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Negative Nominal Interest Rates Trending [Updated]

Posted in Money

“Nominal interest rates are now negative not only for overnight debt, but also for ten-year government bonds. Indeed, about $6 trillion worth of government bonds around the world today have negative nominal yields.” – Nouriel Roubini

There is a trend coming. In my opinion, this is a dangerous trend, but the end result will determine if this was good for the economies involved.

Central banks are implementing negative interest rate policies (NIRP). Denmark, Switzerland, and Sweden have NIRP for several years. Japan started negative interest rates earlier this year. These policies are geared to fight deflation and “hoarding” of their currencies. [Investopedia]

Basically, banks can charge you on the amount of money you keep in the bank. Savers are being punished for being practical and prudent. The U.S. Federal Reserve has kept interest rates nominal (near zero) for the last 8 years. Since the early 90’s, savings were hammered with lower interest rates (below 8%), where the incentive was to move money from simple savings to “growth stock market.” These policies want people to consume and spend, not worrying about the future, thus allowing the economy to inflate.

This doesn’t mean that banks will pay you interest if you borrow money. Banks will still charge you happily many fees and high credit card interest rates, while banks pay less than 1% interest in savings and certificate of deposit accounts.

There seems to be some indication that NIRP is failing. The expectation is that people will spend on consumables, but people have been saving more. Indicative of this adage, “Nervous people save.” [Zerohedge] In failing economies, there has been increases in bitcoin purchases, like Greece. [Bloomberg]

It is hard to imagine why investment funds and governments will buy $6 trillion worth of government bonds with negative nominal yields. A rational individual, like myself, would think this is not a wise investment. However, they must be playing a different game with different rules and goals. A game I don’t think I want to play, but most likely will be impacted by it.

Currently, the U.S. Federal Reserve chairwoman Yellen has indicated an increase in fed funds rate. [Bloomberg] We will see if there is an actual increase in September. However, we have seen strange behavior in the stock market in January 2016 (high volatility) when the Fed raised interest rates in December 2015. No way we can predict the future, but we can be prepared either way.

Here’s what I would do to minimize the impact of negative interest rates:

  1. Recognize the warning signs before it is too late. The signs were there in 2000 before the tech bubble burst. It was also there in 2007 when the real estate bubble in the US started to pop, causing a panic in the financial sector. US central banks may go down the path of NIRP. They may ease more credit for consumers to spend. They may continue quantitative easing (QE) to inflate value of financial assets like stocks, bonds, real estate, etc. All parties must come to an end, and you don’t want to be left holding the broom.
  2. Invest in gold and bitcoin (or other e-currency). Physical gold is tangible, relatively easy to carry around, and outside the banking system. Bitcoin is intangible, but is outside the banking system. I can only assume the encrypted blockchain will be extremely hard to corrupt or manipulate. Most likely 10 – 20% of my assets.
  3. Sell property that is not owned clear and outright. As I have started to live a more minimalist lifestyle, I have determined my house to be more of a liability, since I am paying a mortgage. Although the house is worth more every year, this also means I have to pay more in property taxes. In the future,I will be looking for land to purchase outright, where I may build a tiny home, no mortgages, and only minimal amount of property taxes with agriculture exemption.
  4. I’ve read that one should invest in art. I don’t think I would be doing that, considering art ownership is out of my price range, tend to be bulky, and needs some amount of care. But, it is a consideration.
  5. Invest in self-defense training. Whether it is learning how to shoot or hand-to-hand combat, the training may help if things get out of hand. Training should include situational awareness. In Chicago, there has been more than 2000 shooting incidents this year so far. The national media may not cover this because shootings on the weekends are common, but when walking around all of Chicago, one needs to stay cautious and alert.
  6. Lastly, keep some cash on hand (emergency fund). Usually, financial planners recommend one keep an emergency fund of 6 to 12 times savings equal to average monthly expense. This will allow one to survive while being out of income for a significant amount of time. However, having some amount on hand can help during a financial crisis. The emergency fund can help with basic necessities, if they become scarce, or help you relocate to a safer area, even out of the country. Look at Greece and Argentina when they had their crisis. Look at Venezuela now, where access to cash from banks are near impossible. Look at England, where there were long “queues” at banks prior to the Brexit vote in June this year. This only helped tourists going to London to buy “cheaper” luxuries, as the unexpected vote caused the British Pound to lose value against the dollar (about 12%) and other currencies. Also, you don’t want to be a target at banks for thieves when you withdraw significant amount of savings during a crisis, like in December 1999 during the Y2K fear. Advice, don’t hide it in the mattress either.
GBP vs USD Source: Bloomberg.com

GBP vs USD
Source: Bloomberg.com

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