Negative Rates Are Coming to the UK and How to Protect Your Savings

Negative Rates Are Coming to the UK and How to Protect Your Savings

Daniel Lacalle 11/02/2021 5
Negative Rates Are Coming to the UK and How to Protect Your Savings

Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists who start from a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.

Inflation and growth are not low due to excess savings, but because of excess debt, perpetuating overcapacity with low rates and high liquidity and zombifying the economy by subsidizing the low productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.

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Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it, they do not strengthen the credit capacity of families, because the prices of non-replicable assets (real estate, etc.) skyrocket because of monetary excess, and the lower cost of debt does not compensate for the greater risk.

Investment and credit growth are not subdued because economic agents are ignorant or saving too much, but because they don’t have amnesia. Families and businesses are more cautious in their investment and spending decisions because they perceive, correctly, that the reality of the economy they see each day does not correspond to the cost and the quantity of money.

It is completely incorrect to think that families and businesses are not investing or spending. They are only spending less than what central planners would want. However, that is not a mistake from the private sector side, but a typical case of central planners’ misguided estimates, that come from using 2001-2007 as “base case” of investment and credit demand instead of what those years really were: a bubble.

The argument of the central planners is based on an inconsistency: That rates are negative because markets demand them, not because they are imposed by the central bank. If that were the case, why don’t they let rates float freely if the result was going to be the same? Because it is false.

Think for a moment what type of investment, company or financial decision is one that is profitable with rates at -0.5% but unviable with rates at 1%. A time bomb. It is no surprise that investment in bubble-prone sectors are rising with negative rates and non-replicable and financial assets skyrocket.

Public debt trades at artificially low yields and, instead of strengthening economies, negative rates make governments more dependent on cheap debt. Politicians abandon any reformist impulse and prefer to accumulate more debt.

The financial repression of central banks begins with a misdiagnosis, assuming that low growth and below-target inflation is a problem of demand, not of the previous excess, and ends up perpetuating the bubbles that they sought to solve.

The policy of negative types can only be defended by people who have never invested or created a job because no one that has worked in the real economy can believe that financial repression will lead economic agents to take much more credit and strengthen the economy.

Negative rates are a huge transfer of wealth from savers and real wages to the government and the indebted. A tax on caution. The destruction of the perception of risk that always benefits the most reckless. The bailout of the inefficient.

Central banks ignore the effects of demography, technology and competition on inflation and growth of consumption, credit, and investment, and with the wrong policies generate new bubbles that become more dangerous than the previous ones. The next bubble is to increase again the fiscal imbalances of the countries. Even worse. When central banks present themselves as the agent that will reverse the effect of technology and demographics, they create a greater risk and bubble.

Protect your savings with gold, silver, inflation-linked instruments and stocks in sectors that do not suffer from negative rates.

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  • Murray Wright

    No way !!!! :(

  • Alex Niles

    I am holding my cash and buying some gold.

  • Rosie Palmer

    A very concise and clear explanation. Protect savers at all cost.

  • Brian Sutherland

    GBP had a positive rally that will be ruined

  • Mick Williams

    Nobody is setting more money aside then the rich people

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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