By the latest count, roughly $6 trillion worth of sovereign debt worldwide now trades at negative yields.
By now, we all know that central bank asset purchases (known as Quantitative Easing or QE) have failed to boost the economies of all the jurisdictions that have done them—Japan, the Eurozone, Denmark, Sweden, Switzerland and the US, to name names. The new, new extreme central bank plan to spur economic growth is negative interest rate policy (NIRP).
Ten-year Japan Government Bonds closed on February 8, 2016 at a record low yield of minus 3.7 basis points, the result of this new NIRP policy adopted by the Japanese Central Bank. By the latest count, roughly $6 trillion worth of sovereign debt worldwide now trades at negative yields, most of it in Europe.
This is nothing short of insane. The madness starts from the ridiculous premise that economic growth comes from consumption, not savings and investment. The very heart of the capitalist system—the only system that has ever generated significant economic growth—is savings and investment in productive enterprise. Negative interest rates destroy the value of savings and discourage real investment in favor of useless speculation. The time value of money is the logical foundation of our economic system—that savers are paid interest to defer consumption.
The sovereign debt market is not the only victim of NIRP. The central banks of the Eurozone, Switzerland, Sweden, and Denmark now charge interest on deposits they hold from commercial banks. Not surprisingly, these commercial banks are now beginning to charge interest on deposits they hold from their customers. Meanwhile, governments worldwide as well as organizations such as the IMF, BIS and OECD are actively promoting the idea that cash should be eliminated to cut off funding for terrorism and crime. So, dear reader, you can look forward one fine day to having all your savings locked into the banking system and being charged whatever interest rate the banks think is appropriate. Gold anyone?
Now, you may think this can’t happen here in the North American, the land of freedom and good government. Think again. Both the Federal Reserve and the Bank of Canada have endorsed the concepts of NIRP and a cashless society.
The Federal Reserve is telling banks to prepare for NIRP, for the first time requiring banks to include the possibility of negative-yielding Treasuries in their stress tests. Several high-ranking Fed officials have recently discussed the idea. In a speech last week, Fed Vice-Chair Stanley Fischer said Europe’s experiment with negative rates is “working better than I expected.”
The February 10, 2016 edition of the Wall Street Journal quotes J.P. Morgan’s economics team led by Malcolm Barr who says euro-area rates could drop to negative 4.5%, U.K., rates could go to negative 2.5% and the U.S. to negative 1.3%.
Negative rates in the U.S. would likely begin with the interest paid on excess reserves that banks store at the Fed, a number currently at $2.15 trillion that is currently earning 0.5 percent interest. The idea would be to charge banks to store reserves. This move would likely result in negative rates on the $2.75 trillion in money market funds used by banks and governments to fund their operations. From there, it wouldn’t take long for the commercial banks to adopt negative interest rates for customer deposits. The hardest hit would be the pension plans that depend on interest to meet their obligations to retirees.
What would you rather depend on for your retirement? Personal savings in money market funds, private pension plans and social security programs, all protected by your friendly national government, or physical gold held outside the banking system?