Negative Interest Rates are Here — Could They Hit the U.S.?

Negative Interest Rates are Here — Could They Hit the U.S.?


Welcome to the
Motley Fool’s Bottom Line series! In this video, we’re breaking down negative
interest rates, and why they’re seemingly popping up in major
economies across the globe. First off, let’s talk about
what a negative interest rate is. With standard behavior and normal interest rates,
if you put money in the bank in a savings account, the bank pays you a small fee or
interest for making that money available to them. Negative interest rates
work in the opposite way. With a negative interest rate, you’d have
to pay a bank to keep money in a savings account. But if you borrow money from the bank
at a negative interest rate — let’s say to buy a house — you would actually end up paying
back less than you borrowed to buy the home. It seems crazy because it’s
so different than what we’re used to. Negative interest rates
were unheard of prior to 2012. Currently, they make up roughly 45%
of all non-U.S. bonds around the world. In some countries, negative interest rates
have trickled down to corporate bonds, and even consumer
debts like mortgages. Even some U.S.-based companies, including
Apple and Microsoft, have issued foreign-denominated bonds with negative yields.
Why exactly do negative interest rates happen? Just like when interest rates are lowered
in the U.S., negative interest rates are a form of economic stimulus. Generally speaking, the lower interest rates are,
the easier it is for money to flow through an economy. Negative interest rates penalize banks for
keeping too much money in reserves and central banks and encourage them to make loans.
They also encourage consumers to borrow money. After all, if you could get a $20,000 loan
and have to pay back just $19,000, doesn’t that sound tempting? What do negative rates mean
to consumers and the economy? On the surface, negative interest rates may
sound like a good thing, at least for consumers. Imagine being able to buy a home, and the
bank pays you interest each month. But negative interest rates can
be a big sign of economic trouble. Usually, central banks and organizations only
resort to this kind of thing if they desperately need to stimulate the economy. Negative interest rates can also produce high
inflation, as cash today would literally be worth more than cash tomorrow. With negative interest rates showing up in economies
like Germany, a lot of people are wondering, could negative
interest rates happen in the U.S.? To be clear, even after the recent collapse
in bond yields, the U.S. is a long way from negative interest rates. Right now, the 10-year Treasury yield is at about 1.8%,
and the 30-year Treasury yield is around 2.3%. Consumer interest rates like mortgages, although
at historic lows, are also well into positive territory. But negative interest rates
in the U.S. are certainly possible. The trade war between the U.S. and China has
created recession fears, and if President Trump had his way, the Federal Reserve would
dramatically cut the federal funds rate now. If the U.S. enters a full-blown recession
and interest rates are already low, it’s entirely possible that negative interest rates could
be a form of stimulus that is used to boost the economy, but it’s the kind of
thing that won’t happen overnight. There would be plenty of other movements
along the way to signal financial distress. With where interest rates are now, they still
have a decent amount of room to be lowered to provide the easy money that
can help revive a struggling economy. Thanks for watching this video! Do you think the U.S. is headed
toward negative interest rates? Let us know in the comments below. If you liked this video, be sure to press
the thumbs up button and click subscribe. It helps us reach more people, which allows
us to make more awesome content.

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About the Author: Maximilian Kuhn

14 Comments

  1. Who is getting these negative rate loans in the world? It just doesn't make sense to me. What's to keep someone from getting the sweetheart loan and just turning around the minute they get it and paying it off? Anyone? Anyone?

  2. Negative interest rates are certainly strange, raising questions like why an investor wouldn't just hold physical cash in a vault, depending on how negative the rate is and the cost of storage. Or invest in a country with stable currency and positive interest rates, maybe with an exchange rate hedge.

  3. Of course a recession is coming.
    They always have and will.
    Predicting when is obviously the tricky part.
    Negative interest rates are likely in my opinion.

  4. I think it would be great if we put a negative interest rate on the US National debt! It would act like a channel changer to stop the flow of all that interest money from ALL the US taxpayers to the owners of the debt. Talk about stimulation.

  5. Negative interest rates create another bubble and hardly reversible. Why would someone buy bonds while there's negative rates.

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