Consequences of negative interest rates
The quote below suggests that Yellen is preparing the Crowd for a surprise. However, it won’t really be a surprise because it was planned all along and we warned our readers about this for months on end.
Separately, former Fed Vice Chair Alan Blinder asked Yellen yesterday why U.S. productivity growth – which ultimately drives growth and living standards – has been a slim 0.5% for the past five years – far below historical averages. “It’s a source of huge concern,” she said. “We really don’t know.” That’s an honest answer. Full Story
What she is saying is that well we knew all along that this economic recovery was nothing but a hoax, but we had to make it look like things were just fine and dandy, before coming out and stating that the outlook is actually a lot worse than expected. Why would they do this? Well, you need to give the masses a reason to feel that it’s okay to rob them again. More hot money is set to flood the markets.
A good headline would be, negative rates coming to a town next to you. Negative rates are going to provide rocket fuel for this market; the corporate world will go ballistic with their share buyback programs. All those top players will walk away with millions, just as all the bankers who were responsible for the financial crisis of 2008 walked away with boatloads of money.
They don’t care if the market crashes, why would they? Would you care if you had several million dollars stashed away? In some cases, this amounts to hundreds of millions of dollars. Some expect no remorse from these individuals; they will do everything and anything to squeeze the last buck out of this market before they let it collapse.
Consequences of negative interest rates: Savers will be punished
Yellen states that negative rates are part of the Fed’s Tool Box. Yellen recently stated that conditions had not yet deteriorated to a point “sufficient to cause the next move to be a cut”. “It’s not what I think is the most likely scenario,” she said in a response to a question in the Senate Banking Committee.
Translation; be ready for her to not only lower rates but to embrace negative rates with a gusto.
Game Plan to deal with the consequences of negative interest rates
The Fed is going to flood the markets with money, and this means that all strong corrections will have to be viewed as buying opportunities. However, you will need to know which stocks to get in, as not everything is going to trade up. There are going to be a lot of stocks that will fall apart as the market trends higher. Look for stocks with strong earnings growth as a starting point or sign up for our free newsletter.
Negative rate outlook update Oct 2019
Negative interest rates turn that concept on its head. For example, when interest rates are below 0% a year, then a depositor would receive less cash back at the end of the year than they put into their account at the beginning. For a more comprehensive discussion, try reading a series on the topic that I wrote a few years ago here.
New research now shows that when central banks push rates below zero, it can have bad effects on the economy.
” We showed that a negative policy rate was at best irrelevant, but could potentially be contractionary due to a negative effect on bank profits,” states the paper titled: “Negative Nominal Interest Rates and the Bank Lending Channel,” by researchers at Harvard University, Brown University, and Norges Bank. The authors include Lawrence Summers, former U.S. Secretary of the Treasury and one-time president of Harvard.
In simple terms, when a central bank decides to pursue a policy of making interest rates lower than zero (a.k.a. negative), then the effects could shrink the economy rather than grow it. That’s because negative interest rates destroy the profitability of banks, especially those that rely on customer deposits to make loans. Forbes
Consequences of negative interest rates according to swissbank.org
Banks are facing a multitude of problems following the increase in negative interest rates to -0.75 per cent on SNB sight deposits and the further appreciation of the franc. The direct costs incurred by the negative interest rates, amounting to over a billion Swiss Francs, are only one part of the burden. A number of banks are not subject to negative interest rates due to the design of the exemption threshold. The burden placed on those banks that are affected is, hence, even greater.
Even more far-reaching overall, however, are the repercussions on the interest margin business, which is one of the banks´ most important sources of revenue. Negative interest rates have resulted in a direct decline in interest margins, and therefore in a decrease in profitability. Competition between the banks and the option for clients to hold liquidity in cash do not allow for the negative interest rates to be passed on to individual clients
The new reality of negative interest rates on risk-free investments is also creating uncertainty in the markets, and this can take on a range of different characteristics. Risk-based pricing becomes more challenging. Insurance companies get a relative competitive advantage over the banks in the mortgage lending business, and the prevailing scarcity of investment opportunities for institutional investors is further exacerbated. Swissbank.org
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