In September, former Fed chairman Alan Greenspan said that it’s “only a matter of time” before negative interest rates come to America.
And this week, President Trump made the statement, “I want some of that money,” referring to the negative interest rate policy (NIRP) of several European nations under the control of the European Central Bank (ECB).
Of course, the Fed will do what they will regardless of rhetoric.
And doubling down on destructive Keynesian monetary policy is what they do best. NIRP is the ultimate example.
It’s the only way to deal with an ever-increasing debt burden – keep pushing interest rates lower and lower. This works in the short-term at the cost of making everything worse over time.
Negative Interest Rate Policy – Consequences
It would make sense for people to panic about the situation. After all, the implications are huge, and negative interest rate policy has never been implemented before. The concept cannot be found in any history or economics textbook that has ever been written.
Until NIRP comes to individual bank accounts, though, I don’t believe the issue will ever be raised beyond the level of a South Park meme.
Here I’m making three predictions about the consequences of negative interest rates. Number one is still speculation at this point, number two is already happening, and number three is an absolute certainty.
So really, that’s one prediction and two observations.
Your Bank Account Will be NIRP’d
This one might be tough to stomach. And rest assured that no banker or financial pundit will let you believe it’s possible. But if banks lose money for lending, at some point they have to take from somewhere to cover that loss. Where else will they take from if not customer accounts?
Some have said that NIRP for government bonds amounts to a slow-motion soft default on sovereign debt. If that’s true, then NIRP for bank accounts amounts to a slow-motion bail-in.
And one way or another, bail-ins are coming. We first saw them in Cypress in 2013. In a bail-in, depositors get “haircuts” imposed on their deposits when the bank gets into trouble.
Breaking news: many banks have already encountered trouble. Big trouble.
Bank Runs Will Become Commonplace
The second consequence of negative interest rate policy will be bank runs. When NIRP trickles down to savings accounts and people realize they lose money every month by keeping it in the bank (even though this happens now through inflation, the effect is masked in nominal terms), they will begin withdrawing it in droves.
Maybe not right away. Most people will probably be too busy trying to survive to notice when it happens.
But as they see their accounts dwindling, at some point everyone will figure it out. They will try to withdraw their money at the same time. And because fractional reserve banking means the bank doesn’t have their money, the banks will fail.
Of course, reality won’t play out in such a simple fashion, both because of an untold number of variables being at play and because of the Fed and its infamous monetary “toolbox,” as Ben Bernanke was fond of saying.
Even with negative interest rate policy still yet to hit individual accounts, we’re already seeing bank runs.
In recent months, there’s been a run on several banks in India, China, Lebanon, and Ghana, to name a few. Will contagion soon spread?
Pension Funds Will Suffer
This last consequence of NIRP is even more difficult to imagine. Many decent people work for decades at government jobs assuming they will be able to retire with a cushy pension plan.
But if the NIRP nuke continues to explode, that won’t be the case.
Existing regulations require US pension funds to hold a significant amount of assets in bonds. The logic behind this comes from the fact that historically, high-rated government bonds have been the safest income-producing asset in the world.
So, in principle, it’s not the worst regulatory guidance to force onto pension plans.
All of that changes when interest rates go negative, however.
Now the safest asset becomes the most assured loss possible. The very laws put in place to protect investors could guarantee their financial ruin.
It likely won’t result in the total annihilation of investor savings right away – just a portion. Pensions won’t be able to make payments to the extent they had promised. And while the cost of living continues to soar, this will deliver a one-two punch that Americans will not be happy with.
Hard Money is the Cure for NIRP
You can’t have capitalism without capital. NIRP destroys capital by making saving impossible.
There is a better way.
In a negative interest rate policy environment, gold looks pretty good.
An asset with no counterparty risk, no ties to interest rates, and the potential for capital gains becomes even more appealing than usual as the monetary black hole that is NIRP continues to engulf the world.
Bitcoin falls into the same category, no matter what you believe about the underlying technology.
As fate would have it, a man named Papa-Wassa Chiefy, who is vice president of an investment bank called Groupe Nduom, told the Bank of Ghana they should diversify their reserves with bitcoin, recommending an allocation of 1%. That was in January 2018.
He made a good point when it comes to criticisms of bitcoin as being too speculative:
“I don’t think it’s a gamble, I think every investment is a gamble, getting out of your bed in the morning is a gamble. If you are completely preoccupied with risk you won’t do anything… in terms of managing reserves there is potentially a new reserve asset and as a central bank, you need to study blockchain.”
Such an allocation would have spared the country’s reserves from the worst impacts of the current banking crisis.
While it’s too late for the country of Ghana, it’s possible that a larger economy could take that advice.
Most likely, it would be China, since the majority of bitcoin mining happens there. The People’s Bank of China could just enact a tax on bitcoin mining and collect it in the form of bitcoin, adding to its reserves without having to do much of anything at all.
Obviously, this would be bullish for crypto.
In fact, everything happening in 2019 is bullish for the assets we have been recommending to our subscribers for years. We expect these trends to accelerate and grow stronger in the years ahead.
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