President Trump is a big
fan of low interest rates. Frankly, if we ever got interest rates
down where they should be and if they weren't raised so fast, you
would see another probably ten thousand points on the Dow. The
Fed acted too soon. I turned out to be right. They
acted too soon and too violently. The Fed moved, in my opinion, far
too early and far too severely. It puts me at
somewhat of an advantage. We'll see what happens with the
Federal Reserve, whether or not they finally get smart and
reduce interest rates. Like many other places around the world
that we have to compete with. If you look at what the other
Fed equivalents are doing all around the world, they're at a much lower rate. And it makes us harder to compete. Recently, Trump even went so far
as to praise Germany's zero percent interest rate. In Germany, they have
zero interest rate, and when they borrow money, I mean, when you look
at what happens, look at what's going on over there. They borrow money, they
actually get paid to borrow money. And we have to compete with that. Then he went even further on Twitter,
referring to the Fed as "boneheads". But what if Trump got
what he wished for? What if interest rates were actually
zero, or negative, like Sweden or Japan? What if instead of a bank
paying you to hold your money, you theoretically had to pay the
bank to keep it there? It could happen with
negative interest rates. Negative interest rates first appeared in
2009, when Sweden cut its rate to -0.25 percent. The move was meant to provide
a short term jolt that would stimulate a stagnant economy and encourage
banks to lend, since holding onto money meant financial institutions would
have to pay interest to Sweden's central bank. But there was a fear the move
could also impact savers who could be charged by the banks
holding their money. Economists feared savers would hoard cash rather
than pay the bank to hold it. But that's not what happened. Instead, Swedish savers spent
or left it there. That's not surprising, since Sweden has one
of the higher savings rates in the developed world, according to
the Organisation for Economic Co-operation and Development. Since then, central banks in
Denmark, Switzerland, Germany, Japan, even the ECB have followed suit,
taking rates into negative territory. So what exactly are
negative interest rates? Interest rates are generally thought of
as the cost of borrowing money. Central banks raise interest rates to cool
off an economy that's close to overheating. zero or negative interest rates, on the other
hand, are seen as a way to stimulate an economy. In theory, negative rates force
banks to lend more. But it doesn't always work that way. Instead, negative rates can actually
have the opposite effect. They can squeeze profits so much
that financial institutions actually lend less. They can also have
an impact on government funding. For example, Germany's economy is on the
verge of a recession, so its lowered interest rates to -0.31 percent, which means investors could be
charged for keeping their money in the bank. But the country still
needs to fund the government. So in August 2019, Germany attempted to
sell 2 billion euros worth of 30-year bonds, which would mature in 2050
and they had a negative yield. As a result. Investors only bought 869
million euros worth with a yield of -0.11 percent. In other words, investors will in theory
pay to have the German government hold their money. Anybody who holds this
bond throughout its full life, is guaranteed to lose money and they're
guaranteed to lose money over a period of 30 years. Now, what this is telling us really
is that anybody who thinks that this is a good investment is factoring
in an extremely bleak economic outlook. You're talking about no growth, no
inflation for the next three decades. In the end, the German government was
forced to buy the remaining bonds itself, which could push down
interest rates even further. At the same time, the European Central
Bank, or ECB, has continued on its own negative rate path. The ECB recently lowered its
main deposit rate to -0.5 percent, a 10 basis point cut. It also reintroduced quantitative easing as
a means to try to stimulate the economy. Negative yields and low
interest rates in Europe have also had another effect. They've driven
investors to the U.S. bond market in search of
safer investments with a yield. Negative rates cause uncertainty
in the markets. Many experts believe negative rates in
Europe have only had a modest impact on Europe's growth. While it lowered the cost to borrow
money, it didn't do anything to increase demand for goods. As a result,
businesses didn't invest. Lowering rates even further could put
the entire global financial system at risk. Negative rates cause a
decrease in margins, which decreases profitability for banks, and that can cause
a bump in fees for loans, including home mortgages. They also make it more difficult
for countries institutional investors to find appropriate opportunities
for clients. If markets shift, bondholders seeking gains
in price rather than yield could get stuck holding
too much risk. Germany's negative interest rates have
dramatically pushed up prices. Recently, traders paid the
equivalent of $195.87 for $100 and 20 year German
bonds, which translates into a technical negative yield of .386 percent. Former Fed chief Alan Greenspan
has said that he doesn't believe negative interest rates in the U.S. would be that big of a deal. But others disagree, saying negative rates can
be a trap, that they may not boost flagging economies and
can even become the norm. And that hurts banks, savers and
companies in the long run. It is the financial sector, the
banks, the insurance companies, the pensions, the security settlement is
all structured, invented on one assumption: positive interest rates. Marginal reserves. Marginal reserves. Everything is
on positive interest rates. You take those away and now the
investment decision loses your money in a negative interest rate world? The
banking system doesn't work. Pensions don't work==. How does the European system work?
They're doing a little fudging, aren't they? Some creative movements, you
are telling me about? Yeah. The European system works because
we, the reserve currency, are still positive. Banks like Deutsche
Bank are restructuring their entire worldwide reserve system to
invest in U.S. dollars because they've
got positive yields. If we go down that road and go
negative yields with them and cut everybody off from positive, I think the financial
system is at severe stress then at that point. There's also a
concern that negative rates encourage governments to borrow more without concern
for growing debt until the rates go up and the bill comes due. Meanwhile, trade wars have taken their
toll on the global economy and there's a growing concern because rates are
so low now, the next recession could force the Fed's hand. Then negative rates could
be the only alternative. Larry Summers, former Treasury secretary
under President Bill Clinton, says that once rates go negative, it
could be extremely difficult to get out and the global financial
system could get stuck. And I think the great concern is
with what I've called the monetary black hole, that zero rates appear to be
where we're stuck in Europe and Japan and we're one recession away from
a situation of that kind. It's a very different world when
everyone's stuck at zero interest rates. We've got to think
about stabilization policy. Institutions are going to have to think
about their investment policy in a very different world, in a very different
way when we have a black hole, zero interest rate world. And that's what I
fear we're headed into. And Morgan Stanley CFO Jonathan Pruzan
agrees, saying that negative rates provide little relief. Clearly, the negative rates have not
really been helpful to spur the economy in some of these markets. And we'll have to just
see how it plays out. But this negative rate dynamic continues
to have investors searching for yield. And I think that's a trend
that's going to continue because not only there are a
lot of negative rates. If you look at this stack of debt
products out there, there is not that much inventory that's yielding
over 5 percent. So on the one hand, you have a
lot of negative rates and on the other hand, not a lot of places
where you can find yield. And that's why Harvard Professor of
Economics Ken Rogoff believes negative rates will eventually make their
way to the United States. But he also says there are more
challenges involved for the US than just the rates themselves. I think eventually it will come
here to the United States. It may happen sooner
rather than later. However, the United States, beyond
the Federal Reserve, the government would have to take a lot of steps
in changing tax laws or regulatory laws, and particularly how to deal with
cash hoarding to really have negative rates dip very far. So Trump may get his wish of
zero or negative rates, but the economic slowdown that led to them would
dampen the president's prospects of re-election, and the end result could
be even worse for the U.S. economy. Well, I am terrified if we
go negative rates in the United States, it will virtually destroy the banking
system as it is doing in Europe as we speak. That would be a major, major crisis. I continue to think there'll be consequences,
you know, in the long term for negative rates as an experiment. I certainly hope in the US there's
never a consideration of negative rate policy here in the US. I think it's interesting to see where
we are in the economic cycle, where we are from a job perspective and
just balance the policy that we have today. You know, personally, I'm not
a Fed governor, but personally I've been surprised still by the amount of
monetary policy or kind of the low rate environment that we still have
at this point in the cycle. I would've expected something slightly
different, but negative rates are not something that I think when we look
back on history and write the book on that, I'm not sure
that'll be a good chapter.
