Sunday, January 31, 2016

Negative Interest Rate: How to Protect Your Assets?

On Friday (01/29/2016), everyone was shocked by the Bank of Japan's announcement:[13]
The Bank of Japan announced it had cut the rate on excess reserves to minus 0.1%, meaning institutions will have to pay the central bank for the privilege of parking reserves that exceed those required by regulators. The rate on most existing reserves, however, remains at 0.1%, while the rate for required reserves was cut to zero (see chart below). Unlike the single negative rate applied to deposits parked at the European Central Bank, the Japanese move is similar to tiered measures put in place by the Swiss National Bank, which punishes sight deposits, or commercial bank assets, of more than 320 billion Swiss francs ($312.5 billion) with a fee of 0.75%.
In this article, we will cover the following topics:
  • Negative Reserve Club
  • Impacts of Negative Interest Rate
  • Is Negative Interest Rate Coming to the US?
  • How Low Can They  Go?
  • How to Protect Your Assets?

Negative Reserve Club

Already, central banks in Switzerland (deposit rate at -0.75% since Jan, 2015), Sweden, and Denmark (overnight rates at -0.75% since 2012) have implemented the strategy. And the European Central Bank’s deposit rate is -0.40%.

No, the BOJ did not increase stimulus on Friday. What they did is joining Switzerland, Denmark and Sweden in the negative reserve club after dropping their rate from 0.1% to -0.1%.  However, as commented by Brian Romanchuk on the NIRP (Negative Interest Rate Policy):[11]
The effect on the real economy of marginally lower interest rates is negligible. The only way this announcement will matter is if it helps weaken the yen.
By itself, an interest rate of -0.10% is meaningless; a 10 basis point annual carry loss is less than the daily mark-to-market volatility of foreign currency asset positions for Japanese investors. Negative interest rates will only become significant if they can move below -1%. 

In the wake of the BoJ’s decision Friday, the yen plummeted to its lowest level in five weeks against the dollar to ¥121.00 compared with ¥118.84 late Thursday.  Japanese yields also hit record lows across curve after BOJ's negative rate shock. 
Race to Negative Bond Yields (Click the image to enlarge)

Insofar as the Americans are concerned, who are now outliers for not having negative rates, we had Ben Bernanke just two weeks ago saying the Fed should think about it. Alan Blinder apparently said it’s a good idea, and Janet Yellen, who previously said it is too dangerous, now says that the Fed should consider it. So here we have that mindset again.[25]

Impacts of Negative Interest Rate

The policy of negative interest rate from Central Banks is supposed to increase businesses' investements and encourage consumer spending.  The thinking goes like this:
  • Banks have to hold reserves somewhere else instead of in the central banks
  • If the risk-free rate is negative, there are immense incentives to borrow and invest.
Negative rates are a last-resort monetary policy tool that central banks use to crush deflation and encourage consumer spending.

Traditional economic theory says that a combination of massive deficit spending and historically low (not to mention negative) interest rates should produce a rip-roaring boom in which workers get generous raises, prices spike, and interest rates follow. Theory also says that, even in the rare case of nominal interest rates turning negative, the rates can’t stay there because beyond this “zero bound,” savers and investors will withdraw their cash and store it themselves, emptying banks and crashing the financial system.
Recent events have challenged both of these assumptions while sparking a debate over the nature and the import of this collapse in yields. Specifically, is it a brief aberration or the beginning of an unfamiliar and potentially treacherous new normal?

What are the potential problems of negative rates? Some commentators say:
  • Negative rates destroy a country’s savings industry and thus its long term growth rate 
    • Negative rates are essentially a tax on your bank deposits, intended to discourage saving[24]
  • Negative rates also raise the risk of a significant disruption to the banking system 
  • Negative interest rates are a solution for a non-existent problem 
    • that undermines the demand for money in a way that might have unwanted and inflationary consequences.[23]
  • Negative rates are not working in some places
    • The European Central Bank began charging banks interest on deposits in June 2014 to encourage them to lend more to companies and consumers. It hasn’t worked.[12,29]
    • Many of Europe's banks are "old-fashioned savings and loans" and cannot really pass on negative interest rates to their small savers.[20]
      • The feeling is that these small savers would not like to pay to keep their money in these banks and would remove a good portion of them, threatening the existence of the banks.
To sum it up:  As Casey Research founder Doug Casey says, this isn’t just wrong, it’s the exact opposite of what’s true. Spending doesn’t drive the economy. Production and saving drive the economy. You have to save to build capital, and capital is necessary for everything.

Is Negative Interest Rate Coming to the US?

It's a fair question to ask.  Here are what Fed Reserve insiders have commented on this topic:
"In the event of a serious downturn, negative interest rates are a tool that the U.S. central bank should consider."  —Former Federal Reserve chief Ben Bernanke[13]
 “Some of the experiences [in Europe] suggest maybe we can use negative interest rates.”  —William Dudley, President of the New York Federal Reserve Bank
“Potentially anything – including negative interest rates – would be on the table.” — Janet Yellen, Fed Chair[12]

Earlier on 11/23/2015, senior correspondent Tim Maverick reported that:[12]
As Andrew Milligan, Head of Global Strategy for Standard Life Investments, told the Financial Times, “This is an Alice in Wonderland situation.” 
It looks more and more as if the United States will be going “down the rabbit hole” in the not-too-distant future if the economy sours.
On 01/29/2016, Peter Schiff told Business Insider:[14]
"I think the Fed is going to have negative interest rates before the election because we're going to be in a serious recession"

How Low Can They Go?

Negative interest rates are introduced for one of two reasons:
  1. To defend currency
  2. To combat deflation and/or a weak economy
In the case of Switzerland, it had to manage a very sharp and sudden upward pressure on Swiss Franc ; investors were fleeing the Euro and the sudden capital inflows from the Eurozone drove the value of Franc to dangerously high levels.

David Zervos (the chief market strategist for Jefferies & Co.) thinks the Swiss National Bank can and will go much deeper into negative territory.[2] In so doing, they will give Mario Draghi cover to do the same. How low can they go? At some point it is more cost-effective to build your own vault and store cash than to pay your bank negative interest for the pleasure of keeping your money. David thinks -1.25% deposit rates – or even lower – are feasible.

How to Protect Your Assets?

The rules for successful income investing have completely changed. If you are living (or plan on living) off the earnings of your savings, you better adapt your strategy to the new world of negative interest rates

One obvious side effect of negative interest rates is that they compel retirees, pension funds, and others who need positive cash flow to move further out on the risk spectrum, says Jensen.[9]
“Rather than accepting extremely low rates in government bonds, many fixed-income managers choose high-yield bonds, emerging market debt, and high-dividend equities.”
The result, according to Jensen, would be “a broad-based fixed-income asset bubble.”
And even in the absence of financial instability, negative interest rates are potentially good for gold: “It costs around 1% a year to store bullion, which is not an attractive deal when high-quality bonds yield 6%. But when bonds are yielding negative 1%, gold looks much better in relative terms,” says Laggner.[9]

Finally, Bill Gross have also chimed in with the following comment:[5]
"I prefer own cash instead of owning the overnight securities which takes away 1% to 1.5% away from me."


  1. Janet Yellen: The Best Pick Pocket in the USA
  2. You Have Questions, I Have Answers
  3. Negative Interest Rates for Canada?
  4. Unintended Consequence of Negative Interest Rate Madness: Swiss Canton Begs Taxpayers "Please Delay Tax Payments"
  5. Bill Gross on Negative Interest Rate (FinancialSense Newshour @35:40)
  6. Cash Is King as Europe Adapts to Negative Interest Rates: Chart
  7. Selected financial statistics from the IMF on countries around the world 
  8. The ECB`s negative interest rate
  9. How Will Negative Interest Rates Change the Rules of the Game? (good)
  10. Free Money Friday- Japan Goes Negative And 'Saves' Asia (For Now)
  11. BoJ NIRP Makes Fed Rate Hike Look Even More Foolish
  12. Negative Interest Rates Coming to the US
  13. What you need to know about the Bank of Japan and negative interest rates
  14. PETER SCHIFF: We're going to have a serious recession and negative interest rates before the election
  15. Where to Hide Your Money From Reckless Governments (Doug Casey Dispatch)
    • The Eurozone’s key rate is -0.4%. Sweden’s key rate is -0.35%. Denmark’s key rate is -0.75%. Switzerland’s key rate is -1.1%.
    • On Friday, Financial Times reported that $5.5 trillion in government bonds worldwide now have negative rates. That’s about one-quarter of the world’s government bonds.
    • According to The Wall Street Journal, countries that account for 23% of world economic output have negative interest rates.
  16. FAQ: The Why And What For Of BOJ's Negative Interest Rates (Marc Chandler)
    • How is manipulating interest rates different than manipulating currencies?
      • Manipulating currencies is a zero sum exercise. 
      • Manipulating interest rates needs not be zero-sum. It can help spur demand. It trading partners could also respond by easing monetary policy; thus boosting demand further.
  17. The Fed Wants to Test How Banks Would Handle Negative Rates
  18. Negative Rates Corrosive to Financial System: James Bevan
  19. BOJ launches negative rates, already dubbed a failure by markets
    • A poll by Asahi Shimbun daily showed 61 percent of people don't expect negative rates will help the economy while only 13 percent said they will.
  20. The Eurozone: Still Hasn't Recovered
  21. ZIRP and NIRP have created 'financial hell'
  22. The failure of negative interest rates is a devastating intellectual defeat for conservatives
  23. No Shortage of Money
  24. Monopoly Is Going Cashless, Could We Be Next?
  25. "Negative Rates Are Dangerous" OECD Chair Warns "Our Entire System Is Unstable"
  26. Are Negative Interest Rates Ineffective?
    • A large central bank like the ECB can enjoy a first-mover advantage by being the first to push interest rates below zero. But as other major central banks follow, diminishing returns set in, and the disadvantages could begin to outweigh the advantages.
    • Negative interest rates are an imperfect tool, but our bet is that key central banks will continue to deploy them as long as global disinflationary headwinds remain.
  27. The head of the Bank of England explains everything that's wrong with negative interest rates
  28. The Investing Implications Of Negative Interest Rates
  29. ECB Doing Whatever It Takes Can't Make Euro-Area Banks Lend
  30. Six Ways NIRP Is Economically Negative

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