Speaking at Davos this week, President Trump hinted that he hopes the Federal Reserve adopts a negative interest rate policy.
Trump then talked up the benefits of negative interest rates, which have been implemented by in the European Central Bank and others. Negative interest rates have been used to stimulate economic growth, but whether they have achieved that objective is still being debated by experts.
“This concept is incredible,” Trump said. “Again, you don’t know where the hell it leads, but you borrow money and, when you have to pay it back, they pay you. This is one that I like very much.”
That’s not really how it works, though.
In theory, it sounds like lenders, in this case bond holders, are paying rather than receiving interest. In practice, though, negative rates mean that banks that store money at places like the Fed and the European Central Bank would have to pay to keep reserves there rather than get interest.
The U.S. has much higher interest rates than Europe or Japan on a relative basis, but the Fed’s overnight lending rate is still close to zero, its historical low from the aftermath in the financial crisis. The Fed also cut rates three times in 2019 after four rate hikes the year before.
But the bottom line is, negative interest rates, more than any other manifestation of financial distortion, are proof positive that excessive debt levels are rendering global capital markets increasingly dysfunctional. Superficially, gold’s zero yield now offers global capital stewards compelling mathematical premium over a burgeoning universe of negative-yielding investment grade (IG) bonds. Far more compelling, however, is gold’s unique immunity to both default and debasement, two forces poised to ravage traditional financial assets in future periods.
The theme of negative interest rates is why many prominent investors are now calling for gold to reach all time highs in USD terms in 2020.