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Negative interest rates are possible

Updated: May 3, 2013 12:15PM

Q. Pardon me if this is a dumb question, but just how low can interest rates go? I’m barely earning anything on my CDs.
And how long can this situation last?

A. That is not a “dumb” question. In fact, it’s on the minds of traders around the globe. The very simple answer is that interest rates could go negative! As unlikely as that sounds, there is precedent for negative interest rates.

And I can anticipate your next question. Yes, that means you would actually be paying the bank to hold your money.

That has happened before, primarily when those who have investment capital are fearful that it will not be returned if they leave it in their own currency. The owners of that money are willing to pay for a “safe haven” for their money.

It happened in Switzerland in the 1970s — when global fears of inflation sent money running to the presumed safety of Swiss banks and the Swiss franc. At one point, deposits in Swiss banks were paying a negative 0.4 percent! (That, of course, was before the Euro.) And still, money came flooding into Swiss banks.

Zero interest rates happened briefly in Japan in the late 1990s, when savers there were so afraid of the stock market, which had collapsed, that they insisted on putting their money in the bank, even at a negative interest rate. In Sweden, in 2009, in the midst of the financial crisis, their central bank actually cut the deposit rate to a negative 0.25 percent.

In the past few weeks, central banks of Germany, the Netherlands, and Belgium have actually sold government securities with slightly negative interest rates. There was demand for these securities despite the rates, because of the perceived security compared to the euro.

And, with foreign money rushing to the perceived safety of the U.S. dollar, some recent U.S. Treasury auctions of TIPS — zero coupon Treasury notes that protect against inflation — have already been sold with slightly negative yields.

So, yes, zero interest rates are a possibility in the United States — and may even become a policy tool of the Fed. You might be interested to know that some economists are discussing the possibility of negative interest rates — a “tax on money” — as a way of pushing money out of the banks and into investments that might otherwise benefit the economy. The Fed’s current low-rate policy hasn’t worked yet, and some think negative rates may do the job.

So, where does that leave you — the saver who planned to live on interest income?

This is where self-discipline comes in. The search for higher yields absolutely means you incur more risk. For example, you could buy dividend-paying stocks that yield far more than the 0.1 percent on 3-month Treasury bills. But stock prices can fall — especially in a slowing economy. You could buy insurance products that offer higher yields — but also have penalties to access your money if you need it. You could buy bonds with higher yields — but find yourself locked in to low rates if inflation returns.

It’s tough, but leaving your money in insured deposits that pay nearly no interest may be the only answer for those who need financial security. This is no time to chicken out on your “chicken money.” That’s The Savage Truth.

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