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We are In an Negative Interest Rate Environment

We are In an Negative Interest Rate Environment

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.