The Death of Savings

“Never believe anything in politics until it has been officially denied,” said Germany’s Otto von Bismarck.

I thought of the Iron Chancellor’s old comment – from the 1870s – when I recently heard Jay Powell, Chairman of the U.S. Federal Reserve (Fed), insist that negative interest rates won’t come to America.

“I do not think we’d be looking at using negative rates,” said Powell. “I just don’t think those will be at the top of our list,” he added, according to CNBC.1

Channeling Chancellor Bismarck, the Fed’s denial is now official.

Stand by for financial shocks that will upturn your world.

One implication of negative rates is that the ancient and honorable idea of saving money is on its deathbed. You will have to adapt, as I’ll explain below. First, here’s what’s going on…

With his “official denial” of negative rates, Powell deflected a monetary and political issue that has already hit home in much of the rest of the world. If you’re not sure about the term, “negative interest rates” are exactly what they sound like.

Let’s back up. If you came of age in America of old, you probably learned the importance of saving money. Perhaps a parent took you down to a bank as a child, and smiled as you set up an account. Maybe you deposited your birthday money, or newspaper route earnings (remember newspaper routes?). Or you had a part-time job in high school and opened an account to clear the paycheck.

Saving money is part of American culture; or at least, used to be. Recall Ben Franklin’s famous quip, that “A penny saved is a penny earned.” (For purists, Franklin didn’t phrase it exactly this way; he wrote “A penny saved is a penny got.”)

Likely, you grew up to believe in the importance of saving for the future. Defer current spending to build up a stash. You’ll be around for a while, and you believe that you’ll need those funds for some rainy day, so to speak. Point is, you deposit money into the bank.

Point is, you deposit money into the bank. Over time, the bank pays interest on the deposit. The idea is that you have a claim on the original deposits, plus interest as calculated by the interest rate over time.

Put in $100, for example, at 3% interest. A year later, you have $103. Let it ride, and it compounds over time. Ben Franklin’s point in action… Seems pretty basic.

But now we get to the present situation, with negative rates. Instead of the bank paying you, you pay the bank. That’s the long and short of it…

Deposit $100, for example. A year later, your claim against the bank is down to $99. The bank has charged you a dollar for the “privilege” of holding your $100 in funds for a year. And next year, it’ll be something like $98. Et cetera…

Your savings shrink. What kind of system is this? People “pay” the bank to hold their money? Who is crazy enough to deal with a rip-off system like that?

Country Chart Well, 19 European countries currently have negative interest rate policies.

The list includes well-respected global economies; Switzerland, Germany, France… and of course many other members of the European Union.

It’s not just Europe, either. Japan has gone negative. The Bank of Japan recently posted its key short-term interest rate at -0.1%.

It gets back to the reason why Fed Chairman Powell discussed negative rates. Economically significant nations across the globe have made the plunge, so when will the U.S. Fed do it?

Per CNBC, “Powell said the Fed entertained the idea of negative interest rates during the financial crisis, but opted against it. Instead, the central bank used a lot of aggressive forward guidance and large scale asset purchases.”

In other words, no negative rates… Or, “Not yet,” as Bismarck might have said.

Meanwhile, more than $17 trillion (yes, “trillion”) of foreign government bonds currently trade at negative yields. That’s nearly the size of the U.S. gross domestic product (GDP).

Clearly, people and institutions across the world are buying foreign bonds with the absolute assurance that they will never recover 100% of the principal. It’s guaranteed that they’ll get back less come maturity. Why?

The implied “promise” of bonds – even at negative yield – is that buyers will get back something, versus nothing. And that goes to the issue of motive in buying into negative yield. That is, people are worried about the future; worried about losing everything.

In particular, across the world there’s deep-seated concern with the future of “growth” in economies. The global growth-model is broken; perhaps even nearing its end.

Every day, monetary policymakers scramble to deal with slowing and declining economic indicators. Bankers have been lowering interest rates, hoping somehow to stimulate economic activity.

But the world has had low rates (even zero-rates) for about ten years, since the Crash of 2008.

Low/Zero… and economic activity didn’t pick up. Notice anything wrong here?

At 2% or 1%, money was cheap; but economies didn’t make traction. Indeed, at zero-rate, money was “free” and most of the world’s economies still remained stalled.

It’s fair to ask… If “zero”-rates didn’t work, why do policymakers think that economic activity will benefit from negative rates?

Negative rates kill economic activity; they don’t stimulate it. Negative rates devour people’s savings. By definition, it costs money to “save,” and hence negative rates destroy capital.

That’s crazy; very Vietnam, in fact… “Burn down the village to save it,” and all that.

If a person or business can’t make money at low rates, if not zero, then perhaps a more realistic assessment is that the economy-stimulating game of monetarism is up.

Another way to say it is that for a multitude of reasons – such as mountains of unpayable debt across the world – there’s no significant, new, large-scale business effort worth borrowing money to pursue.

The 100-year long, monetarist “growth”-game is over. There’s no serious, macro-growth ahead. So, people and businesses have begun parking funds in banks or bonds, even at low yield. Now, along comes the “negative interest” money-grab. It’s literally a loser’s game.

As you might expect, people are bailing from foreign currencies where rates are negative. We’ve experienced a big move into U.S. dollars. All that new foreign money has strengthened the dollar.

Meanwhile, as 2019 has unfolded, the price of gold has hit new highs in foreign currencies; 73 currencies in fact, per the following chart.

Gold Chart

Don’t be misled though. The dollar has strengthened because it’s the cleanest dirty shirt in the laundromat of world currencies. Which gets us back to the “death of savings.”

There’s an old Chinese saying… “An inch of gold and an inch of time are both valuable. But even an inch of gold cannot buy back an inch of time.”

In other words, time is valuable. We see it when people devote time to a job and get paid for their hours. It’s similar with money. Save money over time and earn (yes, the term is “earn”) interest. With savings, you forego consumption and earn a return called interest.

Along these lines, savings are beneficial to an economy. Savings form the capital base that allows banks to lend funds to others, who in turn pay interest on the loan. It’s the credit cycle, working within a business cycle.

Traditionally, savings and interest are a key means by which money finds its highest and best use. Ideally, market demand for funds blazes a path to determine the best returns for any set of investments.

Money moves into all manner of things; home loans, car loans, industrial loans, development loans, corporate and government bonds. Even loan sharking, after a fashion; if you need money in a hurry, you’ll pay a serious premium for it.

But now, we see negative rates. The economic model has crashed.

What kind of nutty economy is it, in which you save funds only to lose a whack? You’re not saving; you’re just losing it slowly!

With negative rates the underlying idea of earning interest is gone. Negative rates punish people for frugality and forbearance. Formerly, not spending was a worthy act; now, the money you save comes back out of your hide.

We’re looking at post-modern nihilism; no future, just a desperate present. Burn it now, or we’ll burn it for you.  In the process, there’s no finding any “highest and best use” for money anymore.

There are glimmers of hope, though. The world is still filled with people who remain hard-wired to save. Somehow or another, people will find ways around the current system when they realize how rigged it is.

We already see a flight to gold.  As noted above, gold prices have set records in many foreign currencies.  At $1,500 over most of the past summer, gold is doing quite well in U.S. dollars.

Still, we can’t escape the fact that negative rates destroy the concept of time-value as part of any overall business or lifestyle model. In other words, the current system is signaling that “time is money” is no longer valid. But we already see pushback.

Something has to give, and it won’t be time; it’ll be the corrupt monetary system.

I suspect we’re witness to an end-state of the century-long government monopoly on money. With negative rates, the idea of a government monopoly on money is discredited.

Upheaval is just over the horizon. On your end, as a Whiskey reader, what can you do? Keep saving, to be sure. Don’t give up the ship…  And seek safe yield where possible. But place some of those savings into physical gold; 5 – 10% of your nest egg is the usual advice.

When the global monetary reset occurs – “when” and not if – gold will come out with a new level of value. It’ll preserve wealth during the tough times yet to come.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder

1 Powell doesn’t see the Fed ever using negative interest rates, even in times of crisis, CNBC

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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