The Trend Is Not Your Friend — Why Negative Interest Rates Are Toxic for Your Retirement Plan

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“An investment in knowledge pays the best interest” — Benjamin Franklin

“Don’t fight the FED’ is an old axiom heard a lot back in the days of the great bull market.

It simply meant don’t trade against Federal Reserve policy with your stocks; buy stocks when rates are falling and lighten up on holdings when the central bank is getting ‘hawkish’ raising rates. However, this is something you don’t hear much these days.

After all, the FED has been historically accommodating over the last eight years, holding rates just above zero with only two quarter point increases in that time. 

Today, things are very different.

Central banks around the world are embracing negative rates at a surprising pace, with nearly 10 trillion dollars in government bonds already auctioned off at prices slightly below zero. When you consider that only a few years ago, traders and so-called industry luminaries universally mocked the idea of issuing negative rate paper, this has become a disturbing trend.

Take Japan, for instance. The country started lowered rates in response to its stock market crash and slowing economy back in 1989. By 1995, officials had forced rates all the way down to zero, where they sat for the next 21 years. Then, just about a year ago, the BOJ started issuing bonds with negative rates attached and joined the small but growing ranks in the group known as the ‘below zero’ club.

You read that right. Slightly more than two decades of zero interest rate policy failed to resuscitate the Japanese economy but for some reason, officials apparently now seem to believe negative rates can in some way help kick-start and turn their lethargic economic situation around.

The Cost of Near-Zero Rates in the U.S.

Here is the seminal question: How fast could the idea of negative rates reach the U.S.? The simple answer is you need look no further than the next recession. And with at least $10 trillion on deposit in banks, just how much have the current near-zero rates already cost American savers? First, let’s remember that as recently as 2007 savings accounts and CDs paying rates of 4-5% were available from nearly any banking institution in the U.S.

By using the four percent rate, we determine the interest earned on deposits of $10 trillion is $400 billion annually. Multiply that by the last eight years and the amount comes out to a staggering 3.2 trillion dollars. That’s real money, and it’s exactly the kind of loss in earnings power that make it tough on folks planning for retirement, and for those already retired. 

The trend is clearly down worldwide — and how long it takes to arrive in America, and more importantly, how long it remains, is anyone’s guess. But one thing is sure: as Fortune magazine pointed out, ‘negative interest rates are more dangerous than you think.’

A New Form of Indirect Taxes

Many experts and scholars agree that negative interest rates are a new form of indirect taxes. Unbelievably, even FED scholars — including Christopher J. Waller, Executive Vice President and Director of Research at the St. Louis FED — say that ‘negative rates are in fact a form of tax.’ Therefore, doubt is no longer permitted on the subject.

If a politician came to you and said he or she wanted to tax income from your retirement plan today, right now, at 50%, what would you say? Probably wouldn’t be anything with a PG rating, I’d guess.

But that is exactly what the Federal Reserve has done. It has ruined the amount of fixed-income returns in your retirement and the broad pension plans upon which so many people are dependent, bringing their values down to practically nothing, all in the name of ‘economic stimulus.’ These myopic and ill-conceived bureaucratic policies have painted the country into the mother of all corners from which there appears no rational exit.

Leader Delusion, Citizen Tragedy

Central bankers and policymakers seem to be living in total delusion, in utter denial of the realities that underlie today’s economy as well as the solutions needed to avert another recession that could cripple the savings and retirement plans of millions of Americans.

In ‘Don Quixote,’ one of Miguel de Cervantes’ most enduring books, the central character has become so obsessed with what he sees as the lost art of chivalry, he sets out on a quest to revive it and return justice to the world. Of course, he’s clearly delusional, having parted company with reality in much the same way as the ECB’s Mario Draghi and BOJ’s Haruhiko Kuroda apparently have.

You see, just a few months ago, Draghi embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory.

Evidently, he had convinced himself he was saving continental Europe from disaster, and, as it was the case of Don Quixote de la Mancha, everyone else gets to pay the price for his delusions. On November 1, 2016, the first European bank began passing along negative interest rates to its retail customers.

Takeaway – Where Do We Go from Here?

In December of 2015, FED officials told Americans to expect four interest rate hikes during the year 2016 but found economic conditions unsuitable for anything more than a single rate hike. And while odds for a rate increase next month are starting to look better, this level of reluctance to restore rates to more traditionally levels is not the kind of thing you’d expect to see in a healthy, expanding economy.  

Negative interest rates are no longer some kind of economic fiction, they are here and now. Central banks in the Eurozone, Switzerland, Sweden, and Japan all have sub-zero rates, but to the point: Taking rates down into negative territory is an emergency measure, a desperation move, and this is a crisis.

Nearly every major crisis begins with a false set of beliefs, a mass delusion embraced by a large percentage of the populace. A decade ago, the belief was, ‘housing prices always go up’, but after the crash everyone wondered how they could have ever believed such nonsense.

One of the false beliefs of today is that interest rates don’t really matter.

Now, what do you think?

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