If you care about your money, you will want to understand how negative interest rates could affect the economy and how they could be a predictor of the future crash of Fiat and traditional finance.
Central banks are lowering interest rates and gradually moving them towards negative percentages. While reading this, you may ask, “what does a negative interest rate mean?” If one acquires a $100 debt with a 1% interest obligation, this means that to pay off the debt one must pay $1 of interest on top of the initial $100.
In this example, you’d be paying $ 101 in the end. On the other hand, if the interest rate is -1%, then one ought to pay only $99. Yes, negative interest rates imply that one earns money by borrowing. The banks pays interest to the borrower. How could this even make sense for banks? Will they start giving money away to you?
No! Sorry to disappoint, but this wishful opportunity from negative rates is not for you. The lucky ones that are able to leverage negative rates to borrow money and accumulate wealth are commercial banks that have direct connection to the central banks – or to the Federal Reserve in the case of USA – which controls the printing of Dollars.
WHY DO CENTRAL BANKS IMPLEMENT NEGATIVE INTERESTS?
The reason why negative interests have been considered in recent years – they were a crazy idea 10 years ago – is simple to understand: central banks want more money to circulate. This means that those who borrow directly from the central bank will not have to pay more than what was requested, but instead less when paying off loans: an incentive for direct clients of the central banks.
Thus, if a commercial bank acquires a loan from a central bank for an amount of $100 million and the interest rate is -0.50%, at the end of the deadline, the commercial bank must return the $100,000,000 minus $500,000. That is, the central bank pays to lend money. This system is supposed to be positive for the economy to reactivate, because soon many commercial banks would try to ask for more and more money from the central banks and would inject it into the market through regular loans for people.
HOW NEGATIVE RATES ARE BAD NEWS FOR FIAT-BASED ECONOMIES
Scarcity, or a solid limitation on the inflation rate of an asset, is an inescapable requirement for the value of the asset to be maintained over time. Any asset subject to uncontrolled inflationary processes is condemned to lose its value. In the case of a currency, the increase in the amount of currency units available in the market causes the money to lose value. People’s money loses value year after year if total supply increases. This constitutes a way of consciously damaging society.
The first victims of the explosive inflation that is derived from negative rates are the ordinary citizens of the economies. Normal people become impoverish. Paradoxically, the same commercial banks that borrow from central banks also lose money in the long term. Banks lend money to people, but later, when people return the money, it will have already been devalued. So banks lend to individuals and generate losses through loans counter-productively.
Several countries are on the way to experience negative interest rates. The United States, Japan, Spain, Germany, Switzerland and many other countries are also issuing debt at negative rates. It is also often said that some governments support negative rates, because the State can borrow money and pay less than it received in order to be financed.
It does not sound very fair or transparent that, because of the government, money is printed at any time, because inflation – the creation of more money – negatively affects the people. Whenever a central bank lends money to the government, citizens will be poorer because people’s money loses purchasing power or objective value.
One of the problems that usually occurs when the interest charged by the central bank to commercial banks approaches zero or becomes negative is citizens perceive a substantial reduction in interest and facilities to obtain mortgages. This happens because central banks pressure other banks to lend money to people. If many banks offer money to the people, money becomes abundant and loses value.
Whenever there is a lot of money available for regular people and many banks offer credit, each bank is forced to lower commercial interest rates and provide a large number of facilities in order to be competitive. In this way, negative rates tend to harm commercial banks that end up lending money to people in unsafe conditions and for very little profit or even losses.
According to facts, the idea of central banks to print more and more money and make commercial banks distribute it at maximum speed to society seems to be one of the most damaging ideas, despite it having governmental support. Money loses value daily; saving no longer makes sense. However, not all is lost. During any historical process of inflation and the resulting crash of a fiat currency, there always seems to emerge other assets that show an opposite trend and serve as financial salvation.
Today, we see how assets such as gold, silver, cryptocurrencies and some valuable stocks, rise in valuation and become a promising safe haven. Millions of investors are convinced that longing precious metals or Bitcoin and shorting fiat will allow them to profit like never before.