Negative interest rates have become a hot topic in recent days. This report is a follow-up to comments on our interest rate article of yesterday. The concept of negative interest rates appears to have become the new cause célèbre among Keynesian-leaning economists who favor printing more money and spending it in an attempt to stimulate the economy. It calls for raising taxes as much as possible and assuming more debt for the balance of the spending. (Note that there are even new euphemisms for this strategy: tax increases are now called revenue increases and spending is now called investing.) To alleviate the problem of the interest cost and force spending rather than saving, central bankers are talking more and more about negative interest rates. Swiss National Bank chairman Thomas Jordan currently oversees the SNB implementation of negative interest rates as does the Bank of Japan’s Haruhiko Kuroda. Denmark and Sweden have also experimented with negative interest rates.
In testimony today before the House Financial Services Committee, U.S. Federal Reserve Bank Chairperson, Janet Yellen, stated that Federal Open Market Committee discussed charging banks to hold excess reserves at the Fed. This is not a new concept for Yellen who had previously suggested it could be positive to go negative when she stated over five years ago that “If it were positive to take interest rates into negative territory I would be voting for that.” Are negative interest rates good for the country?
And what are the positives? Let not your financial peace of mind be troubled … yet. The current argument for negative rates would apply only to commercial bank deposits at central banks. Unlike consumers, commercial banks cannot readily convert assets to cash. Individuals, on the other hand, can more readily convert to cash where such cash may be stored in safe deposit boxes or in the proverbial the mattress. However, we all understand that in a vertical society, the blessings as well of the liabilities at the top eventually trickle down from on high. Therefore, the costs may prove to be inescapable since all taxes are ultimately paid by individuals whose reality is that there is no one else behind them to accept the tax burden.
Yellen’s credibility may have suffered somewhat because her December rate hike – minuscule as it was – served as a signal that the Fed was applying the brakes to what was clearly an already slowing economy. Who would have thought that a mere 25 basis points would contribute to an 11% decline the the Dow stock index, volatile downward pressure in oil and other commodity markets and a distressed economic environment going into an election year? Yellen’s confusing testimony of today attempted to address the paradox of continuing her rate increase policy with a struggling U.S. economy. Remaining unspoken by Fed officials as they whistle past the graveyard, is the potential budgetary catastrophe of rising interested rates for $19 Trillion of U.S. debt.
Expect to see government officials in not only the U.S. but throughout Western civilizations continue to educate their populations to accept the concept of negative interest rates. The alternative, increasing rates, could paralyze any debt-burdened government with devastating consequences for all classes, rich and poor.