Negative Interest: Paying For a Bank Account?

Picture this: You go out for the mail. You have an official-looking letter from your bank.

The letter says this: From now on, you will have a negative interest rate on your savings account, checking account, and any Certificates of Deposit you might have.

This means you will paying to keep your money in the bank. No longer will it make you any money on interest, or even be free. You are officially being charged to keep money in the bank.

Most people would start shopping for a new bank. I probably would.

But I doubt we’d be in a situation where only one bank is doing this. Considering the economic and financial climate in the USA, if one bank is doing this then it probably means that most banks are doing it.

So there would be nowhere to run, for the most part. If this is the case, what will you do?

I know what I’d do: keep my money in the bank. I’ll pay the -0.5% rate (or whatever) to keep my money in the bank. What else am I going to do with my money? I have nowhere safe to keep it. Furthermore, I’d like to retain my checking services; it is too convenient to go without. So, I’ll pay the negative interest rate to retain security and convenience. I may not be happy about it, but I’ll do it.

I think most people would feel this way. There may be a lot of grumbling, but most people will not withdraw their money unless negative rates exceed -5% or worse.

WHY NEGATIVE INTEREST RATES?

Why is any of this relevant? It is relevant because it could theoretically happen within the next year or two.

Long story short: The Federal Reserve is out of ideas. The economy has been mostly stagnant since 2008. Yes, the stock market has rocketed upward; but this is a direct result of Federal Reserve policy, which has basically shoveled money into Wall Street in hopes of jump-starting the entire US economy.

This policy is Keynesian in nature. Another term for Keynesian economics is Fantasy economics, although the Keynesian economists might not like me calling it that. I have discussed why Keynesian Economics are utter BS in this article.

You don’t need to read the article to know that Keynesian policy is utter BS. You can see it in real life. The Federal Reserve has been working Keynesian magic on us for nearly 10 years, and it’s been a bonanza for elite businessmen and bankers on Wall Street while Main Street has barely recovered at all.

As part of the ongoing Keynesian fantasy, some people at the Federal Reserve may conclude that negative interest rates on bank accounts are needed to force savers to spend more money and boost the economy. They might conclude that if you are being charged money on your bank account, then you will be more inclined to spend it on investments or at least consumer goods.

Problem: this is not how economies become prosperous. If simple spending was all it took, we’d have no economic problems at all. Like I mentioned earlier, read my article on this to understand why.

WILL IT HAPPEN? WHAT WILL HAPPEN?

The idea of the negative interest rate is foreign to most people. It has never been done in the USA. In fact, it is not even clear yet if such a thing would be legal in the USA. Bank accounts under $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC), meaning that you are insured for your money if something happens to the bank (it closes, burns down, bankers run off with the money, whatever). Basically, you are insured against losing your money in the bank. So if the bank starts charging you for your deposit, this theoretically means that the FDIC owes you money, because they’ve insured your account.

This is a legal knot that has yet to be untangled. I see it this way: What the Federal Reserve wants, the Federal Reserve gets. If they want banks to charge negative interest rates, they’ll find a way to make it happen regardless of the current letter of the law. Think of it as “progressive” banking.

It is difficult to say if it will happen or not. Central Banks worldwide are lowering interest rates. Some are already experimenting with negative interest rates. The Federal Reserve is currently not moving in that direction – they recently raised interest rates on excess reserves – but I do not doubt they will try this, if they think they have to.

What will happen with negative rates depends on just how negative things get. If rates go as negative as they are positive right now – that is, a fraction of a percent – then I do not predict much change. Not on a macroeconomic scale, and not on your personal scale. You and I will grudgingly pay a fraction of a percent to retain the security and convenience of a bank account. So, there will not be mass cash withdrawals as people stuff money under their mattresses. The major depositors – those with accounts over $250,000 – cannot even realistically do this. They are mostly trapped into the banking system.

Some people will flee into 30-year treasury bonds, which will still have a positive interest rate. A low one, but positive nonetheless. But most people don’t even know what treasury bonds are; so I doubt this will have much impact.

The major prediction I make is this: when the stock market collapses, which I believe it will, then investors will flee into treasury bonds on a large scale. This will raise their price and lower their yield. But investors will take yields near zero for the security of an even fractional positive return.

DAWN OF A NEW AGE

In this sense, we stand at the dawn of a new age. For years, we’ve heard about the benefits of compound interest and saving for retirement. A common retirement strategy in the past has been to save a nest egg and allow it to accrue compound interest. For the most part, this was always a fantasy. Simply retiring on compound interest on your savings account only had any effectiveness if you already had at least a million in the bank. Most Americans certainly do not have a million in the bank. In fact, nearly a third of Americans have no savings at all.

But now the curtain is being pulled back on the fantasy. Now the financial media cannot even pretend that this is a viable strategy. Rates are far too low to be of any use. If rates go negative, then this strategy will officially backfire. It won’t be an investment strategy, but a money-losing strategy. There will be no way to hide it.

So who actually benefits from a negative interest rate policy? The government, of course. This will allow them to expand borrowing and deficit spending. You remember what I said earlier:

“…Investors will flee into treasury bonds on a large scale. This will raise their price and lower their yield.”

In case you don’t understand what these are, they are debt instruments of the US government. Buying a treasury bond is basically you loaning money to the government. When this happens, people will pay more (loan more) for treasury bonds, while the yield (how much the government pays back) will go down. For politicians who want to vote for expanded federal spending, this is great news. Investors will very nearly be paying the government to take their money. I wish I could get people to do that.

So, the federal deficit will continue to grow. Both mainstream Democrats and mainstream Republicans will support this, because they are more similar than different. They both support expanded government spending, just on different things. Neither party ever makes serious efforts to roll back the other party’s spending.

This is one reason why Establishment Democrats and Republicans both hate Ted Cruz with such vigor, even more so than Trump or Bernie Sanders. Ted Cruz talks a big game about tackling the deficit, and they are afraid he might actually mean it. I have my doubts he would actually do anything about the deficit. But the Establishment, both left and right, does not want to take the chance. As far as they’re concerned, he is a cancer to be swiftly eliminated.

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