negative interest rates

Toxic Negativity, Interest Rate Edition

© Can Stock Photo / sqback

Economic theorists are devoting a lot of analysis to the extraordinary exertions of central bankers, recent and planned, in their attempt to shape the economy to their wishes. Increasingly, we read and hear justifications of negative interest rates in connection with potential future “policy tools.”

Our life experience has taught us all that interest is the price of money. If you borrow money, the price you pay is interest. If you lend it out or deposit it, the price you receive is interest. A lot of things go upside down when you make interest rates go negative.

Can you imagine your bank balances declining every month because the bank charged you interest on your deposit? Or being paid every month to owe on a home mortgage?

Some Federal Reserve officials seem to have convinced themselves that this would all work out very well. The Federal Reserve would be able to distort things so we would spend more money than we otherwise would, which is often its goal. But we believe they are ignoring a huge problem, one that is right out in the open. It may take a little common sense to see it.

One of our bedrock beliefs about money, perhaps for most of us, is that we know how bank accounts work. There have always been special features attached to money in bank accounts. We understand it to be guaranteed, safe, and it will always be there. It is backed by the government via F.D.I.C. It does not fluctuate or lose value. We all know how this works.

But in the world of negative interest rates, money in bank accounts would no longer be like “money in the bank” as we have always understood it. It would not be safe, it would lose value, it will not always be there. Negative interest would eat it up part of it over time.

We have questions. As we watch our saving get chipped away, would we patiently listen to the theories of the economists about how it was all good? Would the average person conclude that the money has been ruined by the government? Would there be resentment against the Federal Reserve for taking action to impair our savings when it decides we are not spending enough?

Bottom line, part of the magic elixir that makes the modern world run is faith in our institutions. Destroy our traditional idea of how bank accounts work, and see if that lasts. We don’t know.

As we monitor this troubling trend, we’re formulating ideas about how to deal with it. Clients, if you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Too Close to the Sun

© Can Stock Photo / Paha_L

In Greek mythology, Daedalus constructs wings of feathers and wax so he and his son Icarus may escape from the island of Crete. Although warned against flying too close to the sun, Icarus becomes giddy with the sensation of flight. His wings melt when he gets too close to the sun, and he crashes into the sea and drowns.

This tale of hubris is perhaps mimicked in our time by central bankers around the world. Central banks including our Federal Reserve Bank are charged with conducting monetary policy to achieve stability of prices and favorable economic results. The stresses of the last global recession induced some of these authorities to adopt unprecedented policies.

Among these ideas, the most unusual might be negative interest rates. If we think of the rate of interest as a price – the price of money – then the concept of negative rates seems insane. If bananas had negative prices, producers would have to pay you to take them.

There are practical problems, too, for savers and investors. Imagine having $100,000 in the bank today. After a year of -1% interest, you would have, say, $99,000. “Money in the bank” would no longer be like money in the bank.

Why would central bankers consider such a policy? Like Icarus with his wings, they seem intoxicated by their apparent power to manipulate the economy. Negative interest rates would be a strong incentive to reduce savings and increase spending. This could theoretically boost the economy.

The unintended consequences of their actions could create real problems. Average folks trying to save for the future were severely disadvantaged by the zero interest policy of the last decade. Negative rates would make that even worse.
The Federal Reserve has not yet gone below zero. But a research paper published by a Fed official earlier this year concluded that “negative interest rates might be a useful tool…”1

Clients, our concern over this trend in Fed thinking bolsters our conviction about the investments we hold that would potentially benefit from the unintended consequences. No guarantees: we wish central bankers would simply avoid flying too close to the sun, so to speak.

Clients, if you would like to talk about this or anything else, please email us or call.

Notes & References

1. “How Much Could Negative Rates Have Helped the Recovery?”, Federal Reserve Bank of San Francisco. https://www.frbsf.org/economic-research/publications/economic-letter/2019/february/how-much-could-negative-rates-have-helped-recovery/. Accessed June 25th, 2019.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.