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Negative Interest Rates Are Almost Certainly in Our Future

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With interest rates still at extremely low levels, what will central bankers do when the next recession comes along?

Just take those interest rates negative.

Iain Stealey serves as Head of global aggregate strategies at JPMorgan Asset Management in London. He raised the specter of negative rates during a recent interview with Bloomberg.

I don’t think the central bankers would like to go back into negative rates once they get out of it, but the reality is they may well have to during the next recession.”

Even now, the number of negatively yielding bonds continues to grow. According to Bloomberg,  market value of the world’s bonds with negative yields has jumped almost 25% over the past month, rising to $8.6 trillion. This despite the Fed raising rates and talking about reducing its balance sheet.

Negative rates effectively place a tax on savings. When rates fall below zero, it literally costs you money to keep your cash in the bank. That leaves you with a few choices. You can spend it, or you can just stuff it under your mattress (or hide it in your microwave as some Swedes have reportedly done in that country), or you can just suck it up and pay the bank to hold cash for you.

While Stealey talked about negative rates with some reservations,  Harvard professor Kenneth Rogoff is all for them. He recently published a paper making the case for pushing rates below the zero bound. He wants policymakers to develop market infrastructure for the widespread adoption of negative rates during the next inevitable downturn.

The US is due for another recession. During economic downturns, central bankers drop interest rates to “stimulate” demand. As Rogoff points out, the Fed has cut borrowing costs an average of 5.5 points during nine recessions since the mid-1950s. Currently, rates around the world are generally below 2% Some are still in negative territory. What is a central banker to do?

There is still strong psychological resistance to negative rates, but Rogoff says they can be extremely effective in today’s economic environment.

It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’s time. The growth of electronic payment systems and the increasing marginalization of cash in legal transactions creates a much smoother path to negative-rate policy today than even two decades ago.”

Enter the “war on cash.”

Last spring, the International Monetary Fund (IMF) published a working paper offering governments suggestions on how to move toward a cashless society, even in the face of strong public opposition. Cash warriors always use the fight against drug dealers and terrorists as the excuse for limiting the availability of cash in society. But here we see the real reason for the “war on cash.” If we have to pay to keep money in the bank, and there is no currency available to stick under the mattress, we’re more likely to just spend dollars rather than lose money by keeping them in the bank. This allows central planners to manipulate us into funding their Keynesian schemes.

It’s all about control.

By controlling access to your own money, banks and governments increase their control over you. They can collect maximum taxes and fees, they can track purchases, and they can even manipulate your spending habits.

It seems almost certain negative rate are in our future.

Of course, all of this financial manipulation wrecks economies. It creates asset bubbles and perpetuates boom-bust cycles. In a 2016 interview, credit analyst Chris Whalen called negative interest rates “chemotherapy for indebted nations.” But the fact is negative rates are good news for gold. As a Wall Street Journal article put it last year:

Gold historically rallies when interest rates are expected to remain low or decline…Gold performs well during periods of extreme duress.”

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