Japan Goes Negative

Japan Goes Negative

When you were a kid sometimes you came home with a crazy kid idea and your mom would say no. The next thing out of your mouth would be that all the other kids were doing it. That’s when your mom would sagely ask, “If all the other kids were jumping off a cliff, would you jump too?” Oh, moms…

Nevertheless, most of us, even as kids, would intuitively realize that jumping off a cliff is a really bad idea – even if everybody else is doing it. That is unless you happen to be a central bank and all the other central banks are jumping off the same cliff.

Bizarrely, that’s almost exactly what’s happening in the world outside the U.S. today. Central banks are going negative on interest rates in an effort to pump liquidity into their respective business markets. During turbulent economic times, banks and big investors seek the shelter of government bonds because they’re safe. Government bonds aren’t paying much interest these days because there’s so much cash sloshing around in the global financial system, investors are bidding down interest rates to ridiculously low levels. Even at that, banks still refused to lend money in a volatile business environment. To a bank, a slim return is better than a loss on a bad loan.

With banks and big investors hoarding cash instead of lending it out, central banks have turned to the ultimate “I’ll show you” of actually charging banks for the excess cash they’re keeping in government bonds in the form of negative interest rates. Japan is the latest to jump off the negative interest rate cliff, joining the European Central Bank, Sweden, Switzerland and Denmark. In the case of the Bank of Japan (BoJ), it’s more a curb than a cliff; a tiny tenth of a percent fee on selected current account deposits. But it’s not so much the size of the cliff, more the message it sends to banks and investment houses, “Start lending or else!”

That said, the BoJ has already indicated rates could go even further into negative territory. That means to keep from losing money, a bank would have to find some way to withdraw its cash and bury it in a giant vault somewhere. Insanity breeds insanity. In Sweden, people have taken to hiding bundles of cash in kitchen appliances. It’s a virtual guarantee that, somewhere in Japan, there’s a bank trying to figure out where they can park truck trailers full of cash.

Doing More of What’s Not Working

A simple gauge to see whether negative interest rates are having the desired effect is to look at the countries that have already tried it. The European Central Bank (ECB) has had negative interest rates in place on some deposits since 2014. If negative interest rates were that effective, one would already expect to see the evidence in Europe. In point of fact European inflation did pick up a bit in January but the increase amounts to little more than a rounding error. Faced with the euro strengthening against the yen, the ECB may be forced to get even more negative to keep up with the devaluation of the yen.

With Allies Like These

The Europeans and Japanese going more negative on interest rates at a time the U.S. Federal Reserve is raising interest rates, means the already strong dollar could get even stronger in the days ahead. As the odd man out in the global race to the bottom on currency values, the problem of the strong dollar looks to get even worse. The Federal Reserve will have to act to address that and negative interest could potentially happen here as well.

Savers Are Losers

The biggest losers in the artificial inflation spurred by negative interest rates are responsible people who live below their means in order to save money. Remember when that used to be a good thing? Today savers are losers and anyone keeping a lot of cash in the bank will get to sit around and watch it lose value. How long before U.S. banks start charging people for holding their cash? Remember, insanity breeds insanity, so don’t think it can’t happen here.

Instead of cash in your microwave, consider a defensive position in a liquid hard asset like high quality Gold and Silver Eagles from the U.S. Mint. You can even put them in a gold IRA, which offers the same tax benefits as standard paper-asset IRAs. Liquid hard assets are a hedge against the buying power of whatever passes as currency in the future. By investing a fixed percentage of your wealth in hard assets now, you avoid becoming one of those hapless souls standing in line at the ATM desperately trying to pull all your cash out when negative interest (now called service fees) finally hits here. Such currency flights have happened in almost every country trying negative interest rates.

Hard liquid assets are also easier to store securely. One word of advice: it’s probably not a good idea to store gold in your microwave. A good sturdy safe is a much better choice.

Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.

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