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Do Low and Negative Interest Rates Scare You?A couple of weeks ago, I brought up the idea of negative interest rates with my nine-year-old daughter, Faith.

Yes, this might be something a little weird to talk about with your kid, but it piggy-backed off of our personal finance class during homeschooling.  And of course, I kept it pretty high-level.

I had kept it simple talking about how banks pay interest to people who store their money there.  The banks then take that money and loan it out to others and charge a higher interest rate to them for things like buying a home.

These concepts are important for kids to understand.  Eventually, we can talk about some of the causes and effects, but for now, that’ll suffice.

But then something interesting happened.  I brought up some of the goofiness of negative interest rates happening in various places around the world.  In parts of Europe and Japan, not only do you not get any interest on your money they’re holding, but they’re actually charging you for it!

Faith was in disbelief…

What?!  Why would anyone keep their money in the bank there then?!  I would just keep my money at home!

I get that.  But you’d be taking a pretty big chance.  What if you had all your money at home and a burglar ended up stealing all your money?  Or if a fire burned your house down – you’d lose everything.  It might not be great, but paying a little bit to safeguard your money might still make sense. 

I told her that negative interest rates are possible in the U.S. as well.  There’s been talk going on that it’s not a matter of if it’ll happen here, but when.

I didn’t get this deep with Faith, but on 09/04/19, former Federal Reserve Chairman Alan Greenspan was quoted on CNBC’s Squawk on the Street as saying, “You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States.”

I left her to ponder the idea a little bit.  It’s wonderful to see the gears cranking in your child’s mind!

But enough about our personal finance lessons at home – the real question is how do low and negative interest rates affect you and me?

 

Heading toward negative interest rates

We all know that lower interest rates have been pretty prevalent in the U.S. for several years now.  The 20-year mortgage we had on our house from 2012 was a crazy 2.875%… that’s peanuts!  When we sold our house in 2018 in preparation for our move to Panama, I was cringing more at losing that rate than the thought of missing our home!

Then there are the banks.  The big banks are currently paying stupid interest rates like 0.01% on savings accounts.  If you don’t have your stash of cash at an online savings bank like Ally, you’re insane!  With a current rate of 1.90%, that’s 190 times what you’re getting at the stupid big banks!

But even so, 1.90% isn’t that great.  And it’s been dropping.  At one point recently, a number of the online banks were pushing above 2.5%.

And now, we’re starting to consider a whole new level of fun.  A week after Greenspan’s comment about negative interest rates being inevitable in the U.S., President Trump tweeted the following…

I’m not here to talk politics (I never am!) so keep that out of the comments, but this definitely made me raise an eyebrow.

 

So what are negative interest rates?

I’m far from an expert on this stuff, but I’ve taken an interest in the whole idea of negative interest rates.  Of course, I want to know some of what that means so I can take any action needed to ensure we stay in a financially sound position.

But, it’s also fascinating to me because it flips everything we’re used to on its head.

In general, when interest rates are high, you’re going to pay more when borrowing money from banks for mortgages or other loans.  However, you’re going to generally get a higher payback in interest for the cash you stash in the bank.

When interest rates are low, you get much cheaper loans from the bank, but you’re also going to get some crappy returns on your cash.  This is the stuff we’re seeing right now.

The curious thing to me though is negative interest rates.  When that happens, as a saver, you’re punished because you’re now actually paying the banks to hold onto your money.

But get this – when you get a mortgage or other loan with a negative interest rate, you’re getting paid for taking that on.  You’re not getting a check every month, but rather your payment pays on the balance and a little bit more.  Imagine getting a car loan just because it’s a better deal than paying with cash.

That’s such a foreign concept in my mind.  But in some places, it’s already a reality.  Parts of Europe and Japan already know what it’s like dealing with negative interest rates.

Jyske Bank in Denmark has recently offered the world’s first negative interest rate mortgage.  At a -0.5% interest rate for a 10-year mortgage, the bank is paying borrowers 0.5% a year just to take out a loan.

Although your debt is reduced by more than you pay every month, you still need to remember that there are fees and other charges that will likely tilt this slightly in the bank’s favor.  Regardless, it’s a mind-boggling phenomenon.

 

What causes negative interest rates

Again, I’m no economist, so feel free to chime in on the comments (without the political nonsense), but the idea is that central banks (such as the Federal Reserve System in the U.S.) have certain roles in a country.  One of those roles the Federal Reserve has is to moderate long-term interest rates.

By doing so, they can theoretically help to stimulate growth or slow things down as needed.  Normally, interest rates can be brought down to encourage people to borrow more money and buy more goods and services.  And as the economy gains strength, they can raise rates in an effort to slow inflation and get things back to where they should be.

But there can also be unique circumstances during times of deflation.  When so many people and businesses are still hanging onto their money instead of spending, demand drops and prices can fall even more.  In that case, dropping the interest rate to zero might not be good enough to stimulate growth.

It was once thought that the lowest the interest rate could is zero (seems to be some sound logic, right?).   That is until countries in Europe and hin Japan proved otherwise.

If you think about what happens with negative interest rates, it makes some sense as to why central banks would at least consider implementing them in these scenarios.  By making it painful to save money in the bank and provide the low-cost incentives to spend, it’s more likely to help give a kick in the pants to the economy that’s needed.

Think about it.  If you’re getting charged to save your money, but the banks are actually giving you money to spend it, it becomes a pretty nice carrot on a stick.

 

What we’re doing…

Although the chances of negative interest rates don’t seem to be very high, it’s still good to think ahead and be prepared.

It’s an interesting dynamic though in that the whole premise rewards spenders and punishes savers.  If you’re part of the FIRE (financial independence / retire early) community, you’re probably like we are and more of a saver than a spender.

That makes planning a little more difficult.

Sure, you could put all your savings in the stock market with the idea that it’ll make you a lot more money.  The problem is that although that’s great for the long term, it doesn’t work well for money you might need in the near future.

You should still consider an emergency fund in case you lose your job or some major crisis happens.  And in the cases of retirees, you probably want to have money set aside to live on that isn’t a possible victim of stock market volatility.  With us, we’re using the bucket strategy and have a bond fund ladder in place and a year’s worth of living expenses in cash at all times.

The problem is that even if you’re stashing that short-term money in a vehicle like an online savings account, your rate isn’t guaranteed.  With falling interest rates, you might find that the rate you’re getting drops over time.  We all want as good of a return as we can get and that’s a big problem!

If you’re in the market to buy a new home in the near future though, this scenario could be right up your alley and a real blessing.  Considering we just moved to Panama, buying a house in the U.S. isn’t high on our list of things to do.  But, man, would I love a negative interest rate mortgage payment!!

However, buying another rental property could be something for us to consider.  We could take a little bit of our excess cash to use as a down payment on another rental.  That would free up some capital from any “penalties” we’d have from sitting on the cash in the bank and give us a good return in the meantime.

I’m guessing we’ll concentrate on some smaller incremental changes for the time being though to help fight the current lower interest rates…

 

12-month CDs

One of the moves that I recently made was to lock in a 12-month CD.  This is the first time I’ve ever purchased a CD, but I think it makes sense for our situation.

With our bucket strategy, we’ll have one of our bond funds mature at the end of the year.  That’ll end up giving us our money to live off of for 2020.  And looking at how we’ve spent money this year, it should also mean that we’ll have a surplus for this year (yay!).

I didn’t want to lock up too much of our money in a CD since I’m still getting a handle on how our living expenses are going to flow here in Panama.  However, I decided that $10,000 would be a safe amount that we definitely wouldn’t need right now.

So I purchased a CD through Ally since we already have a few online savings account there.  I locked in at a 2.40% APR.  That’s obviously higher than the 1.90% the saving accounts are currently offering.  And if the rates continue to drop, we’ll be happy that we’re getting a guaranteed 2.40%.

Once we re-evaluate everything at the end of 2019 and the beginning of 2020, we might purchase another CD.  A lot of this will depend on both how interest rates are looking and how we wrap up our expenses for the year.

 

¡Bienvenido a Panamá! (Welcome to Panama!)

So I just had a Homer Simpson “Doh!” moment.  Two days after I bought the CD at 2.40%, we signed the lease for our apartment that we’re moving into here in Boquete, Panama.

While talking to the owner of the property and the property manager, we started discussing banking here.  They informed me that the banks here are paying over 3% interest on savings accounts.

That made my jaw drop, but then they told me that CDs are paying close to 5%… doh!!!

The funny thing is, if I had done the Panama Relocation Tour with Jackie before we moved here, I would have known this.  She discusses banking, the rates you can get here, and which banks to use.  I know I’ve said this before, but if I had to do it all over again, I’d make sure to book a tour through her before ever considering moving to Panama.

After digging into it more, I found that at the time of this writing, Caja de Ahorros is offering 3.12% to 4.43% interest on amounts of $10,000-$100,000.  And Global Bank is offering CD rates of 3.25% for 1 year all the way up to 4.5% for up to 5 years.

This is incredible when you compare the rates to the U.S.!  My understanding is that it is possible to open a Panamanian bank account even if you’re not a resident of Panama.  The fun part though is that you still get to pay taxes on any interest to the U.S. because, well, it’s the U.S.

Since we already tied up some of our money, I want to wait until the beginning of the year to go further with this.  But it might make sense for us to store most of our cash in a bank here instead of at a U.S. online bank.


Will the U.S. go to negative interest rates?  Who knows.  In 2010, the idea was considered, but it never went anywhere.  Even though President Trump is pushing for it, White House Economist Adviser, Larry Kudlow, contradicted Trump while criticizing Europe’s current situation:

“The Europe story – all this super easy money, zero and negative rates.  You know, if it was going to work, it would have worked.  And it’s not worked.”

 

If they did implement negative interest rates, would it fix anything or just create more problems?  Again, not in my wheelhouse – I’ll let the folks with all the power figure that one out.

 

But, if the rates do go negative, I want to be prepared.  And if there are opportunities, I want to be able to take advantage of them.  Even if something like this does happen, eventually it’ll just be a blip in the past for everyone and I don’t want to regret inaction.

The biggest opportunity I can envision for our situation would be another rental property.  Being rewarded for taking on debt isn’t something that happens too often.  Being rewarded for taking on a new investment… priceless.

If you’re planning to buy a new house or a new car, this can be a great position to be in (and I thought my 2.875% mortgage was good!).

If not, the incremental changes might be the best option to focus on.  For example, if you already have debt, your money’s probably going to be more valuable sending it that way.  After all, even if you have a low-interest rate, it’s still more expensive than it would be earning next to nothing on your savings (or having to pay to save!).

Another great option would be to refinance your debt if the numbers make sense.  If you have a higher interest loan like a mortgage, even the costs to do the refinance could likely still result in you coming out far ahead.

We live in an unusual time and this causes some folks to panic and possibly make the wrong decisions.  I think it’s important to know that no matter what the economy is doing, there are always opportunities to come out ahead.  You just need to pay attention to what’s going on and be ready to strike at the right time.

 

Do low and negative interest rates scare you or do you think we just need to adjust how we do things?

 

Thanks for reading!!

— Jim

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Do Low and Negative Interest Rates Scare You?
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12 thoughts on “Do Low and Negative Interest Rates Scare You?

  • September 17, 2019 at 9:08 am
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    How does a negative rate mortgage affect longer term housing prices? In one scenario it would be inflationary as it would provide an incentive to buy a home. Thinking this is a short term affect. On the other hand, I think it would be deflationary because the bank is offering to pay you to take a mortgage which makes me think they would prefer to pay you to take a loan to get their money out of deflationary cash and into a more stable real asset. Shorter term it would make real assets more stable, but longer term it will put deflationary pressure on housing prices. What do you think?

    Reply
    • September 17, 2019 at 4:15 pm
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      Hi Jerone – my understanding is that one of the biggest problems with negative rates is that people see this great opportunity and try to buy more home than they can afford. Eventually, a new housing bubble us created causing even more problems… we all know where those lead. So, yeah, I’d agree with that.

      Reply
  • September 17, 2019 at 12:10 pm
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    Negative interest rates sounds like one of those discussions we might have had after a night of college drinking. It seems to me that pushing the rope to get people to spend is not very productive – maybe there is something else holding people back. Like job security, overall debt, life stage, regulation, whatever.

    Nine years ago I refinanced with a 3.25% 5/5 mortgage, betting on a slow recovery. I won – the loan reset at 2.75%. Next reset is a year from now – I could win again, although the floor of the loan is 2.5%!!

    What scares me more is that negative rates make it even easier for governments to borrow – and both feds and states seem comfortable with being over-leveraged. At some point, they will be tempted to “seize” 401k and IRA assets, like Greece did a few years ago.

    Reply
    • September 17, 2019 at 4:21 pm
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      Yeah, it sounds like an easy solution to kick up things in the economy, but everything I read seems to point to it causing more problems toward the long-term.

      More importantly, I think we should have a night of excessive drinking to discuss this. What do you think? 😉

      Reply
  • September 17, 2019 at 4:16 pm
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    Great topic Jim! I wish I’d actually written this post!

    For me, I’ve had the opportunity to see what negative interest rates have done in Japan and it doesn’t look pretty. For example — you don’t see people buying a bunch of rental houses and getting rich. Quite the opposite really. Negative rates have pushed down investment returns to essentially nothing. Would you take on millions of dollars in debt to earn 0.25% on that investment? No? Probably not when you could earn more from a part-time job.

    Furthermore asset prices in Japan are at unprecedented lows. Japanese stocks are some of the cheapest in the world — many selling for less than book value.

    So yeah, I’m not really a fan of negative rates.

    Reply
    • September 17, 2019 at 4:51 pm
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      This does sound like a post that would make sense on your blog, Mr. Tako – you’d probably be able to drive in deeper than I did. Maybe you should write your own take on the topic?

      Great point on the investment returns being part of the equation. Hopefully, this never comes to fruition, but it’s a good mind exercise just to ponder what you would do and if you’d be prepared if it happened.

      Reply
  • September 18, 2019 at 11:20 am
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    Negative interest rates don’t scare me at all, because it most likely means we’re still in a deflationary environment. Keeping money in the bank at 0% or less is fine as long as prices are staying level or even going down.
    Let’s say I’m saving $1000 in the bank to replace my laptop when it dies, and the replacement would currently cost $1000. We’re in a negative interest rate environment, so after two years my savings is only $980. But the price of a new laptop has now dropped to $600. I’m a huge winner.
    Back when Quantitative Easing first started we were all thinking it would lead to massive IN-flation, and no one I know of truly foresaw that the combined impact of oil surpluses, technology-enabled price transparency, etc., would lead to so much worldwide DE-flation. But that’s what has happened. Many things are getting cheaper rather than more expensive.
    So in sum: the only time we should really fear zero or negative interest rates is in an inflationary environment, because then the purchasing power of our savings is being eroded. As long as prices of most things we need to buy are staying level or going down, low or negative rates are not a problem.

    Reply
  • September 18, 2019 at 1:14 pm
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    I like the Panamanian bank interest rate. 5% is good! Do you bank USD?
    I’m not too worried about the negative interest rate. We’re looking to refinance to get some money out to invest. Getting another rental is a great idea, but I can’t be a landlord anymore. It’s too much work and stress. I prefer to invest in RE crowdfunding and REITs now. They probably can do a better job than I can anyway.

    Reply
    • September 19, 2019 at 3:26 pm
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      Haha, I know you’re ready to throw in the towel on landlording. I definitely feel that way sometimes, too! I’m a fan of REITs and might look at expanding that as well depending on how things play out in the next year or so.

      Right now we’re strictly doing US banking but that might change in a few months to simplify a few things like paying rent and to take advantage of the better interest rates.

      Reply
  • September 22, 2019 at 7:21 am
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    Low interest rates in the short term do not concern me but longer term an unknown for the world economy and governments. My approach as a retired 55 year old American living in Canada is to take a little more risk and invest in high quality dividend payers. I can get a 4-6 percent divvy in high quality banks, utilities, telecoms etc. Canadian companies pay out higher divvies than their US counterparts, payout ratios are very reasonable and most of these companies are oligopolies. I get payed annually and look for steady capital gains over time. These companies are also listed on US stock exchanges.

    Reply
    • September 22, 2019 at 10:25 pm
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      I like that Michael! I think just laying attention and not having your head in the ground like sometimes happens to folks is half the battle. Then it’s just a matter of looking for good opportunities like you’re finding and taking action.

      Reply

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