Negative Interest Rates Are Failing to Prevent a Global Financial Crisis

The town of Gmund am Tegernsee, located in the Bavarian District of Germany, has been all over the news lately. It’s rare for a small town with almost 6,000 inhabitants to make the world news. But Gmund am Tegernsee has a unique claim to fame.

You see, the town’s cooperative bank decided to start passing on the European Central Bank’s negative interest rate to its customers. For now, only clients with deposits of 100,000 EUR or more will pay the 0.4% annual charge. But it could extend it to all its customers in the future.

And with this action, Gmund am Tegernsee’s cooperative bank has broken a taboo. Banks are now charging savers to hold their money.

If other banks start taking the same initiative, we could soon be living in an upside down world. One where borrowers get paid money and savers get penalized.

The fact is that European banks have been putting up with negative yields for two years now. The ECB brought the interest rates to below zero in 2014, and has kept them there.

They were hoping to increase borrowing and spending. But all they seem to have accomplished is to tax wealthy Germans.

Banks margins are lowering. And they are racking their brains to find ways to keep their profitability up. But the only way to increase their already low margins is by charging their customers.

And the ECB is not the only one with negative interest rates.

Japan has also been experimenting with negative interest rates. And they haven’t been successful. The strategy has caused low consumer spending, little growth and a decrease in exports. Japan’s economy is stagnating.

Sweden, Switzerland and Denmark also have negative rates.

There are now US$8 trillion government bonds offering negative yields.

In the UK, the Bank of England has just cut interest rates for the first time in seven years. That brings them to a new record low of 0.25%. They’re also approaching negative interest rate territory.

And they did this amidst fears that unemployment would rise after the Brexit vote. You see, Britain cannot afford to have unemployment rise.

According to HSBC, 24% of households have no savings at all. And almost a third would not be able to pay their mortgages if they lost their jobs.

In the US, the interest rates have been at ultra-lows. Yet recent unemployment figures have surprised the economists. The US added 255,000 jobs in July.

But even though jobs are being created, the economy is not growing. It is actually on a downward trend.

US GDP annual growth rate


So if you consider that employment is growing but the economy is not, then productivity is decreasing.

Economic growth has been relying on consumer spending more than business investment. And by keeping interest rates low they are hoping to keep fuelling that consumer spending.

In Australia, interest rates are also at record lows. And the housing market price has shot up. Australian’s are getting into more debt to buy a home. Australian households are some of the most indebted in the world.

But instead of increasing interest rates to cool the debt market, the RBA is decreasing them.

Governments around the world are trying to prevent deflation. But by using low or negative rates as a stimulus measure, they run the risk of triggering a bank run — or a currency war.

They are reaching the limit of what monetary policy can do.

As debt to GDP keeps on growing, fiscal policy is also becoming an unsavoury option.

Are we on route to helicopter money?


Selva Freigedo,
For Markets and Money

PS: Selva recently joined the Port Phillip Publishing team as our macroeconomic analyst. She works closely with Markets and Money editor Vern Gowdie on his advisory service,The Gowdie Letter.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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