Negative Interest Rates Disguise Government Bankruptcy and They Encourage People to Consume, Not Save

The whole financial world is in a bubble because of the trillions of currency units created since the crisis unfolded in 2008. Bonds are in a hyper bubble—the worst possible place to be. They’re a triple threat to capital—interest rate risk, currency risk, and default risk. And, again, at negative rates, they are truly a return-free risk.

Negative interest rates are being enforced by governments and central banks for several reasons.

First of all, governments are so head over heels in debt that they can’t afford to pay actual market-based interest rates.

If the US government, for instance, was paying even 6%, historically a more or less normal interest rate, on its $23 trillion of debt, that would be about $1.5 trillion a year in interest. That, just by itself, would more than double the current annual deficit.

That’s one reason governments like negative interest rates: it disguises their bankruptcy. They live on borrowed money. Tax revenues are nowhere near adequate to fund their spending—not to mention that spending is going to skyrocket while their revenues plunge for the foreseeable future.

Another reason governments like negative interest rates is that they encourage people to consume as opposed to save, which is also bizarro-world stupid. The only way you grow wealth is by producing more than you consume and saving the difference. The problem is that in today’s world the way to save is in currency in a bank account. If the currency loses value simultaneously with negative interest rates reducing the number of units, savings will drop.

If you’re penalized for saving, you’re going to do less of it. You’re going to go out and spend the money now on a bigger house, a new car, or perhaps a wild party. This is one reason why Third World countries never progress on their own. Their currencies are unstable, worthless, and not worth the trouble of people saving them. So, they never develop a capital base. It’s why poor people with bad habits stay poor.

From every economic point of view, negative interest rates are pure destruction. They make everything worse for prudent savers and better for profligate borrowers. But printing money and lowering rates are the only things that central banks can do to ward off a deflationary collapse. Their actions will only deepen and lengthen the Greater Depression.

—Doug Casey, “Doug Casey on the Disturbing Trend to Tax Savings and Eliminate Cash,” LewRockwell.com, entry posted April 2, 2020, https://www.lewrockwell.com/2020/04/doug-casey/doug-casey-on-the-disturbing-trend-to-tax-savings-and-eliminate-cash/ (accessed April 2, 2020).