Less Than Zero

For many people in my generation between 40 and 50, the term ‘Less Than Zero’ stands not only for low temperatures, but for the culture of decadence of the wealthy youth in Los Angeles in the middle of the 80’s, as shown in the (depressing) movie with this title. 

This is going to change –  and the term ‘Less Than Zero’ will probably soon be a synonym for the rate we ‘get’, should we be stupid enough to deposit our money at the bank around the corner.

It’s not yet the case in Romania, but in many countries in Europe and since a few days also in Japan, that depositors are actually charged to keep their money in an account. 

The Bank of Japan (BoJ) stunned the capital markets by adopting a negative interest-rate strategy at the end of January 2016. The BoJ followed the example of negative interest rates already in place for quite some time in Sweden, Denmark and Switzerland. Still many banks there are not yet passing the negative rates to customers not to loose them. 

Negative interest rates are generally viewed as a very bad signal, that traditional money-policy had no effect and have the purpose punish banks that hoard cash instead of offering loans to activate the economy. At least theoretically, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. 

This is the case in Japan, where the central bank are fighting for 25 years against the deflation, but it’s most likely that even rates below zero won’t have the desired effect. At least the immediate reaction of the markets were extraordinary negative as well.

The negative rates for bank-deposits in Sweden, Denmark and Switzerland have been imposed on some other purpose. All three countries are ‘non-Euro’-economies and use negative rates mainly to avoid their own currency – the swedish & danish krona and the swiss franc – from getting to strong vs the Euro which would hurt exports into the Eurozone or income tourism.

The trend of negative interest rates is  also a topic in the US. Federal Reserve Chair Janet Yellen told Congress this week the central bank has not ruled out imposing negative interest rates if the economy takes a downward turn but is investigating their viability. ‘I wouldn’t take them off the table but we would have work to do to make sure they would be workable.’

Now, if you have some money to deposit, what should you do? Well, when the talk is about negative rates, you know, the economy is not in it’s best shape – and therefore you should consider an investment in something, that usually gains in value when times are hard – that would be first and foremost gold.

11-2-2016

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Negative consequences: Japanese government bonds rallied this week on increased demand for haven assets, sending the benchmark 10-year JGB yield negative for the first time ever, with the yen rapidly strengthening and the Tokyo stocks in a steep selloff.

(picture by asia-nikkei.com)