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Negative Interest Rates: How Did This Happen?

Until recently, negative interest rates were considered inconceivable. Now, however, $7 trillion worth of bonds are trading at negative yields. That means the owners of those bonds are guaranteed to lose money unless interest rates plunge even further. The latest Macro Watch video, uploaded today, explains how this disaster came about.

There are five reasons interest rates have fallen into negative territory:

  1. Globalization circumvents the domestic bottlenecks that used to cause inflation.
  2. Manufacturing in ultra low wage countries drives down the cost of production and product prices.
  3. Fiat money creation produces an economic boom that creates excess capacity and falling product prices.
  4. Fiat money creation changes the Supply and Demand balance for Money and pushes down yields.
  5. The imposition of a Negative Interest Rate Policy (NIRP) by some central banks puts downward pressure on all interest rates.

Thus far, five central banks, including the European Central Bank and the Bank of Japan, have imposed negative interest rates on the reserves commercial banks hold on deposit at those central banks. Fears are growing that the Fed also intends to introduce a Negative Interest Rate Policy.

In this video, we consider how NIRP works and what it is meant to achieve. We then ask, “Has it worked?” We also look at its negative consequences. Finally, we consider whether and under what circumstances the Fed would begin charging banks negative interest rates in the United States. What we find is that if deflation does take hold in the US, the Fed may not have a choice.

If you have subscribed to Macro Watch, log in and watch this 25-minute video now. There you will find 45 (downloadable) slides with all the details.

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