There Will Be Negative Interest Rates – Here’s Why

A Guest Editorial From E.B. Tucker

Dear Fellow Investor,

Editor’s Note: My good friend and popular market commentator E.B. Tucker called me up a couple of months ago to let me know he’d decided to write a book called “Why Gold? Why Now?” to educate generalist investors on, well, exactly what the title implies.

I encouraged E.B. in this pursuit...and was amazed when he emailed me three weeks later to say he’d finished the book!

That speed certainly didn’t detract from the quality. In fact, like many great works, it was apparently written in a “white heat” and practically flew from his fingertips. In short, I couldn’t recommend it more highly, and practically begged E.B. to provide an excerpt for Golden Opportunities.

It’s presented below, and will give you a taste for E.B.’s great writing style and perceptive insight. And below that you’ll find links to order or download the book, which I strongly recommend.

— B.L.

There Will Be Negative Interest Rates
– Here’s Why

Imagine receiving this letter from your bank.

Dear Valued Customer,

Effectively immediately, the interest rate on your savings account will be -1%. We will calculate interest owed to the bank on a daily basis and deduct the total charge from your account on the last day of each month.

We appreciate your business and loyalty!

Sincerely,
Your Local Banker

What would you do? If you’re like most people, the idea of paying your bank to hold on to your money repulses you.

The Fed knows exactly what you’ll do at the first sign of negative interest rates. It knows you’ll withdraw that cash and do something with it. You’ll buy stocks, real estate, or even spend it. Either way, you stimulate the economy.

The Fed Lost the Power to Stimulate

These days, there’s a trillion-dollar solution for every problem. Politicians and bankers know the one thing the U.S. system can’t handle is an economic downturn. That’s why the Fed and the Treasury throw everything they’ve got at the first sign of trouble.

Take the 2020 virus situation for example. Within weeks the U.S. economy went from firing on all cylinders to a dead standstill. Then, almost overnight, Washington pumped $2.2 trillion into the system. It upsized that to nearly $3 trillion shortly after. Now there’s talk of another $1 trillion for infrastructure. Meanwhile, the economy is still off track.

The Congressional Budget Office (CBO) projected a $3.7 trillion deficit for fiscal 2020. That was in April. Two months later, things are worse. There could be another trillion added to that within weeks. It’s all borrowed. And it will never be repaid.

No sensible person would loan the U.S. government money. At least not at 0.80% interest for 10 years that is. Luckily, the country can borrow limitless quantities of money from its own central bank.

Twenty years ago, it was unimaginable to think of the Fed buying U.S. Treasury debt. In 2008, it bought just a few hundred billion to get things back on track. In 2020, it buys almost every cent of net new issuance.

It started out as a temporary measure. The Fed would buy treasury bonds giving the government the power to spend more averting recession. Twelve years later, it’s more than temporary. The Fed is the market.

Worse yet, trillions in borrowing can’t get things moving again. That’s why the Fed needs your help. It knows you won’t volunteer. So, it will use negative rates to get you into gear.

Save

Not A Subscriber Yet?
Get Golden Opportunities For Free

Subscribe to our Golden Opportunities e-letter to receive timely market
updates from the Gold Newsletter research team, plus video
presentations by expert speakers from the New Orleans Conference
— and the Investor’s Guide to Gold and Silver — all at no cost!

CLICK HERE to start your subscription.

A Debt-Based System Can’t Shrink

The problem with a debt-based system is it can’t shrink. If it does, you see the true value of assets.

From “zombie companies” that can’t generate enough revenue to make debt payments to corporations that borrowed heavily to pay dividends, America is hollowed out.

After more than a decade of 0% interest rates, cheaper borrowing lost its effect. These zombie firms make up a zombie economy today. More debt won’t do the trick anymore. Instead, they need you to boost spending. That gets the economy moving.

The problem is, at the first sign of crisis most people hoard cash. This used to be physical cash. Years ago, there were $500, $1,000, $5,000 and even $10,000 bills. In an effort to prevent you from hoarding cash the government got rid of those.

Today, people hoard cash in bank accounts. In a crisis, they ramp up the hoarding. Notice the spikes in cash account balances around the time of each crisis.

The Investment Company Institute (ICI) reported $4.75 trillion sitting idle in money funds as of last month. Lowering interest rates to near 0% didn’t slow down cash hoarding. Negative interest rates on deposits will.

The first sign of negative rates will get cash moving. That greases the wheels of the system. It stimulates the economy in a way the Fed can’t.

$4.75 trillion unleashed into the economy solves a lot of problems for the Fed. It forestalls the inevitable kicking the can down the road even further. Forget about this being fair or unfair. You’ve got to protect your wealth while there’s still time.

This Is When Gold Shines

Remember that old Warren Buffet quote about gold? He said after digging it out of the earth you, “….melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

He was right. The Martians would be confused. Gold takes tremendous effort to produce.

What might confuse the Martians even more is how the Fed’s money machine works. There’s no natural force limiting it. People die discovering, developing and producing gold. After thousands of years the total supply is worth only $11 trillion. The Fed can make that in a year or two.

Compare that $11 trillion worth of gold that took humankind thousands of years to produce to the total world debt load. At the end of last year, it was $255 trillion according to the Institute of International Finance. It grew 9% last year. The supply of gold grew around 1.8%.

Half-way through 2020 it’s not unrealistic to think that debt load might be closer to $300 trillion when the Institute runs its next calculation. Meanwhile, the gold supply will again grow at 1.8%.

Gold is the only asset I (E.B. Tucker) know of that’s not someone else’s liability. Apartments need tenants, office towers need companies, and companies need customers. Gold needs nothing.

At a time when these assets seem on the edge of collapse, it begs the question, which is crazier? Gold, or a world of negative interest rates?