We are now officially in the economic “Twilight Zone” (que the music)!
Buy a house. Take out mortgage on your house and the bank actually pays you interest instead of the other way around? Yup, it is very possible!
Before you think I have gone absolutely bonkers here, let me elaborate.
To begin, check out this recent Financial Post article.
I like this specifically:
“That’s a departure from 2009, when the bank said its theoretical lowest-possible interest rate was 0.25 per cent because to go lower would have been incompatible with certain financial markets, such as money-market funds.”
“The bank is now confident that Canadian financial markets could also function in a negative interest rate environment,” Poloz said.
Correct me if I am wrong here, but if I was a Canadian bank faced with negative interest rates why would I ever agree to this?
I would either:
i) Find another sovereign nation with positive rates to hold my funds, which is very simple and can be done at a push of a button in today’s electronic and global economic world (one likely scenario), or
ii) I could deploy and lend the cash at nearly peanuts interest rates (unlikely, yet this is what central bankers are hoping for as a way of attempting to stimulate the economy), or
iii) I could use the funds in excess of regulated minimum capital requirements to buy back their own common stock, positively manipulate their earnings but by doing so no stimulation of the economy would occur!
Choose your own adventure!
Still think I am bonkers? Then stay with me here a while longer…
For a glimpse of what possible impact negative interest rates can have if implemented here at home in Canada, you will find the recent Wall Street Journal article below is very enlightening.
This is not some outlandish economic theory or economist that are high on some illicit substances talking. This is what is actually happening in some European countries TODAY!
Crazy “Bizarro World” economics are happening in some European countries where borrowers are the ones who earn interest and actually get paid by their lenders. While at the same time savers actually end up paying interest and fees to banks when depositing cash into their savings account!
All this talk about increasing interest rates in any material way whatsoever in the US, and North American in general, is just a bunch of hogwash!
Investment ideas in this environment:
1) Buy income producing assets, like rental real estate properties (my own personal favourite)
2) Buy precious metals
3) Buy hard assets, especially those that tend to appreciate in value, like land
and lest we forget…
4) Mattresses! To hold your cash under, of course! Since you would lose money if you were to deposit it into your bank accounts! (Aside: Mattress sales will go through the roof!)
As for the common wisdom “power of compounding interest as a path to financial freedom”, you can now find these publications in the dumpster of book stores and libraries near you!
You definitely do not want to keep any money in the banks in this type of environment as you will keep on losing your money each and every day!
Who knew that the new bank robbers of the new millennium would be the actual banks themselves!
Crazy and wacky times indeed!