Economic slowdown! What if the Fed imposes negative rates?

After the huge financing operation put in place by the FED in 2008-2009, lending $7.5 Trillion to the banks at a 0.1% interest rate, we were introduced to the toxic assets purchasing program (Capital Purchase Program) by the Us Department of the Treasury, a $700 Billion of distressed assets buying program. Afterwards we had the “twist operations” in which the Fed tried to lower the long term interest rates in the attempt to boost long term investments. All of these measures were not sufficient, so the Fed started the QE, a larger asset buying process of corporate bonds, government bonds and much more. If you thought there are no more bazookas on the hands of the Fed, you were wrong, here comes the negative rate. For them who are curious about the future bazooka, we can anticipate you; there is the abolition of cash.

In eight years we have seen such huge interventions on different monetary policies that we haven’t seen in the previous eighty years. There’s more than a reason to be worried. Not the same can be said for Mr. Warren Buffet. In his last letter to investors he looks pretty optimistic and the Berkshire Hathaway’s numbers bear him out. In this mess of economic data many of the analysts and money managers seem rather confused. Just three months before, the US indexes reached record levels and there was much more optimism regarding the US economy. This optimism was also shared by the Fed which raised the rates giving to the market a strong signal of economic and inflation growth. Right now we are flash backwards in the debate of economic slowdown.

There are even serious analysts that talk about a recession not only in the US but also in the entire world. What make these analysts think about a recession and what makes the Fed valuate the possibility of negative interest rates in the US? We will list here some of the main reasons of such a huge change in such a short term:

  • The oil and mining sector’s crisis, as oil has been getting hammered in the first quarter of this year.
  • The strong dollar, which is weighting on the US exports.
  • The hard landing of China’s economy and the fears of a huge devaluation of the Yuan.
  • The negative interest rates imposed by the Bank of Japan, which increased speculations on similar actions in the US.
  • The worsening of profits and sales figures of US companies, after records had been reached in the previous quarters.
  • The tumble of the US financial market indexes in this first quarter, as a result of a needed correction after a long bull market.

Markets were unsettled mainly by the negative rate ideas which have been spreading in the minds of investors such as the last bazooka, which the Fed has implemented in order to avoid a possible economic slowdown in the US. The fact that the Japan entered in the negative interest rates’ era after the European Area and some other countries like Switzerland, Denmark, Sweden, had a strong impact on pushing the Fed to consider the idea, and the markets to take it seriously.

There has never been any experimenting with negative rates before and in terms of finance, the concept is something very unusual. People have to pay for their savings instead of receiving remuneration for their sacrifices. Theoretically, this would affect them to spend more, having a positive impact on the economy. It could be a good thing on a short term focus but what about the long term? Are we sure this is something sustainable on long term speaking? The American people have always had problems with savings and for many years we have been hearing suggestions that they should save more. Now someone is trying to convince us that we should spend more. This seems to be a paradoxical situation. Even if spending isn’t our intention we’ll be forced to spend or invest. If this will happen for real, probably it could be better to fly to safety, investing in Gold and Real Estate. Both these assets seem to be in an uptrend lately.

What mostly worries the Fed is something else. The dollar is not like any other currency, it’s a vehicle currency and an international reserve currency. As such, there’s a natural global demand for the dollar and in case the Fed decides to impose negative rates on the accounts in dollars, this demand could be in danger. This fact could put in doubt the Kind Dollar’s supremacy in the international scheme of payments and reserve currency system.

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1 Response

  1. Erwin Amann says:

    Negative interest rates do not imply we should not save. They imply we should not keep our money at the bank account. We should certainly not fly for safety as gold is all but safe. It is much more volatile than money. And real estate has been the trigger for the financial crisis. We should rather go for risk, investing in new technologies, buying stock, going to emerging markets.

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