Negative Interest Rates, the Federal Reserve, and Your Retirement

Recent news reports have indicated that President Trump has filled two of the open positions on the Federal Reserve’s Board of Governors. One of them, Randal Quarles, was formerly involved in the President’s Working Group on Financial Markets, a.k.a. the Plunge Protection Team. The other, Marvin Goodfriend, is an enthusiastic advocate of negative interest rates. If these picks for the Fed’s Board are any indication of the type of people President Trump will continue to pick for Fed vacancies, the next few years could be very interesting for savers and investors, and not in a good way.

Likes Negative Interest Rates, Doesn’t Like the Gold Standard

Marvin Goodfriend’s advocacy of negative interest rates isn’t buried in his past. Just last summer he delivered a speech at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming advocating for negative interest rates. He likened it to getting rid of the gold standard, claiming that the gold standard was an encumbrance that kept central banks from pursuing monetary policy.

There’s a reason for that encumbrance, though, and it’s precisely to keep central banks from creating money will-nilly. Since the Federal Reserve’s creation, gold has maintained its purchasing power. Those who were able to hold gold or invest in gold haven’t seen their wealth deteriorate. The dollar, however, is not so fortunate. A dollar today is equivalent to about four cents from 1913.

Why Negative Interest is Impossible

The natural rate of interest is the ratio of prices between present consumption and future consumption, understanding that human beings prefer to consume in the present rather than in the future. People prefer to have a pizza today rather than a pizza next year. Most people when given the choice would prefer to have a pizza today rather than two pizzas next year. But how many people would choose to have a pizza next year rather than two pizzas today? Nobody. But that’s what negative interest rates are, an expression of the desire to have less in the future than more in the present.

If people or banks are willingly depositing their money at negative interest rates, taking a guaranteed loss on their deposits, that’s an indicator of an economy that is highly dysfunctional. The solution is not to drive interest rates further down as Goodfriend suggests, but to find out what the source of the dysfunction is so that interest rates can return to normal.

Of course, the cause of the dysfunction is the Federal Reserve System, which through its creation of money and credit intentionally tries to force interest rates lower. But the Fed will never admit that it is the cause of the problems it seeks to solve.

The Effect on Retirement

Forcing negative interest rates below the rates already set in place by central banks such as the Bank of Japan and the European Central Bank would mean pushing them to negative one, two, three percent or more. Saving and investing money would be punished, while consuming would be rewarded. That is just the opposite of what people need to do in order to be able to retire.

Some of the methods Goodfriend suggested for getting around the “zero lower bound” included abolishing paper currency, letting the value of paper currency fluctuate so that a paper dollar may not be worth a dollar anymore, and establishing a central bank-controlled currency to replace cash. All of those are horrible decisions that would affect anyone who keeps money in the bank or invests in stock and bond markets. You wouldn’t know from day to day how much your money is worth or what it would buy.

All the more reason to stock up on gold and silver today and keep your wealth out of the Fed’s reach. An ounce of gold will buy the same goods today as it will in a hundred years. If you want to make sure that your savings don’t become the play toy of the Fed’s economists, invest in gold and silver while you still can.