The Truth About Negative Interest Rates

Inflation and interest rates are pretty much the main headlines these days (when the administration can’t distract us with threats from the “Ultra-MAGA” folks or the war in Ukraine). We’ve been talking about these topics at some length in your last couple letters. 

Let’s recap…

The government actually helps create inflation by continued, massive deficit spending on entitlement programs. Then they use that inflation to shrink its oversized debt load… Via a little 4th grade math magic. 

That means as long as they can keep inflation rising at a certain level, they can keep spending to their hearts’ content. They are using “fake” prosperity to make things seem better than they are. Frankly, it’s pretty despicable.

But it is what it is. 

And the government’s efforts to hide their misfeasance go beyond simply massaging the math on the debt numbers. They get you to play too… 

Negative Interest Rates: Paying Someone Else’s Debt 

Negative interest rates would be a “miracle cure” for paying off any debtor’s tab. Here’s how it would work…  

Say you invest $1000 in a bond with a negative interest rate. Every year, instead of you getting a payment for lending your money, the bond issuer would shave a little off your principal and put it in their own pockets. 

And at maturity, you get back $900. 

How easy would it be for a debtor to reduce however much they owe by issuing more debt at negative rates? It might take a while, but you would basically be the one who ends up paying off their bills. 

Now you might be thinking, “OK Bob, that makes sense in theory, but who on earth would actually offer to “pay” a negative interest rate?”

Well, it may sound crazy but, according to the World Economic Forum: 

The central bank of Denmark was the first to go below zero, in 2012. To the surprise of many, it did not result in stress in the financial system. In 2014, several of Europe’s central banks followed suit. Two years later, so did the Bank of Japan.

Back then these countries’ economies were struggling to recover from the financial meltdown of 2008. And their central banks were trying to spur more economic activity — more lending and more spending. 

The theory goes, higher interest rates discourage borrowing and encourage saving. Based on that logic, negative rates should have the opposite effect — discouraging saving and encouraging borrowing (and ultimately spending). In theory, it’s a strategy to fight recessionary periods — the bad times when people hoard cash waiting to see if things get better. 

And when they say these negative rates didn’t “result in stress in the financial system,” they mean depositors didn’t crash the system by demanding their money back and heading for the hills.

But why would anyone deposit money where they’re guaranteed to lose money…

Let’s be clear on a couple things here. The negative rates I’m talking about are rates offered by central banks. (When it comes to smaller retail deposits like your savings account, banks will typically resort to paying interest just above zero and then hitting you with extra fees to make up the difference.) Member banks who are willing to absorb these costs basically consider them payment for the convenience of not having to hold their money in cash. 

And for the record, there is a bottom to how far negative rates can go before they do “stress” the financial system…  At the moment — while still uncertain — that level appears to be 0.75%

So negative rates are a very real thing. And they can be mighty handy when used to pay down a borrower’s debt! But surely not here in the US…

Yes they are, and I’ll show you how they steal from you in your next issue…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily