Living with Negative Interest Rates

The negative interest rate environment means businesses must operate as if they were in a parallel universe.

This article was written by Tim Scala, President of TRCI.

Although we tend to forget it at times, financial markets are, for the most part, made up of humans expressing collective opinions about group behavior.

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This group concept also extends to our ability to adapt to changes and, over long enough time periods, a willingness to accept an odd, even abnormal environment, as simply business as usual.  As observers of financial markets, it’s often worthwhile to step back and examine the landscape as a way to determine how rational or irrational they are behaving…kind of a market reality check, if you will.

One indicator to which we tend to give significant weight is that of interest rates, both actual (nominal) and real (adjusted for inflation), and we’ve noticed that in several parts of the developed world, the latter, and more surprisingly, the former, have gone negative.  Economic stagnation and persistently lackluster prospects for growth have prompted several international central banks to engineer nominal rates to this level, testing the very limits of monetary policy.  And some believe the Fed, despite its announced desire to guide rates higher, may join them.

While such conditions are clearly unsustainable, businesses navigating through a negative interest rate environment are forced to suppress their natural instincts and operate as if they were in a parallel universe.  Indeed, the implications for even the most basic of businesses can be far-reaching.


(The following conversation was overheard at a local social club)

Lou:  Son, I’m getting too old to run the family business, so I’m going to teach it to you and you can be the boss.

Son:  Papa, I want to be an architect, not a loan shark.

Lou: How many times have I told you, I’m just like a finance company, only there’s no red-tape and no discrimination.  I approve everybody -immediately.  Besides, I want to see what kind of a return I’ll get on that fancy business school of yours that cost me an arm and a leg – not mine, thank goodness.

Son:  Well, things have changed and I’m not sure your old business practices work anymore.

Lou: What are you talking about?

Son:  It’s the new trend in financial markets.  It’s called ‘Negative Interest’. You have to pay people to borrow from you now.

Lou:  What!?

Son:  Yes.  Today, people get paid for borrowing money.

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Lou:  Who pays them?

Son:  Whoever lends them the money.

Lou:  Me!?

Son:  Yes.

Lou:  You mean, if I lend some mark 10 big ones on Monday, I don‘t get my usual 12 back on Friday?

Son: No, you only get 9Gs back.

Lou:  I break a guy’s legs for that!

Son:  Look, don’t get me wrong.  You can still put the hurt on a guy, only now you hurt him if he squeezes you – if his vig is too high.  For example, if he wants more than a grand for you to lend him the money, then you bust him up.

Lou: I got to be honest with you; I’ve never been squeezed like that before. Neither have any of your relatives.

Son:  Look Dad, you’d better get with the times here.  Negative interest is the wave of the future.

Lou:  You know son, I’m beginning to think that being an architect might be the way to go after all.

Looking at negative rates this way, it’s easy to see how irrational the current financial climate is.  One might even go as far as to use the word bizarre.


But we can understand just how we’ve reached such an unusual place.  It happens when a given government reaches a dysfunctional stage and ignores unsustainable economic and fiscal policy, something that is happening, not only in the US, but throughout the world.   This happens when political choices overtake economic ones.  Rather than behave responsibly through a sane fiscal policy, governments instead choose to manipulate monetary policy, even to the point of irrationality, because it simply doesn’t have the will to act appropriately.

It seems obvious that we are in just such an unsustainable environment.  Just ask Lou.


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