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September 20, 2019 | Negative Rates Erode the Base on Which the Financial System Depends

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Hard assets like gold and silver bullion have always been negative-yielding once owners pay for insurance and storage. Real estate is often negative-yielding when it does not generate income sufficient to pay for its carrying costs. Stocks and corporate bonds are always at risk of negative yields when their value can fall more than any income received in dividends and interest.

Cash equivalents and government treasuries are supposed to be the only assets guaranteed to generate some income while ensuring the return of principal over the holding period.

Today the infliction by central banks of negative policy rates in the banking system not only thwarts the risk-free presumptions upon which all capital markets are priced but works to drive cash out of the banking system completely.  This reduces bread and butter spread profits for financial intermediaries but also works to erode the base capital on which the entire banking system depends.  In short, self-defeating.  This clip offers a simple, effective explanation of negative rates.

CNBC’s Geoff Cutmore explains the consequences of negative interest rates for banks and savers.  Here is a direct video link.

Here’s how negative rates impact banks, savers and the economy from CNBC.

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September 20th, 2019

Posted In: Juggling Dynamite

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