Though many people don’t understand what negative interest rates are and even more don’t understand why they are significant, we can be sure that they certainly do, and will, have an impact on our economy and our clients’ portfolios.
Last year, I wrote an article that likened Federal Reserve rates to a weather barometer. A weather barometer that is reading high pressure means favorable weather is coming. Similarly, rates that continue to rise indicate a stable economy. Conversely, if a weather barometer detects a low pressure system, or if interest rates are lowered, that is a sign that an unfavorable event is likely rolling in.
Last week, I came across an article from CNBC “Fed could use negative rates if US recession strikes, Goldman Sachs chief economist predicts.” This is a fairly significant deal. Throughout history, the Federal Reserve has averaged cutting rates by 4.5% to “help” get us out of recessions. Seeing we are already at such low rates, what other tools can they use? Economists across the board believe we are close (if not already in) to the next recession.
Negative interest rates have been used all over Europe since 2011. In fact, Denmark even has negative mortgage rates. Yes, you read that correctly. Denmark banks literally allow homeowners to pay them back less than what they originally paid for their house.
Adding fuel to the fire, President Trump has been pushing for the U.S. to use negative rates. His tweet below indicates that negative interest rates would help us with our debt problem. Let me be very clear – adopting these policies is crippling for economies. Credit dries up, banks lend less and businesses decline.
“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet…..” – President Donald Trump via Twitter on September 11, 2019.
From a gold and silver perspective, if the U.S. does adopt negative interest rate policies, we could see a significant inflow of money into precious metals. Think about it: bonds, insurance products like annuities and even money that is just sitting in a bank will lose value just by sitting there. People may begin to move more of their wealth into gold and silver, but those markets are extremely small, especially our non-qualified pre-1933 private (currency) markets. It doesn’t take much for product to be completely gone, or to have premiums on the products rise significantly.
Our interest rates “barometer” is already telling us we need to be prepared for unfavorable conditions and if President Trump gets his way things could get messier. The best time for flood insurance is before the hurricane arrives and the same principle applies to gold and silver as “wealth insurance.”
Let me know how I can help you position your clients (or yourself) in physical wealth insurance today.