Negative Rates And Its Effects On Retirement

negative-interest-rateFollowing the Great Recession, the world’s major central banks rolled out multiple monetary stimulus packages with mixed or poor results. Boards of the world’s foremost banking experts approved trillions of dollars in experimental asset purchase programs. There were two stated objectives for these programs:

  1. increasing liquidity in capital markets
  2. lowering the nominal rate of interest charged on savings and loans (S&L) operations.

Interest rates certainly dropped. For most developed nations — the United States, members of the European Union, and Japan — the period between 2009-2015 was the longest period of zero or near-zero nominal rates in recorded history.

Many believe those methods produce stagnant growth and dangerous asset bubbles, but some central bank advocates prefer the counterfactual argument. To them, zero rates were not low enough, and global markets now need negative interest rate policies (NIRP) to jolt aggregate spending.

The idea is to force people to save less, spend more, and borrow more. This is all part of the classic Keynesian Circular Flow of Income model, although the early returns of NIRP suggest serious flaws in the theory.
Negative Rates and Your Savings

In July 1984, the average 1-year CD offered by retail banks in the United States produced an 11.27% yield. Twenty-two years later and the average yield on a 1-year CD is a paltry 0.22%. (You can see how much the rates have changed here.)

These figures correlate almost perfectly with the effective federal funds rate set by the Federal Reserve. The federal funds rate stood at 11.23% in July 1984. It was just 0.38% in July 2016. Whenever the experts at the Fed decide to slash their own interest rates, you can expect that it means bad news for your savings rates.

At a point, the rate of interest paid on your savings accounts (and other short-term deposit vehicles) fails to keep up with the rising cost of living. Whenever nominal savings rates fall below inflation levels — something that has likely been true for most Americans for nearly a decade — the purchasing power of deposited money declines.

Economists call this a “negative real interest rate.”  Chances are high that you’ve experienced a negative real rate long before think tanks were publishing white papers on the validity of negative nominal rates.

With Negative Rates, Banks Have to Squeeze Depositors

Negative nominal interest rates are effectively the same as a fee. If someone lends you $100 and you only have to pay them back $95, there is no practical difference whether the $5 loss was due to a fee or due to a negative-5% interest rate. This is one reason why negative rates from the Fed may correspond with higher fees on your deposit accounts.

When central banks impose a nominal negative rate on member banks, they usually do so by charging a deposit fee for reserves kept at the central bank. To reduce their loss exposure, those member banks reduce the interest they pay to their own depositors. If nominal interest rates fall enough, banks might be forced to charge deposit fees on savings accounts.

Opportunity for Alternatives, Including Gold

Alternative assets, especially tangible physical assets, are more likely to perform well than savings accounts during a NIRP regime. There are several reasons for this, including:

  • Negative rates are a signal that central banks are desperate and concerned about growth, which means investors may flock to safe havens, such as gold. This should drive up the value of gold, especially compared to inflation-exposed deposit accounts.
  • Negative rates inevitably end up forcing banks, central banks, and governments to expand their balance sheets. Many central banks and government institutions increase their gold reserves to protect downside risk. This places upward pressure on gold prices.
  • The total volume of gold cannot be manipulated. Unlike government fiat money, gold’s safe-haven characteristics are not subject to the misgivings and policy scruples of central bankers.

If you are interested in using gold to leverage your declining savings, American Bullion can help you make a positive, informed decision. We will provide all of the education you need, discuss your options, and help you every step of the way. Our #1 goal is for you to take control of your own finances – and we promise to be transparent, safe, and efficient in the process.

Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.