Negative Interest Rates Make More Sense Than Ever
In Europe, the banks are starting to charge for holding your money – and everyone in the United States is starting to panic about it.
In Germany, Switzerland, and elsewhere, however, things are just moving along as usual. People are happily paying to house their wealth at famed Swiss multinational investment bank UBS, and Switzerland remains one of the most stable banking centers of all time.
Germany and Switzerland, among others, also continue to charge negative interest rate out 30 and even 50 years in some cases.
So, why do American investors start to panic at the thought of negative interest rates?
After all, we do not think twice about paying for a safe deposit box or a sturdy fire safe in which to store our gold and precious metals assets. We do not blink when asked to pay rent on a tank in which to store petroleum or a silo in which to store grain.
After all, holding that asset is a service.
And, when we sell the asset, we are going to make more money than we paid for the storage (assuming we ran the numbers right)! Even if we don’t get the numbers right, it is still worth the peace of mind that comes with holding a valuable safe-haven asset safely to pay the price of safe storage.
Many European investors feel the same way about banking as investors in the United States feel about, well, pretty much every type of service-based asset storage out there except our checking accounts, savings accounts, and bonds.
However, some analysts are starting to come around to thinking negative interest might not really be such a, well, negative, thing.
As Bloomberg Businessweek contributor Joe Weisenthal put it in a recent column, “The concept of paying a fee just to maintain paper wealth shouldn’t be that weird. The wealth management industry is gigantic precisely because it’s not trivial to hold onto wealth and get access [to] it at some point in the future.”
He points out that investors seldom flinch when asked by a portfolio manager to pay a fifth of their profits to said manager in addition to a smaller percentage on an annual basis for management services.
Why, then, Weisenthal asks, is it “bizarre to pay 0.1 percent to the German government to hold a bond that historically has done a great job of hedging your wealth against fluctuations in the market and the economy?” He concludes, “People have always paid the pros a lot of money.”
If negative interest rates become normal around the world – and that seems increasingly likely as central banks in nearly every country are currently engaged in some form of easing – then it is possible the trend could prevail in the United States as well.
However, it seems far less likely that U.S. investors will take the development calmly. If you are paying to store assets anyway, why not store something that is a true hedge, like gold?
If negative interest rates prevail in the U.S., you may be quite confident the run on gold will be unlike anything you have ever seen before.
Negative interest rates could take that run to new, historic heights.
Negative interest rates may not really be all that “weird” in concept, but they will still change the face of market – perhaps permanently.