Gavel to Gavel: Negative Interest Rates – Probability or Problem?

How many of us can remember home mortgage interest rates of 10% per annum?

During that same time, commercial loan interest rates often topped 18% per annum.

Imagine, now, the current economic madness involving negative interest rates. Within the last month, China sold several billion dollars of five-year bonds to yield a -0.152% return. In plain terms, this means that China will repay its bondholders less than it has borrowed.

In a logical world, this should be impossible. Who would rather have 90 cents a year from now than $1 today? Negative interest rates are essentially savings rates below zero. With negative interest rates, individuals and banks are charged for savings rather than being paid interest.

Interest rates are largely driven by the central bank of any given country. Negative rates supposedly boost the economy by encouraging consumers and banks to take more risk by borrowing and lending money.

The Federal Reserve Bank has cut the federal funds rate twice in 2020. It now is +0.25% per annum. If interest rates are lowered further to help the American economy, rates could drop below zero. While negative interest rates have never happened in the United States, that doesn’t rule them out. Countries such as Switzerland, Sweden, Denmark and Japan have all implemented negative interest rates. Sweden paved the way for negative interest rates in 2009 when it cut its deposit rate to -0.25%.

Notwithstanding the so-called advantages of negative interest rates (a 0% home mortgage rate, for example) there are a number of negative possibilities. The hope is that banks lend to individuals and businesses in order to spur economic growth. However, because it’s less profitable, banks may actually reduce their lending.

Consumers may also see lower returns on their pension funds and life insurance. None of the economies that have implemented negative interest rates have been able to jump-start enough growth to get out of negative interest rates. The bond market would eventually take a hit and if you’re looking for higher yield, negative rates could create bubbles in the stock market or in real estate. So-called safe-haven Treasurys would have little to no yield as the national debt explodes.

Without question, the halcyon days of high-yield certificates of deposits are now gone forever. Sorry, Mom.

This article first appeared in The Journal Record on December 9, 2020, and is reproduced with permission from the publisher.


Associated People:

Gary A. Bryant