U.S. Federal Reserve Bank Chair Janet Yellen has been speaking all week and all week the markets have been in turmoil. The new hot topic: negative interest rates. Everyone’s doing it. For the past seven years, the U.S. government’s solution to our economic malaise has been to try to become more like the rest of the world in all things – particularly, Europe. The current 2-year U.S. Treasury note yield is 0.64%. But, one-fifth of the world’s total GDP is in countries which have imposed negative interest rates. In Europe, now, short-term rates are almost all negative which means investors get less than their principle back at maturity. For example, Germany’s 2-Year yield is –0.547%; the Switzerland’s is -0.89%; Sweden’s is -0.63%; in France, the 2-year yield is -0.44%. This is all a relatively new phenomenon.
Ever since the 2008 real estate bubble burst and subsequent stock market crash, national governments, more than ever before, have tried to actively intervene in the economic process through their central banks. An array of creative monetary tactics have been used including printing massive amounts of money (euphemistically referred to as Quantitative Easing) and artificially forcing low interest rates. Heretofore, the bottom for interest rates was considered to be zero, i.e., no interest paid for the use of money. But, all these tricks appear to have failed. In addition, such efforts combined with the Keynesian economic policies of tax and spend have resulted in record levels of public debt.
But fear not; the government is now considering even more ways to intervene. It’s called negative interest rates. Fed Chair Yellen is testifying again today before the Senate Banking Committee and once again, Yellen stated that negative interest rates are not off the table. This is the same Fed chairwoman who raised interest rates only last December for the first time in over a decade.
In a recently released annual report, the Federal Reserve issued rules for stress-test scenarios that include a move to negative interest rates. Everyone seems to be talking about negative interest rates now. This only appears to lend more uncertainty to the business environment. No one seems to know how negative interest rates would impact the U.S. economy. Have you been foolish enough to save your money? The central bankers will spank your financial bottom line for that transgression. This, however, may lead to the assumption is that consumers will stay in cash rather than give their money to banks because of the prospect that they will not get it all back. But,as you may have surmised, big government has an answer for that as well: forcing a cashless society. There will be more on the cashless society in our next report.
One economics professor speculates that the real purpose of negative interest rates is to drive the smaller commercial banks out of business and eventually the larger banks until there is effectively only one bank left: the government’s own central bank. Do all these over-educated, over-paid people really know what they are doing or are they just grasping at straws and putting out bogus and misleading economic statistics while the West’s middle classes continue to shrink? This confusing topic has only begun to percolate and will be a major story as the world economies struggle with a lack of growth and search for remedies.