Going Negative

“Well, the endgame is a total collapse, but from a higher diving board. The Fed will continue to print and if the stock market goes down 10%, they will print even more. And they don’t know anything else to do. And quite frankly, they have boxed themselves into a corner where they are now kind of desperate.”

– Mark Faber, Bloomberg TV

We hit new highs on the stock market yesterday with the announcement that Ben Bernancke will continue pumping money, i.e. printing more dollars for an unlimited time. As an American, you can’t help but worry that this is not a good thing. Obviously investment expert Mark Faber worries, too.

Will Bernancke’s successor be any better?

Doesn’t look like it if it is Janet Yellin and she is favored right now. Faber has this scary info to share:

“She will make Mr. Bernanke look like a hawk. She, in 2010, said if could vote for negative interest rates, in other words, you would have a deposit with the bank of $100,000 at the beginning of the year and at the end, you would only get $95,000 back, that she would be voting for that. And that basically her view will be to keep interest rates in real terms, in other words, inflation-adjusted.

The idea of negative interest rates is outrageous, but yes, it has been talked about for awhile, particularly by Ms. Yellin.

David Kotok at ritholtz.com explains:

Negative interest rates are the ultimate in market distortions. They employ only a stick and no carrot. Their use tends to progress from disincentive through penalty to punishment.

There is only a limited history of the use of negative interest rates. Many decades ago, Switzerland discouraged incoming Swiss-franc deposits by imposing a negative interest rate on balances placed with Swiss banks. In other words, a person deposited money in the bank, and the bank charged the depositor for the privilege of keeping it there.

During the financial crisis in the US, the Bank of New York imposed a negative interest rate – a penalty – on deposits over $50 million. The bank essentially told customers to remove their money.

The money GPS adds:

Scary stuff, but not unthinkable in the Obama era.

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