The United States is in a negative interest rate environment. Bank accounts essentially pay zero interest but price inflation is at a minimum 2.2%. That is if you believe the CPI.
I don’t know what the actual rate of price inflation is, however, I think it is rather closer to 5% than 2.2%.
If the CPI were calculated the same way it was in 1990 it would be 6%.
I like to save tweets like this for posterity
The tweetist above is wrong about us not being in a negative interest rate environment. Are nominal interest rates negative? Basic math tells us of course not.
Are real interest rates negative? Definitely. Real interest rates are what matter. If the rate of inflation is greater than the rate of interest paid then real interest rates are negative. This is the situation we find ourselves in.
While we are already in a negative real interest rate environment I do think there is a good chance that we will see overtly negative interest rates in the future in the US. If the Federal Reserve starts buying bonds again, the price of bonds in dollar terms will go up and yields will drop, as anyone who knows anything about bonds knows.
However, bonds are paid in dollars and if the Fed were to restart Quantitative Easing what would that eventually do to consumer prices? Would the market wake up and realize the Fed can never shrink it’s balance sheet? What would that do to the value of the dollars the bonds are claims on?
Buying the 10 year right now would be a winning trade in dollar terms if the Federal Reserve adopts negative interest rates but I think the dollar would tank.
The Fed is raising interest rates. So bond prices naturally fall as yields rise. Does it make sense to buy bonds in a tightening cycle? No.
And if you think everything is fine and you believe the CPI then you wouldn’t want to own bonds anyway since they pay a very small yield relative to the official rate of price inflation.
In my view treasuries are reward free risk and I see no point in owning them.
I’ve written about negative rates (potentially) coming to the US and the importance of holding cash. I personally hold about 1 month’s worth of expenses in physical cash stored in a secure location outside of the banking system.
Why would I do this when I know that Inflation Destroys Dollars and that in the long term the value of fiat currencies goes to zero? When I’ve written articles like the above and Downfall of the US Dollar you know I’m not a fan of paper currencies.
Two main reasons why I want some cash:
1) If the US adopts negative rates that means that banks will take interest out of your account. Instead of gaining a fraction of a percent of interest on your bank deposit like you get today (if you get anything) you’ll lose a fraction of a percent of your money on a regular basis.
2) Banks might impose capital controls, you’ll only be able withdraw a certain amount of money (if anything) from your bank account in the form of cash. That’s because the natural response when a bank imposed negative rates is to withdraw cash to avoid having your money taken.
Keep in mind that cash is just one tool in the toolbox. There are other important tools as well.
Tools like precious metals, cryptocurrencies (even though I’m a bit skeptical of this tech as investment pun intended), value stocks, real estate, options, the list goes on.
So would I want to be 100% in cash? No way. Bad idea. I’ve never said that or done that.
I reside in the US so I think in terms of dollars, but there are a variety of countries where I think holding physical cash would be a good idea. Negative rates have already come to Japan and parts of Europe.
Keeping a months worth of income in physical cash is something I’ve determined is a great way for me to protect my wealth, but it’s not all I’m doing.
In fact my physical cash holding is a small percentage of what I do. I withdrew some cash in $20’s (larger bills like the $50 and $100 are not right for me since some places won’t take them) over a period of time and I don’t think about it anymore (except to write some articles).
Holding cash is a defensive strategy that I do just to be able to buy gas and groceries in the event of negative interest rates, capital controls or natural disasters.