Friday, September 09, 2016

Negative Interest Rates: 
Not Without Consequences
Essay highlights the unintended negative consequences of financial repression on investors .. "An important criticism of the low-rate environment we are in is that many people who want to save their money in a bank to gain interest wind up paying the price—particularly when inflation is factored in. Instead of earning interest on their deposits, they are essentially charged money to keep it in the bank!" .. negative interest rates are making the situation worse .. "The negative rates are shrinking bank profit margins and thus, making them reluctant to lend. Many people who would normally deposit their money in the bank now simply keep their cash in safe deposit boxes or under the floorboards. The lack of interest earnings make people who are not able to invest the money elsewhere feel that they are financially disadvantaged. Many pension funds are in trouble since the safety they sought from government bonds normally held in their portfolios has not been earning any yield to speak of, and some are forecasting they will not be able to meet their obligations to pensioners in this prolonged low-rate environment. The result is a search for yield among those institutional investors, leading them to more toward risky bonds and equities. This, some observers fear, could lead to another financial market bust if the risky investments come home to roost .. we must be mindful of the macro developments engendered by unconventional central bank policies which could have unforeseen consequences for many investors."
LINK HERE to the essay

No comments: