I received a couple emails asking how negative interest rates would effect the average person and the economy. This is always an interesting topic as most of the research is, of course, theoretical and unproven. However, we can look around the globe to find some test cases in which we may be able to obtain some answers.
I have come across some research and articles with respect to Denmark and its ongoing experiment with negative interest rates. The results, while not easily transferable to other nations, provide a glimpse into what many here may see if the US Fed or other national central bank decides to institute a policy of below-zero interest rates. Denmark’s situation is unique as their central bank is pegging its krone to the euro. As a result, the Danish central bank, Danmarks Nationalbank, has been forced to suppress their short-term lending rate to below 0% since 2012 in order to overcome its relative strength.
Economic busts & negative interest rates can bring opportunity
While most in the alt- and patriot-media have concentrated on the gloom and potential catastrophe that negative rates may bring (e.g. savers bereft of interest income), I see an opportunity to enhance our personal balance sheets. Indeed, any minus interest rate program that was promulgated from any dire economic circumstances that precipitated it could have some appealing benefits. If you own assets you may feel a lot wealthier.
Danes have another reason to be happy: they’re richer than ever before.
After more than half a decade of negative interest rates, rising property values in Denmark have left the average family with net assets of 1.9 million kroner ($314,000), according to the latest report on household wealth.
“Right now, net assets are at a record-high level,” said Tore Stramer, an economist at Nykredit in Copenhagen. “So the good news of the day is that the average family has never been richer.”
That is an astounding amount of wealth and the situation in Denmark is certainly unique, since their economy is performing well as the krone is being artificially suppressed to keep it in equilibrium with the euro. This is basically giving Denmark a free ticket for the time being. Regardless, even with a poorly performing economy that may be the catalyst for minus rates here domestically, it is difficult to see how asset prices would not be supported.
Mortgage rates at 1.5%
Another upshot for Danish citizens, they can lock in a 30-year mortgage at 1.50%.
Half a decade after rates first went negative in Denmark, the country is continuing to test records in ultra-low borrowing costs.
The latest example is in Denmark’s $470 billion mortgage-backed covered-bond market, the world’s biggest. Interest rates are now so low that Danish households can lock in to mortgage rates of 1.5 percent for 30 years. By comparison, the government of the U.S. pays a 2.75 percent coupon on its benchmark 30-year bond.
If you live in Denmark you have good reason to be happy
Here is some research from the UN, which indicates that the Danish are the second most happy people on earth. Yes, I do not necessarily subscribe to these subjective measures, but it is easy to imagine why the Danish are happy. They have a strong economy and massive personal wealth; gratis negative rates.
Danes are on course to spend at the fastest pace in 12 years after more than half a decade of negative interest rates.
The nation that has dominated the UN’s world happiness rankings since they were created in 2012 is growing more optimistic, according to a gauge of consumer confidence published on Tuesday. The index reached its highest level since July last year, according to Statistics Denmark.
Here is a link to the UN’s World Happiness Report. You can turn to page 20 of the report to see that Denmark is second out of 155 nations in the survey.
Americans may not be happy, but imagine if they don’t take advantage of negative rates during the next bust
OK. I know most of us do not live in Denmark and those working in the crowded and expensive areas of the US do not seem happy. I live in Fairfax County, Virginia, and Fairfax has the second highest median household income in the United States. Bordering Loudoun County has the highest in the nation. The amount of wealth in the Greater DC area is staggering and yet people here seem miserable. Life around here is not really easy for many people and they live here to make money. Nevertheless, even if the US experiences an economic downturn in the future I am sure the USFed will once again begin to discuss the idea of below-zero rates.
So, imagine a scenario with a blown-out economy and negative rates and not being able to gain advantage from it? I wouldn’t be happy. The booms and busts are engineered, but if we know how it’s done then we can make the correct financial and investment decisions. Anyone with this insight earlier in the decade was able to invest in most income-producing sectors and profit. While this cycle may have topped out there will come another one after the next bust. The Fed will have no choice but to lower rates to historically low levels once again.
Unfortunately and by definition, most will be caught offside. Worse, most in the patriot movement will not know how to spot the opportunity and will be caught in the undertow. The result is that a regime of negative rates in the US will further divide the wealthy and working poor.
The US Fed will eventually have to contemplate negative rates. Be prepared to take advantage of it
The US has never dealt with minus interest rates, but the time may soon come when we have no choice, but to carry on that experiment. While the circumstances that will lead up to the the US Fed instituting some sort of negative rate regime will surely be dreadful, the upshot is that the cost of capital will be much lower. Thus, anyone not in much debt and owning income producing assets will probably be a lot better off than their neighbors and may indeed feel wealthier.
While the USFed may be raising rates and that may bring severe economic dislocations in the intermediate term, we need to remain mindful that the Fed is attempting to raise rates as high as possible, if only to have ammunition for the next recession. I am sure it is not far off; we have gone on for almost a decade now without negative GDP growth. I can imagine how asset prices could be decimated in any downturn, but if we are aware of how monetary policy works we can capitalize on any price drops, especially if the Fed drops rates back to zero and below.
Be careful of what the Patriot and alt-media espouse. We need to move forward and be able to make money in any environment. I think it may be wise to set ourselves up to have the flexibility to prosper with negative interest rates.