Negative Rates are a Virus

Hello there again readers and welcome back to Coffee Break Liberty, a blog where we tackle books, news and many other things under the sun where liberty is a guiding principle. If this is your first time here we would like to extend a special warm welcome to you and hope you enjoy yourself while here.

Over the weekend we all got some surprising news from the Fed. (federal reserve bank). Chairman Powell announced Sunday that the Fed has a new attack plan for the economy and to try and correct the stock market. The two major things that most people noticed was that the Fed wants to inject the market with $700 billion with more rounds of QE (quantitative easing). Following that it was also announced that the Fed rate was going to drop near zero, between 0.25% and 0%. The chairman said in December that negative rates weren’t even on the table, but now rates that low have been discussed it seems. And Finally the Fed is lifting the requirement on banks to have so much money, a certain percentage, in reserve. That percentage has now been lowered to 0%. Anyone of these measures on their own should be cause for concern, all three at once, for those that pay attention to this kinda news, are past the point of just being concerned.

We have discussed QE before here. Then we wrote about it at smaller levels but now we are seeing much higher levels and a number that increases day after day! This house of cards is falling down made ever higher by this addiction to printed money. Now the Fed and US Treasury just want to seem to throw more firewood on to this burning house with reckless abandon.

The requirement for the banks to have so many assets in reserves being lifted causes concern in that there is a fear that there is not enough capital left to lend. There are issues with this all over. First, it is not borrowing and spending that moves the economy on a strong footing but rather savings and spending. Having so much of the overall GDP (gross domestic product) leveraged against isn’t the greatest plan for success. When all is borrowed against far less value is obtained by that which is borrowed for or against. Additionally having fears of not having enough capital to lend may cause panic and can lead to a run on the banks. Though most checking accounts are insured by the federal government it is still something that we hope to never have to use right?!

Finally the negative interest rates that might be coming our way very soon. The Fed isn’t there yet but they sure are close as the rates are now the lowest they have ever been. Keeping the rates low isn’t a good idea to start with as it is not where the rates should be. Having a central bank decided at which price money can be borrowed rather than the market making that choice is rather foolish and dangerous. We have seen it for over the last 100 years, the Fed was put in place to try and ensure market stability, yet these have been the most volatile 100 years in market history ever recorded. Keep the rates low was also a contributing factor to the 2008 financial crisis. In short the banks can’t make money off of the money they are lending out so risky practices become the norm until it once again comes crashing down. Having negative rates is worse even still though. With negative rate the Fed will pay banks to take out loans to lend to people. Now the banks won’t offer negative rates, at least not at first. But the rates will be very low thus again more risky behavior associated with higher risk. And what does this do to the value of the dollar? Well the US Treasury will have to print more money now so it can be paid to the banks thus decreasing the value of your money. Saving money will be a bad idea too, it will be better to spend and or invest it recklessly as holding on to it will decrease it’s value. Your savings account will slowly be worth less and less than before.

We here at CBL hope that negative rates don’t happen but it truly looks like we are headed towards that path. That will be just like crossing the Rubicon. Once that has happened there is no turning back and life as we know it will change forever.

Thank you for reading and please don’t forget to like and share!

Keep that coffee warm for us

LWS