Negative Interest Rates Explained
In September of 2016, three years ago, Barack Obama was still America’s President. The 2016 election would not happen for another month and a half. At that time the Fed had just, once again, failed to raise interest rates, as I had publicly predicted. So I made a video, posting it online, to explain what was happening. In the video I speculated that unless the banks that control Fed policy simply decided to shuck it all, in other words, decided to knowingly allow the mother of all recessions by returning to normal interest rates, incidentally producing the largest wealth transfer in American history, rates would never raise again...ever. As it turns out, I was right. Although the Fed tried, it must now reverse itself.
At that time the world was anticipating Hillary Clinton to win, in which case any economic reset could count on cover from Hillary, perhaps in the form of a major conflict in the Middle East, or another geopolitical event, to blame a stock market crash on. That would be an alternative.
But as I also related in the video, America still had one chance at survival. And that would be to elect Donald Trump as President. As much as I had studied the money system I write about so often, I could see in his words and actions that Trump understood the problem and would be the only person who could, or really would fix it. Even so, I said it would be a bumpy ride.
A month and a half later, the election of Trump, surprising to many, changed the equation. No longer could the financial elite count on a major geopolitical event as cover to reset the system. Trump would never go along with that. And soon after taking office, Trump revised long-standing economic policies. He revitalized major industries lost for decades to bureaucratic regulation. He pushed and America become energy independent. And very importantly, Trump began repatriating foreign-held dollars into the US economy, while keeping domestic dollars from leaving, imposing significant tariffs on Chinese imports. In effect, Trump’s policies placed a tourniquet on the bleeding.
The American economy would begin to take off. So what did the Fed do to stop him? Shortly after Trump won, and before he even took office, despite Trump's public objections, in December of 2016 the Fed began a program of raising rates. For the next two years, during each quarterly meeting the Fed announced upward stair-stepping of rates eight times, from 0.5% to 2.5%.
With each quarterly announcement came a significant stock market loss. The meteoric ascension of the markets began to bend horizontal. But miraculously, Trump policies kept the economy strong. Each time the markets plunged, they would soon recover. As I write, the markets are on the verge of eclipsing the Trump highs set during July.
But notice, as Trump keeps overcoming each financial headwind raging at the U.S. economy, the economy keeps growing. Unemployment keeps diminishing. The markets, finally trading somewhat on fundamentals rather than tricks, keep rising. The same cannot be said, however, about China, or Europe. Both of those economies are suffering. Why? Because President Trump’s policies are sucking the economic oxygen out of the world economy. China and the European Central Bank are printing money, devaluing their currencies with respect to dollars, just to stay afloat.
China is an export-based economy. China’s central bank redeems dollars it receives from Chinese exporters, and exchanges them for yuan to enter the Chinese economy. But after Trump’s tariffs are deducted from its export revenues, the Chinese economy realizes less and less real profit. As a result, since Trump’s tariffs took effect, it takes more yuan per dollar of export revenue to keep paying Chinese bills and honor contracts. To deal with the loss in revenue, China has devalued its currency to make up the difference. That way they still issue the same number of yuan, but base them on less dollar profit than before. That difference in Chinese profits, therefore, remains in the U.S. That difference profits America, where it is used to build our economy and pay for infrastructure.
The ECB, on the other hand, has begun a different route to the same purpose. They just announced a first round of radically-desperate measures, "negative interest rates." That’s hard to wrap your mind around, isn’t it? What that means is that EU governments, all of which issue debt to finance operations, will be paid more than face value for the debt they issue. It also helps corporations that debt finance. Negative rates operate as if the government and corporations are loaning the money themselves and receiving interest as a result. Imagine being paid to borrow money. Sound pretty ridiculous? You bet.
What we have here are desperate measures by desperate people. Truth is, the western central banking system is broke, a house of cards. And Trump is removing any visible means of support under it. The ECB is now forced into negative interest rates just to keep EU member treasuries paying their bills, which helps to keep their cash-strapped economies afloat.
One adverse effect all that has on American industry is that it makes U.S. exports more expensive. And that is one reason Trump has told the Fed it should do the same thing, go negative. Imagine the U.S. Government receiving interest on the dollars it borrows. Just think, if Trump did that long enough, he could pay off the national debt. What did I just say?
At that time the world was anticipating Hillary Clinton to win, in which case any economic reset could count on cover from Hillary, perhaps in the form of a major conflict in the Middle East, or another geopolitical event, to blame a stock market crash on. That would be an alternative.
But as I also related in the video, America still had one chance at survival. And that would be to elect Donald Trump as President. As much as I had studied the money system I write about so often, I could see in his words and actions that Trump understood the problem and would be the only person who could, or really would fix it. Even so, I said it would be a bumpy ride.
A month and a half later, the election of Trump, surprising to many, changed the equation. No longer could the financial elite count on a major geopolitical event as cover to reset the system. Trump would never go along with that. And soon after taking office, Trump revised long-standing economic policies. He revitalized major industries lost for decades to bureaucratic regulation. He pushed and America become energy independent. And very importantly, Trump began repatriating foreign-held dollars into the US economy, while keeping domestic dollars from leaving, imposing significant tariffs on Chinese imports. In effect, Trump’s policies placed a tourniquet on the bleeding.
The American economy would begin to take off. So what did the Fed do to stop him? Shortly after Trump won, and before he even took office, despite Trump's public objections, in December of 2016 the Fed began a program of raising rates. For the next two years, during each quarterly meeting the Fed announced upward stair-stepping of rates eight times, from 0.5% to 2.5%.
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| Election of Trump Brought About Entirely New Fed Policy of Raising Interest Rates |
With each quarterly announcement came a significant stock market loss. The meteoric ascension of the markets began to bend horizontal. But miraculously, Trump policies kept the economy strong. Each time the markets plunged, they would soon recover. As I write, the markets are on the verge of eclipsing the Trump highs set during July.
But notice, as Trump keeps overcoming each financial headwind raging at the U.S. economy, the economy keeps growing. Unemployment keeps diminishing. The markets, finally trading somewhat on fundamentals rather than tricks, keep rising. The same cannot be said, however, about China, or Europe. Both of those economies are suffering. Why? Because President Trump’s policies are sucking the economic oxygen out of the world economy. China and the European Central Bank are printing money, devaluing their currencies with respect to dollars, just to stay afloat.
China is an export-based economy. China’s central bank redeems dollars it receives from Chinese exporters, and exchanges them for yuan to enter the Chinese economy. But after Trump’s tariffs are deducted from its export revenues, the Chinese economy realizes less and less real profit. As a result, since Trump’s tariffs took effect, it takes more yuan per dollar of export revenue to keep paying Chinese bills and honor contracts. To deal with the loss in revenue, China has devalued its currency to make up the difference. That way they still issue the same number of yuan, but base them on less dollar profit than before. That difference in Chinese profits, therefore, remains in the U.S. That difference profits America, where it is used to build our economy and pay for infrastructure.
The ECB, on the other hand, has begun a different route to the same purpose. They just announced a first round of radically-desperate measures, "negative interest rates." That’s hard to wrap your mind around, isn’t it? What that means is that EU governments, all of which issue debt to finance operations, will be paid more than face value for the debt they issue. It also helps corporations that debt finance. Negative rates operate as if the government and corporations are loaning the money themselves and receiving interest as a result. Imagine being paid to borrow money. Sound pretty ridiculous? You bet.
What we have here are desperate measures by desperate people. Truth is, the western central banking system is broke, a house of cards. And Trump is removing any visible means of support under it. The ECB is now forced into negative interest rates just to keep EU member treasuries paying their bills, which helps to keep their cash-strapped economies afloat.
One adverse effect all that has on American industry is that it makes U.S. exports more expensive. And that is one reason Trump has told the Fed it should do the same thing, go negative. Imagine the U.S. Government receiving interest on the dollars it borrows. Just think, if Trump did that long enough, he could pay off the national debt. What did I just say?
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