President Trump is a big fan of low interest rates.
Frankly, if we ever got interest rates down where they should be and if
they weren't raised so fast, you would see another probably ten thousand
points on the Dow. The Fed acted too soon.
I turned out to be right. They acted too soon and too violently.
The Fed moved, in my opinion, far too early and far too severely.
It puts me at somewhat of an advantage.
We'll see what happens with the Federal Reserve, whether or not they
finally get smart and reduce interest rates.
Like many other places around the world that we have to compete with.
If you look at what the other Fed equivalents are doing all around the
world, they're at a much lower rate.
And it makes us harder to compete.
Recently, Trump even went so far as to praise Germany's zero percent
interest rate. In Germany, they have zero interest rate, and when they
borrow money, I mean, when you look at what happens, look at what's going
on over there. They borrow money, they actually get paid to borrow money.
And we have to compete with that.
Then he went even further on Twitter, referring to the Fed as "boneheads".
But what if Trump got what he wished for?
What if interest rates were actually zero, or negative, like Sweden or
Japan? What if instead of a bank paying you to hold your money, you
theoretically had to pay the bank to keep it there?
It could happen with negative interest rates.
Negative interest rates first appeared in 2009, when Sweden cut its rate
to -0.25
percent. The move was meant to provide a short term jolt that would
stimulate a stagnant economy and encourage banks to lend, since holding
onto money meant financial institutions would have to pay interest to
Sweden's central bank.
But there was a fear the move could also impact savers who could be
charged by the banks holding their money.
Economists feared savers would hoard cash rather than pay the bank to hold
it. But that's not what happened.
Instead, Swedish savers spent or left it there.
That's not surprising, since Sweden has one of the higher savings rates in
the developed world, according to the Organisation for Economic
Co-operation and Development.
Since then, central banks in Denmark, Switzerland, Germany, Japan, even
the ECB have followed suit, taking rates into negative territory.
So what exactly are negative interest rates?
Interest rates are generally thought of as the cost of borrowing money.
Central banks raise interest rates to cool off an economy that's close to
overheating.
zero or negative interest rates, on the other hand, are seen as a way to
stimulate an economy.
In theory, negative rates force banks to lend more.
But it doesn't always work that way.
Instead, negative rates can actually have the opposite effect.
They can squeeze profits so much that financial institutions actually lend
less. They can also have an impact on government funding.
For example, Germany's economy is on the verge of a recession, so its
lowered interest rates to -0.31
percent, which means investors could be charged for keeping their money in
the bank. But the country still needs to fund the government.
So in August 2019, Germany attempted to sell 2 billion euros worth of
30-year bonds, which would mature in 2050 and they had a negative yield.
As a result. Investors only bought 869 million euros worth with a yield of
-0.11 percent.
In other words, investors will in theory pay to have the German government
hold their money. Anybody who holds this bond throughout its full life, is
guaranteed to lose money and they're guaranteed to lose money over a
period of 30 years.
Now, what this is telling us really is that anybody who thinks that this
is a good investment is factoring in an extremely bleak economic outlook.
You're talking about no growth, no inflation for the next three decades.
In the end, the German government was forced to buy the remaining bonds
itself, which could push down interest rates even further.
At the same time, the European Central Bank, or ECB, has continued on its
own negative rate path.
The ECB recently lowered its main deposit rate to -0.5
percent, a 10 basis point cut.
It also reintroduced quantitative easing as a means to try to stimulate
the economy. Negative yields and low interest rates in Europe have also
had another effect. They've driven investors to the U.S.
bond market in search of safer investments with a yield.
Negative rates cause uncertainty in the markets.
Many experts believe negative rates in Europe have only had a modest
impact on Europe's growth.
While it lowered the cost to borrow money, it didn't do anything to
increase demand for goods.
As a result, businesses didn't invest.
Lowering rates even further could put the entire global financial system
at risk. Negative rates cause a decrease in margins, which decreases
profitability for banks, and that can cause a bump in fees for loans,
including home mortgages.
They also make it more difficult for countries institutional investors to
find appropriate opportunities for clients.
If markets shift, bondholders seeking gains in price rather than yield
could get stuck holding too much risk.
Germany's negative interest rates have dramatically pushed up prices.
Recently, traders paid the equivalent of $195.87
for $100 and 20 year German bonds, which translates into a technical
negative yield of .386
percent. Former Fed chief Alan Greenspan has said that he doesn't believe
negative interest rates in the U.S.
would be that big of a deal.
But others disagree, saying negative rates can be a trap, that they may
not boost flagging economies and can even become the norm.
And that hurts banks, savers and companies in the long run.
It is the financial sector, the banks, the insurance companies, the
pensions, the security settlement is all structured, invented on one
assumption: positive interest rates.
Marginal reserves.
Marginal reserves. Everything is on positive interest rates.
You take those away and now the investment decision loses your money in a
negative interest rate world? The banking system doesn't work.
Pensions don't work==.
How does the European system work? They're doing a little fudging, aren't
they? Some creative movements, you are telling me about?
Yeah. The European system works because we, the reserve currency, are
still positive. Banks like Deutsche Bank are restructuring their entire
worldwide reserve system to invest in U.S.
dollars because they've got positive yields.
If we go down that road and go negative yields with them and cut everybody
off from positive, I think the financial system is at severe stress then
at that point. There's also a concern that negative rates encourage
governments to borrow more without concern for growing debt until the
rates go up and the bill comes due.
Meanwhile, trade wars have taken their toll on the global economy and
there's a growing concern because rates are so low now, the next recession
could force the Fed's hand.
Then negative rates could be the only alternative.
Larry Summers, former Treasury secretary under President Bill Clinton,
says that once rates go negative, it could be extremely difficult to get
out and the global financial system could get stuck.
And I think the great concern is with what I've called the monetary black
hole, that zero rates appear to be where we're stuck in Europe and Japan
and we're one recession away from a situation of that kind.
It's a very different world when everyone's stuck at zero interest rates.
We've got to think about stabilization policy.
Institutions are going to have to think about their investment policy in a
very different world, in a very different way when we have a black hole,
zero interest rate world.
And that's what I fear we're headed into.
And Morgan Stanley CFO Jonathan Pruzan agrees, saying that negative rates
provide little relief.
Clearly, the negative rates have not really been helpful to spur the
economy in some of these markets.
And we'll have to just see how it plays out.
But this negative rate dynamic continues to have investors searching for
yield. And I think that's a trend that's going to continue because not
only there are a lot of negative rates.
If you look at this stack of debt products out there, there is not that
much inventory that's yielding over 5 percent.
So on the one hand, you have a lot of negative rates and on the other
hand, not a lot of places where you can find yield.
And that's why Harvard Professor of Economics Ken Rogoff believes negative
rates will eventually make their way to the United States.
But he also says there are more challenges involved for the US than just
the rates themselves.
I think eventually it will come here to the United States.
It may happen sooner rather than later.
However, the United States, beyond the Federal Reserve, the government
would have to take a lot of steps in changing tax laws or regulatory laws,
and particularly how to deal with cash hoarding to really have negative
rates dip very far.
So Trump may get his wish of zero or negative rates, but the economic
slowdown that led to them would dampen the president's prospects of
re-election, and the end result could be even worse for the U.S.
economy. Well, I am terrified if we go negative rates in the United
States, it will virtually destroy the banking system as it is doing in
Europe as we speak.
That would be a major, major crisis.
I continue to think there'll be consequences, you know, in the long term
for negative rates as an experiment.
I certainly hope in the US there's never a consideration of negative rate
policy here in the US.
I think it's interesting to see where we are in the economic cycle, where
we are from a job perspective and just balance the policy that we have
today. You know, personally, I'm not a Fed governor, but personally I've
been surprised still by the amount of monetary policy or kind of the low
rate environment that we still have at this point in the cycle.
I would've expected something slightly different, but negative rates are
not something that I think when we look back on history and write the book
on that, I'm not sure that'll be a good chapter.