Negative Nominal Interest Rates may Be Coming: Time to buy a Safe

Many of you may be familiar with the idea of a negative real rate of interest. This is when the inflation rate is higher than the nominal interest rate. Here's the equation that explains this idea:

RIR - Real Interest Rate
NIR - Nominal Interest Rate
IR - Inflation Rate

RIR = NIR - IR

Note that the RIR is normally less than the NIR because the rate of inflation is normally positive. However, if the rate of inflation becomes negative, then the RIR is greater than the NIR.

Also, it would seem that one could never have a negative NIR. Why? Well, if you look at this from the perspective of a normal person, if the bank tells you that you are going to have to pay them to keep money in a checking or savings account, you might just say to your bank: "Great, give me cash so I can keep it in a safe in my house."

On the other hand, big businesses with lots of "cash on hand" may not be willing and able to hold cash in corporate safes.

Also, central banks like the Federal Reserve are now holding short term interest rates at very low levels. The Fed is doing this in an effort to use monetary policy to prop up the stock market, the housing market, and the rest of the bubble economy. One suspects that Trump is putting political pressure on Fed Chair Powell to keep these bubbles inflated, at least until after the 2020 election.

Anyway, the interest rate on long term debt keeps falling and falling. And, when ever the LT interest rate goes below the ST interest rate, we have what is called a yield curve inversion. This is very bad for banks. They make money by borrowing at ST rates and loaning the money out at LT rates. This works as long as ST rates are below LT rates (i.e. when the yield curve is not inverted).

So, as LT nominal interest rates continue to drop towards zero, and as the rate of inflation remains stubbornly low, we start to hear more and more stories in the press about why we should expect negative nominal interest rates.

So, what would negative nominal interest rates mean to the average citizen, especially those who thought that they were supposed to save for their retirement.

If we have negative nominal interest rates, then retirees who try to save money the old fashion way may find that they have to pay their bank for the privilege of saving money.

I'm not sure about you, but I'm thinking of buying a safe.

For those of you who want to know more about negative nominal interest rates, see the article by David McHugh below.

References

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Beshears, Fred

The Five Sector Circular Flow Model of an Economy
https://innovationmemes.blogspot.com/2017/10/the-five-sector-circular-flow-model-of.html

FMB: This is my crash course on macroeconomics.


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Federal Reserve Bank of St. Louis

10-Year Treasury Minus 3-Month Treasury (the Yield Spread)
https://fred.stlouisfed.org/series/T10Y3M


10-Year Treasury
https://fred.stlouisfed.org/series/DGS10


3-Month Treasury
https://fred.stlouisfed.org/graph/?id=DTB3,


Long-run inflation expectations
https://fredblog.stlouisfed.org/2014/04/long-run-inflation-expectations/


Wilshire 5000 Total Market Full Cap Index / GDP
https://fred.stlouisfed.org/graph/?g=qLC

FMB: This is Warren Buffet's favorite measure of the degree to which the stock market is over valued (i.e. is in a bubble).

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Market Watch

Using the yield spread to forecast recessions and recoveries
https://journal.firsttuesday.us/using-the-yield-spread-to-forecast-recessions-and-recoveries/

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McHugh, David

Negative interest rates turn saving, borrowing upside down
David McHugh and Christopher Rugaber
2/14/2020


https://finance.yahoo.com/news/negative-interest-rates-turn-saving-131450036.html