I first heard about negative interest rates a few months back but thought those murmurs were from people who wear tin foil hats.
This morning I decided to Google “IMF negative interest rates” and it took me about 2 minutes to find a working paper from the IMF. All I had to do was read the title and its short summary.
The title is Enabling Deep Negative Interest Rates: A Guide
Here’s the first half of the summary word for word:
“The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank.”
You can find the working paper here
The Great Recession they are referring to is the aftermath of the GFC.
Basically, this is saying that you can fix the economy by dropping interest rates very quickly into negative territory.
To me this sounds like a really stupid idea because over the last 5 years we have drastically reduced our interest rates and we are now even closer to recession than before.
Fixing a problem by essentially throwing money at it doesn’t sound like a real smart idea to me.
There is so much to talk about here.
First, I want to start with this report – to me it feels like the IMF are saying there’s a chance of a deep recession soon otherwise why would they raise the issue? Reading the tea leaves here, the IMF are saying that some countries are going to experience deep recessions soon.
So, here is what I think is going to happen. America are sliding into recession and the rest of the world will get caught in the whirlwind. If I was a betting man, I would say this is just around the corner so I’ve done the closest thing to betting.
I’ve switched my super fund to defensive. I haven’t done this lightly but I had put it in my diary to review this in July and switch out. I’ve been thinking America will tank for a while. I thought Trump’s tax cuts to corporate America might trickle down and cause some increased productivity and push this bull run further.
Now you might think, Will, that’s exactly what’s happened, their share market is at record highs. Instead reinvesting these tax cuts back into business these company directors have bought back shares in their own companies which has inflated the price even further.
For future reference today is the 15th of August and the Dow Jones is at about 25,600 and the ASX 200 is 6595.
So, I think the share market is going to tank and push us toward recession. The IMF have given central banks a green light to reduce rates to whatever they want.
I want to take a second to say this is a classic cycle and why we won’t see “Economic Armageddon” as some commentators are preaching just yet.
This is because humans govern the system and when we are at the bottom of the cycle, we inflate the economy by lending more money in to the system. Now after the Royal Commission it was hard to see how APRA could suddenly unwind all these lending policies they’ve enforced on the banks in recent times.
So we have to come up with something else. No sane person would have come up with negative interest rates but here we are and it serves the cycle.
Negative interest is going to get us out of recession fast by lending money into the economy fast. In that respect the IMF are correct.
It means that property and share markets will go to deliriously high levels. I fail to see how that won’t happen.
What comes after that though is incredibly scary. Maybe the term Economic Armageddon will be more appropriate then, time will tell.
I’m calling it now; the next 10 years will see the most money made and lost in our lifetime.
To me it’s exciting because of the opportunity that provides. In the flip side it’s also sad because there will be many loser’s out of this too.
Whilst I’m making bold predictions, I’m going to say the gap between the rich and the poor in America will widen massively.
This action from the IMF shows the rich have too much sway over how things are done. Why? Because only the rich can benefit from this. I would love for someone to challenge me on this and prove me wrong.
Ok 3’s a charm so here’s bold statement number 3. Out this negative interest rates madness you can say goodbye to cash.
Why will anyone possibly be holding cash when under negative rates you’re getting taxed to hold cash? They will put that money to work somewhere else – probably either in gold or the share market. I’m guessing the share market because when this next boom starts rolling with the free money from negative interest rates the share market gains are going to be too good to resist.
To be honest I’m not sure where the world will be at end of the next boom. Who knows how long it will take to get there. It’s a very scary concept.
The reason I’ve created this podcast is to try and show a different perspective. Something different from what you will hear in mass media. Hopefully you can go further and do your own research and take action when it matters.
I would also like to say that I’m not a financial planner or an economist. I’m just a mortgage broker who actually wants to look forward. I’ve seen the toll that too much debt and not enough forward thinking takes on my clients.
Please, don’t take my opinion as financial advice. For the record I think financial planners play a very important role in assisting people throughout their lifetime. Maybe that’s something for another article.
A lot of what I thank and write is very left of field. It shows I am open to listening to different perspectives.If I can further educate myself then it will provide better value to my audience.
So please feel free to contact me if you have any questions or feedback.
Will Bell Mortgage Broker is a mortgage and finance broker based in Melbourne specializing in residential home loans. Will is all about the average Australian understanding the broader economy. This way you can take action on your own personal economy. He is the host of the My Personal Economy Podcast which you can check out here
Additionally, you can follow him on Facebook