Preparing For Negative Rates
What will you do on the day you go into the bank to make a deposit and they want to charge you a storage fee on your cash? They want to charge you negative interest rates! They say that because prices are falling globally, they can’t pay any interest. They say you are lucky to be able to store your money there and that the storage fee is so little.
I recently had a chance to interview Mike Verge, author of the newly published book, Global Deflation, and the Next Great American Decade to Come’. I think it is fair to say that his perspective is not main stream. In fact, Janet Yellen, Chair of the U.S. Federal Reserve feels that the global economy is on track for continued growth over the next several years.
However, Verge suggests we should all at least prepare for one scenario where the world economy enters a period global deflation. If that happens, we could certainly see negative interest rates migrate from Europe and Japan to North America.
Verge mentioned that these same Central Bankers who are saying that they have the solutions and that everything will be all right, have a poor track record of predicting the future. For example, Janet Yellen has been saying for almost a year that they will begin raising interest rates when the economy improves.
However, the economy does not seem to be improving and interest rates have not gone up. In fact Verge thinks the Fed has misread the situation. He thinks the Fed’s next interest rate move will be down. He asked me if I was prepared for that. Was I prepared for negative interest rates? He made me think if it was me, what would I Do?
Would I take my money out of the bank? Would I store all my cash at my house? Would it be safe there? If everyone did that, would there be an increase in house break-ins? Are the authorities prepared for a ‘run on the banks’? Would the government announce a ‘Bank Holiday’, and shut the banks? …. That’s when I realized that I have been watching this whole global economic debacle develop over the past few years as if in slow motion. But still I would have to say, “I am not prepared for this”.
In this stimulating conversation Verge explained that the reason why most of us do not see negative interest rates coming is because there is one important piece of the economic puzzle that is missing from all global discussions. That is deflation.
Since the time of the Romans, citizens and governments have depended on inflation to get them out of economic jams. Governments have always spent more money on programs than they have in their coffers. They borrowed the dollars today with the intent of paying it back later with cheaper “future dollars”. This historic phenomenon has created a whole ‘inflation industry’.
Business schools, politicians and economists all got on board with this concept, always focussing on inflation, not even discussing deflation. However, deflation is just as important a part the business cycle as inflation. It is like breathing in and breathing out. It is only when you understand the role that deflation plays in the economic cycle that negative interest rates make sense. That is the concept of his book. In his book, Verge explains complex economic concepts in very simple ‘visual’ models. He likens these models to ‘Deflation Sunglasses’. He says that using these new models, the reader will be able to predict our financial future. What he sees in our future is negative interest rates!
Verge says that the world is in a massive global debt bubble and that China has the pin. The road to negative interest rates will begin as China begins to slow, deflation takes hold around the world, and all countries try to devalue their currencies ( a form of negative interest rates ) in order to gain global competitive advantage. To do this, central bankers will drop interest rates, one country at a time, in a last ditch effort to increase exports and local inflation. For countries where their currencies continue to increase in value in spite of lower interest rates, ( i.e. Japan) those central bankers will go below zero. Other countries will be obliged to follow.
Local and national banks around the world will revolt against negative interest rates since they become more unprofitable as interest rates decline. But central banks will have no choice but to resist the cacophony and continue lowering rates anyway. The central banks will all explain that this is a temporary measure but you will know, deep down, that this is not true. This will be a one way ticket. This time it is serious. The United States will resist negative rates as long as possible, but will have no choice as their dollar rises, their exports suffer and their stock markets begins to tumble. From a currency standpoint, it will be a global race to the bottom.
Verge goes on to describe a whole new ‘counter-intuitive world of deflation’ where oil prices drop to twenty dollars per barrel, retailers are reduced to “Showrooms and phones”, banks are formed where nobody pays, asset taxes replaces income taxes, and negative interest rates are rampant. In order to fully understand negative interest rates he says you must get your head around the whole concept of Global Deflation. In his book he develops scenarios and immediate action plans. He shows us how to be prepared. When I look at the warning signs around the world, I think I should be preparing now!
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile is a mid-market business brokerage specializing in the automotive aftermarket. He can be contacted at www.mercantilemergersacquisitions.com