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Negative interest rates: To get paid to borrow

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Doug Gardner

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By Doug Gardner
Columnist

Friday, November 8, 2019

You loan me $10.

I pay you back $9.

That’s a negative interest rate.

You may have noticed that mortgage rates are hovering just above 3 percent. A local bank touted a 2 percent-plus rate on a time deposit in this paper recently. Interest rates on money market funds are near zero.

But, negative rates? Who could get away with being paid to borrow money?

Turns out that around the world at least $15 trillion of borrowed money, 30 percent of all the debt out there, is financed at rates below zero.

The German government borrowed $826 million for 30 years in August. The country’s central bank, called the Bundesbank, won’t pay any periodic interest on the loan, and, will be obligated to pay back investors who loaned the money, just $795 million in 2049, a negative rate of about 0.16 percent. As you read this, every German bond, from 3-month maturities to 30-years, carries a negative rate.

Rates are negative in Sweden, Switzerland, Japan and in Denmark, where you can get a three-year adjustable rate mortgage at -0.28 percent. The bank pays you a small amount each month for borrowing from them.

President Trump tweets nonsense from the White House daily. But on the subject of interest rates, he may be right: American rates are high, relative to the rest of the developed world. Negative interest rates would greatly lighten the carrying costs of the country’s $22 trillion in debt, a number sure to get larger whichever party prevails next year.

What’s causing this Alice in Wonderland reversal of traditional finance and what does it mean to you?

Remember the financial meltdown of 2008 caused by over-leveraged real estate? Central banks, like our Federal Reserve and those in Europe and Japan, have printed $8.5 trillion in new cash in the last 10 years, a process with the fancy name, “quantitative easing.” For us regular folks, that means printing money out of thin air.

The aim of printing all this new cash was to prop up shaken economies and to give commercial banks plenty of money to lend to struggling corporations and individuals. It worked to an extent, forestalling a global depression, but failing to accelerate anemic growth rates around the globe. Much of that cash went into stocks, sending indices to record highs; to real estate in hot markets like San Francisco and Manhattan, where hedge fund operator Ken Griffin paid $238 million for an apartment; and into art, like the Picasso that fetched $175 million in 2015.

Now economies around the world, including ours, are slowing again. Central bankers are lowering interest rates to negative territory to stimulate economic activity. They may be pushing on a string.

Populations are aging. Old people don’t buy as much stuff as younger folks do. Companies aren’t investing in machinery like they once did. Former Federal Reserve Chairman Alan Greenspan observed that the economy is getting lighter. Baldwin Locomotive Works once manufactured 100-ton railroad engines. Microsoft, Facebook and Uber produce software and services which weigh nothing. They require no steel to manufacture or trucks to deliver.

Negative interest rates effectively punish commercial banks for not lending.

They have perverse side effects, too.

It is a terrible time to be a saver, even as investors profit mightily.

Some European companies have begun storing pallets of cash in bank vaults rather than plowing it back into their businesses.

In Denmark, real estate investors build empty houses in the hope that their neighbors eventually will have children and buy houses again.

Credit card rates have soared to a 10-year high of 17.8 percent here in the U.S. as banks frantically search for offsets to declining interest rate spreads on deposits and loans.

Foundations, like College of The Albemarle’s and Elizabeth City State University’s, and pension funds, like the N.C. State Employee Retirement Plan, invest in riskier assets in lieu of low-paying bonds to keep up with the promises made to future scholars and retirees.

How to cope with the negative interest-rate phenomenon?

Perhaps with a little humor? Ask your favorite banker when he’ll start paying you to visit his office for a loan.

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