Inflationomics

The Future Under Negative Interest Rates

We’ve all heard about negative interest rates by now.  How the bank depositor has to pay the bank for the privilege of keeping his/her money in the bank…the opposite of the way things have worked in the past.

In the past, investors could put their money in the bank, earn interest, and eventually retire on their interest income.  Businesses could keep their idle cash earning interest while looking for the next best venture or product in which to invest.  Governments, if they were creditors, could also earn some income, thus reducing the need for tax hikes, borrowing, or money printing.

Today, however, with negative interest rates, investors can’t retire, businesses can’t let their money be idle, they have to actually look for things to do with their money…buy back stock, buy out the competition, merge with a foreign company (inversion), or pay a dividend.  Governments are no longer creditors (for the most part) and, therefore, benefit from low to negative interest rates.  In fact, low to negative rates allow governments to spend more than they otherwise could.

Which raises the obvious question:  Could the central banks of the world be setting their interest rates low to negative to help out the governments (their governments!) of the world avoid a default on their debts, which have been escalating in recent years?  Why else would central banks set interest rates so low, and now negative in Europe and Japan?

In my opinion, this is exactly why central banks have manipulated interest rates; i.e., to keep their masters (their governments) from defaulting on their debts.  So what happens next?

Two things:

  1. Investors and businesses will try to find a safe haven from this new upside-down interest rate policy.  If they can’t find a geographical place, they’ll turn to a safe-haven money; i.e., precious metals.  Even though they don’t pay interest, they do a better job of holding their value.  At some point, everyone will want some.
  2. When investors and businesses flee the new interest rate policy, central banks will once again try to accommodate their masters…this time by printing more money.  Central bankers and governments believe that more money is the answer to all problems.  They don’t understand value.  (There are times when food can be more valuable than gold.)  In time, the new money-printing will make it easier for governments to pay off their debts (with cheaper dollars), but it won’t teach the politicians and bureaucrats to stop spending.

In the long run, however, the spending, along with the negative interest rates (and the profligate governments) will come to an end and hopefully “the people” will re-learn the lessons about fiat money depreciation, interest rate manipulation, and the advantages of a free-market-determined money, rather than government intervention/manipulation.

Robert F. Sennholz

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