Send this article to a friend:


Dropping Interest Rates Negative Will Wake the Bear
Jim Hoffer

This week’s announcement that the Fed is cutting interest rates by a half of a percent, to keep cash flowing amid coronavirus concerns, could be just the beginning.

President Donald Trump wants to take interest rates into the negative, as part of his latest bid to push inflation and stimulate the economy. This will effectively punish savers and encourage more Americans to take loans, thereby keeping more people on the hamster wheel of the monolithic banking structures. 

While the Fed hadn’t dropped rates as an emergency measure since the 2008 crisis, many believe that covid-19 market chaos is propelling the onset of a global recession. 

This may, in turn, hasten the implementation of negative interest. “The Fed has to be willing to cut repeatedly, a senior economist at AllianceBernstein, Eric Winograd, said of Tuesday’s announcement. “If this is a one-and-done cut, that's a disaster and counterintuitive.”

In the face of imminent economic contraction, Fed Chairman Jerome Powell acknowledged that coronavirus is causing trouble, so it may just be a matter of time before Trump wins and interest dips below zero.

Rather than stimulating spending, this manipulation will invite instability into America’s entire financial system. Sure, a little correction might be just what’s needed to shake up the powers that be. But penalizing everyday people for earning more than they spend? 

Negative Interest and False Promises 

It sounds crazy, but negative interest charges commercial banks for holding reserves in central banks. The penalty is meant to propel more lending and investment, as banks follow the Fed’s benchmark and drop their rates as well. Consumers are enticed to take out loans and spend money, pushing more cash into circulation, strengthening businesses, and driving economic growth. Or at least that’s how it’s meant to work.

If America does fall through the negative interest looking glass, the banking system will turn on its head. Savings accounts will be diminished by punitive negative rates, and borrowers will be rewarded, potentially paying less on a loan than the originally borrowed total. The Fed is using the threat of an impending recession to push this topsy-turvy policy, but it won’t work. 

Instead, negative interest will generate a whiplash effect, imposing volatility and higher costs on the average American. 

The policy incentivizes people to borrow more, making them bank-dependent and putting them in debt. Furthermore, commercial banks won’t tolerate loss, covering their bets by passing on penalties to the fiscally cautious. Even when borrowers think they are getting a good deal, it’s often too good to be true. 

Already bullish, the $4.7 billion crypto lending industry will step in, as banks lose big fiat bucks and pass their losses on to their clients in the form of high fees and low security. “The idea that mainstream options – like savings accounts at banks, for example – could soon become ROI-negative is especially unnerving,” Dan Schatt, CEO of the Cred platform, told me.

And this is exactly how the crypto para-economy can step in where bank lending fails. “Our entire platform was conceived to allow digital asset holders to have an alternative to the unpredictability of fully centralized financing channels,” Schatt said. “As headlines surrounding interest rates and the spread of coronavirus get more and more alarming, we're keeping a close eye on rising curiosity over crypto-lending mechanisms.”

Who in the World Thinks Negative Interest Works?

Manipulating economies with negative interest rates is becoming more popular in Europe, with Denmark, Switzerland and Germany following the European Central Bank’s example. Sweden has just reversed its negative interest policy after a five-year failure.

Japan implemented negative interest in 2016 as a short-term measure to stave off a spike in the yen’s value and has been stuck with it ever since.

The global economy is sluggish, spooking investors who are increasingly risk-averse. In Europe, central bank policy makers decided that negative yields will encourage lending and investment. In actuality, it is undermining the very purpose of banks and moving wealth to debtors, resulting in price discovery erosion. Unsustainable housing bubbles are cropping up in the eurozone, as borrowers rush to lock in negative interest mortgages. 

This ill-conceived policy is also impacting pension and insurance markets, as negative interest eats away at the profitability of secure investments and quantitative easing gobbles up the bond market, leaving investors without options. 

This short-sighted move will punish millions of American retirees, who rely on secure savings to survive, and will drive consumers to take irresponsible risks as they move savings out of banks to avoid penalties or increase their debt to take advantage of negative interest loans. Businesses would flee the banks, dramatically increasing liquidity risk and destabilizing the entire banking system. 

Holding Tokens to Avoid Domino Effects

When negative interest comes after our fiat savings, it may push Americans to pull their money out of banks. Oppressive negative interest rates will punish savers and secure investors, pushing them towards transacting in crypto. If America goes negative, crypto will be the only real alternative to taking out unwanted bank loans, risky investing, or keeping cash under your floorboards. 

Not beholden to the Fed’s foibles, crypto can offer higher interest rates to make investing worthwhile. 

At Blockchain Economy 2020 in Turkey, Lennix Lai, the financial markets director of OKEx, asserted that “Savings, staking, as well as DeFi lending, these are new avenues that can provide crypto interest income to users on a regular basis.”

The crypto economy has shown plenty of promise to date, and I’m as bullish as the next guy when it comes to these channels. But is it ready to replace a centralized banking system thrown into chaos? Hard to predict. 

And yes, centralized banking is already taking a lot of heat from business experts, laypeople and even politicians. “We need a legal ban in Germany that prevents these negative rates from being passed on to small savers,” said Markus Söder, the prime minister of Bavaria, Germany.

Popular outcry has been met with shrugged shoulders – the ECB calls the shots, and Europe’s commercial banks toe the line even as consumers get shafted and the global economy begins to show its seams under the weight of uncertainty. With Trump trumpeting the alleged benefits of negative interest, it’s critical to watch Europe’s downward spiral and keep a crypto parachute handy when America nears the edge of the cliff.

America Through the Negative Interest Looking Glass

President Trump is haranguing the Fed to drop interest rates below zero. Powell, meanwhile, does not seem to be in any hurry to make dramatic changes. As he wrote in a statement last week, “the coronavirus poses evolving risks to economic activity,” so his team is “closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

Lowering interest rates into the minus is just playing with fire. Short-term lending would be scaled back in response, leaving people to seek out higher risk funding options or face financial ruin. 

Sure, if America leans into negative interest peril, the crypto economy can serve many consumers and businesses looking for financing or investment alternatives. But overall, negative interest is not the answer to conservative saving behavior. 

Instead of steepening the yield curve, propelling inflation, and staving off the impending recession, negative interest will destabilize America’s already sloth-like economy. Once we go low, it will be impossible to grow. 



A grateful husband, father, grandfather and writer with over 35 years’ experience in enterprise finance, with an MBA from Warrington College of Business, Jim has been the CFO and the Finance Manager in several public and private global companies in a range of sectors. Jim has been directing the Hoffer Financial Consulting Firm since 2012 which specializes in financial strategy, cash management, accounting, assistance in formulating company's future directions and tactical support. Jim also develops financial and tax strategies, manages capital requests and budgeting processes, develops performance measures, and directs the implementation of strategic business plans. Jim likes to write about everything finance, fintech and enterprise finance related and can be found on Twitter @ jimhoffer85.

Send this article to a friend: