Negative Rates: Not a probability but a possibility

July 7th, 2020 | Anuj Shahani

I’m a contrarian at heart, and every time I hear a mention of negative rates in the U.S., a number of folks jump up and down saying it can never happen, but we need to take note. As explained by Black Swan author Nassim Taleb, it tends to be these “surprise” events that shock most. My objective is not to suggest that negative rates will happen in the U.S. tomorrow or in the very near-term, but to explore the possibility that we may experience negative interest rates, and what this means for us personally and for our businesses.

There are a growing number of voices recommending negative rates. From ex-president of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, to billionaire and hedge fund manager Ray Dalio, to Goldman Sachs. The range of economists/market commentators is varied. A lot has changed as a result of this pandemic and a lot more will change before we have this “event” behind us. I urge you to consider and prepare for possibilities that are outside our typical consideration set. Modern Monetary Theory (MMT) suggests a playbook that involves running extremely large deficits and negative interest rates and has been implemented by Japan and some European nations already. Opinions on if these are “successful” vary and depend on your vantage point. Needless to say, this is something that has been tried and has been in play for over 20 years, especially in the case of Japan.

Why Now?

Debt has reached levels that require the U.S. to make exceptionally hard choices, should we choose to reduce these deficits. We need to increase taxes beyond anything that anyone has proposed to date and/or cut government spending more drastically than any nation has ever been able to. Neither of these options sounds very doable.

COVID-19 is a spending problem

The pandemic has increased the savings rate in the U.S. to historic levels. Consumer spending had increased in May, but early readings from June suggest it may be dropping again due to pent-up demand from March and April. Also, the extra $600 in stimulus from the government was likely a factor.

Unemployment numbers were starting to paint a rosy outlook, but the recent rise in COVID-19 infections suggests employment will likely be a slow recovery at best. Hopefully, we will not experience another wave of layoffs: a strong possibility in the case of a large second wave. The un- and under-employment has caused a lot of pain on Main Street and the Fed has, rightly, stepped in to offset a lot of this pain by cranking up Quantitative Easing (QE) and taking on Yield Curve Control (YCC). I don’t claim to fully understand the side effects these actions will cause down the road, but I do believe that there is no ‘free lunch’ in life, and we’ll pay one way or another for all of this money creation.


The Bank of Japan (BOJ) has now kept rates at or near zero for 20+ years, which started with a couple of QE-like programs. Other kinds of stimulus failed, deflation stayed relentless, and negative rates seem to be the working solution. According to the IMF, Japan’s debt-to-GDP sits at around 230% as compared to 108% for the U.S. at the end of 2019.

The impact on Japanese retail bank products:

        Personal savings rates in Japan still sit around 25%. Japan has always been a savings culture and negative rates haven’t impacted or stopped people from saving. New instruments have been created for people to continue to find ways to save.

        Japan has been more of a charge card nation and people use installment loan products connected with charge cards and end up paying an average of 12% to 16% to revolve on charge/credit cards.

        Mortgage Rates are very different as the current average in Japan is 0.44%, however, the banks in Japan make significantly more money on the fees as opposed to the rate when compared to the U.S. (I attribute 50% of this low rate to the negative interest rates and 50% to a different business model).

End Game:

Every investment decision should have an exit strategy. Ideally, this decision is made before the investment is made. However, we are at a crossroads where we’ve left ourselves few choices, and arguably Japan and some of the European nations that have been walking down this road seem to be doing “fine”. As a result, I view negative interest rates as a real possibility and implore you to consider it as one too.

As always, please share your thoughts and opinions to discuss further at

Anuj Shahani

Anuj Shahani

Anuj Shahani is Vice President at Comperemedia, providing thought leadership to Financial Services clients.