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February 1, 2016 | Less than Zero

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


It was cute the way this blog lit up Friday when the Bank of Japan said it’ll diddle with negative rates. Lots of people believe it’s only a matter of time before RBC starts sending them a cheque every month because they’ve got a mortgage. Free money!

The news came only weeks after our own central banker boss Stephen Poloz gave a weird speech in which he said the Bank of Canada would, if the world went to hell, consider dropping its rate to as little as -0.5%. Reaction to that was just as rabid. It fed the meme among the over-extended and the moisters than interest’s a thing of the past which Boomers invented and is croaking along with them.

How can money pay or cost less than nothing?

Europe has been employing negative rates for a couple of years in order to fight deflation. So there have been negative-yield German bonds (they keep the money safe, for a small price) and negative-pay Danish savings accounts. Now Japan’s government bank will charge a tiny fee (starting in two weeks) for money that institutions move there for deposit.

There are three things worth understanding.

First, savers in Canada will never be charged for keeping their money in a bank (well, more than they already are). No interest below zero.

Second, your bank will never pay you to borrow. Lending rates will not go negative. They won’t hit zero, either. In fact, we’re likely at the bottom.

Third, if the Bank of Canada ever does drop its key rate (now at one-half of a percentage point) to zero or below, there’ll be nothing to celebrate. The economy will be diving into a recession with rapidly-mounting unemployment and a hit to the value of your real estate. Like in Japan – where rock-bottom rates (10-year mortgages have been 0.85%) and massive government stimulus, and now negative rates, have not reversed a 40% decline in house prices.

Negative rates only come with deflation, which is to inflation what Justin Bieber is to good music. Inflation raises asset values, prices and wages, and usually accompanies growth. Deflation sucks. Prices and salaries decline, real estate withers, people stop spending because things just get cheaper. Worse, debt gets harder to pay since it doesn’t reduce even though your ability to service it does. So in a country like Canuckistan, with house-horniness, high taxes and a populace pickled in historic debt, deflation’s the enemy. Only if it were approaching, would Poloz go neg.

There are lots of reasons this ain’t going to happen.

Actually we have an inflation problem at the moment, thanks to the dollar’s oil-induced decline. Negative rates would be the worst policy, driving the dollar down further, signalling economic crisis. Besides, who would buy Canadian bonds paying less than nothing? That means the T2 plan to run up $50 billion or so in new debt over the next few years would fizzle for lack of financing. No deficits, no infrastructure spending.

And in a few countries when negative rates have been toyed with – notably Sweden and Denmark – the experiment caused housing prices to spike even further as borrowers were relieved of discipline and a crashed currency allowed foreign investors to flood in. There are additional dangers. Negative rates would wound the banks, which (for better or worse) are the pillars of our economy. They’d trash borrower confidence and the encourage hoarding of cash. And the pall cast over the economy would chase away investment capital from a country where cash pays nothing.

So why would Poloz even suggest going minus?

Apart from being a drama queen, to encourage lending. In theory, it would penalize deposits that the chartered banks might leave with the central one. But in reality bankers would rather pay for safety than lend into a deflationary economic storm. In fact, there seems no evidence this wacky idea has succeeded anywhere yet.

At a time when the US has raised rates for the first time in a decade and will do so again in the months to come, when oil’s wildly volatile and we’ve embarked on a new tax-and-spend political escapade, this negative talk is, well, less than zero.

So, suck it up and pay your mortgage. No unicorns coming.

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February 1st, 2016

Posted In: The Greater Fool

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