gold IRA, where your savings can be secured from both reckless central bank policies and the ravages of inflation. Central banks, including our Fed, can erode the buying power of your cash, and harm the value of your stocks and bonds. But they can’t touch your gold.

Demand for gold is near all-time highs in countries where both the businesses and citizens are worried about the value of their currency. In the U.K., demand’s also being fueled by fears the pound will devalue if Britain votes to leave the European Union on June 23.

Gold not only provides an intrinsic value hedge against such a sudden devaluation of currency, but ultimately it gives you peace of mind in a world where crazy people are running our central banks.

Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau. To read more of his work, Go Here Now.

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TrevorGerszt
We've all had the experience of getting together with some of our buddies and, over a couple of beers, crafting a brilliant solution to one of the world's problems. Sure it's a crazy idea, but it just might work!
negative, interest rate, bomb, invest
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2016-57-15
Wednesday, 15 June 2016 06:57 AM
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