While negative interest rates are prevalent in Europe, the risk of interest rates going even lower here remains.
Even though low and negative rates have caused asset bubbles and as you’ll read below also heightened the odds of bank failures and system risk…
By Justin Spittler
Negative interest rates are here to stay.
As you probably know, negative rates are the latest and most radical government “stimulus” measure.
They basically turn your bank account upside down. Instead of earning interest on your money in the bank, you pay the bank to look after your money.
Central banks in Europe and Japan introduced negative rates to stimulate their economies. The idea is that people will borrow and spend more money if they have to pay a “tax” to save money.
But that’s not happening, according to a recent report by JPMorgan Chase (JPM). CNBC reported two weeks ago:
Europe has seen a balance sheet recession since the economic crisis of 2008, it said, highlighting that a 10.9 percent increase in reserves at these banks has failed to increase lending to the wider economy.
Instead, people are hoarding money. According to Business Insider, safe sales have shot up through the roof in Europe. In Japan, people are buying safes at the quickest pace since the financial crisis.
• Negative rates have failed miserably…
Yet, they’re spreading like a virus.
More than $13 trillion worth of government bonds have negative rates. Keep in mind, negative rates were just an idea a couple years ago.
And this is likely just the beginning.
Two weeks ago, the head of global banking giant JPMorgan Chase (JPM) told CNBC that European investors should “expect negative lending rates until 2021.”
This is a serious problem for everyday Europeans. It’s also a major threat to Europe’s banking system.
• Negative rates are already eating European banks alive…
You see, banks make money by charging interest on loans. They’ve been doing this for centuries.
But, thanks to central bankers, global interest rates are at their lowest level in 5,000 years. Many major European banks are now struggling to make money.
Second-quarter profits at HSBC, Europe’s biggest lender, fell 45% from a year ago. Spanish banking giant Banco Santander’s second-quarter profits fell 50%. And Deutsche Bank’s profits plunged 98%.
• Europe’s banking system now looks like it’s about to collapse…
The chart below shows the EURO STOXX Banks Index, which tracks 26 major European bank stocks.
You can see that European bank stocks have plunged 42% since the European Central Bank (ECB) adopted negative rates in June 2014.
• The longer negative rates are in place, the more damage they’ll do…
Two weeks ago, JPMorgan said European bank profits will stay weak as long as negative rates are in effect:
[M]argins will not improve. Sixty percent of revenues is net interest income and as long as that’s the case earnings will not improve. So return on equity is very low.
JPMorgan isn’t the only major bank to issue this kind of warning:
➢ Bank of America (BAC) estimates that negative rates could cost European banks as much as €20 billion a year by 2018.
➢ Last week, the CEO of Swiss banking giant Credit Suisse (CS) warned that negative rates could lead to instability for Swiss lenders.
➢ Two weeks ago, the CEO of Saxo Bank, a Danish investment bank, called negative rates a “Ponzi scheme.”
➢ Last month, the CEO of Deutsche Bank (DB), Germany’s latest bank, called negative rates “fatal.”
➢ In May, BaFin, a German financial services watchdog, said negative rates are a “poison.”
In an effort to fix Europe’s economy, the ECB could end up destroying Europe’s banking system.
• You might not think negative rates are anything to worry about if you live in the United States…
After all, the U.S. doesn’t have negative rates yet. Plus, the Federal Reserve is talking about raising rates right now…not dropping them below zero.
But here’s the thing: the Fed isn’t serious about raising rates.
As we explained last week, it chickens out every time it’s close to raising rates.
In March, it didn’t raise rates because of a bad jobs report. In June, it held off due to concerns about the global economy and “market volatility.” Last week, it didn’t raise rates because it’s waiting for the job market to improve.
• Whether it admits it or not, the Fed is worried about the economy…
And you can bet it will “do something” if the economy runs into serious problems.
There’s just one problem. The Fed is running out of ammo.
You see, the Fed has already pumped $3.5 trillion into the financial system since 2008. It’s also held its key interest rate near zero for the past eight years.
This means it will likely have to do something even more radical than zero-percent rates when the next crisis arrives.
• Last week, Ben Bernanke said the Fed shouldn’t rule out negative rates…
As you probably know, Bernanke ran the Fed from 2006 to 2014. Today, he works for the Brookings Institution, a government think tank.
Last week, Bernanke wrote an essay explaining why the government should consider negative rates:
[S]ince the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks.
t is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.
• Current Fed chair Janet Yellen is entertaining this radical idea, too…
In February, Yellen said negative rates aren’t “off the table” if the U.S. economy runs into trouble.
More importantly, the Fed has already been quietly laying the groundwork for negative rates. In February, it asked major U.S. banks to “stress test” their balance sheets for negative rates.
This tells us something is very wrong with the U.S. economy.
• Negative rates could show up in America sooner than you think…
To see why, watch this eye-opening presentation.
In it, E.B. Tucker, editor of The Casey Report, explains why a major financial crisis is already well underway. By the end of this video, you’ll see why the U.S. economy simply can’t stomach higher rates.
You’ll also learn why this coming crisis is a threat to your wealth—even if you don’t own a single stock or bond.
The good news is that there’s still time to prepare…
You can get started by holding more cash than usual. This simple step will help you avoid major losses if stocks crash like they did in 2008. It will also put you in a position to buy stocks when they get cheaper.
We also encourage you to own physical gold. As we often point out, gold is the ultimate safe haven asset. It’s survived every financial crisis in history, and its value often spikes when governments do reckless things like print money or cut interest rates.
Of course, there’s so much more you can do to protect yourself. To learn other ways to “crisis proof” your wealth, click here.
• REMINDER: Casey Research founder Doug Casey’s latest novel just went on sale today…
The New York Times bestselling author just released his newest book, Speculator…the riveting story of a 23-year-old man who risks it all in a far corner of the earth.
It’s now available for purchase on Amazon. To buy your copy today, click here.
Chart of the Day
Deutsche Bank’s stock is in free fall.
Today’s chart shows the performance of Deutsche Bank since the ECB introduced negative rates in 2014. You can see that the stock is down 70% over the past two years. On Monday, shares plunged 7% to a new all-time low.
The stock is now trading for less than $12. According to Jeffrey Gundlach, the global economy could have serious problems if Deutsche Bank continues to nosedive. Gundlach, who manages more than $100 billion at DoubleLine Capital, warned in July:
Banks are dying and policymakers don’t know what to do…
Watch Deutsche Bank shares go to single digits and people will start to panic… you’ll see someone say, “Someone is going to have to do something.”
Gundlach’s advice to investors is simple: own gold. According to Gundlach, “gold remains the best investment amid fears of instability in the European Union and prolonged global stagnation.”
If you’ve been thinking about buying gold, watch this short video first. It reveals what could be the cheapest way in America to buy gold coins. Click here to take advantage of this incredible offer.