Negative Interest Rates Are Likely Coming to the United States This Year and Will Likely Be a Boon for Bitcoin

March 6, 2020 / by Zachary Mashiach

The Federal Reserve conducted an emergency rate cut earlier this week, lowering the Fed Funds Rate from 1.50-1.75% down to 1.00-1.25%, a 0.50% cut. However, this rate cut was essentially wasted, since stock market volatility and weakness has continued, and the market is already pricing in another 0.50% rate cut in March. 

These cuts hint at a future with negative interest rates, and that turn of events will likely be a major boon for Bitcoin (BTC).

In order to understand the gravity of this situation, it is important to look at history. In October 1987 the United States stock market dropped 23% in several hours, an event known as Black Monday. More than 20 other stock markets worldwide fell by similar amounts.

The morning after Black Monday, the Fed promised to do whatever was needed to support the economy, and 10 days later, it cut interest rates by 0.5%. This rate cut in combination with liquidity injections proved to be a successful strategy to reverse the economic crisis.

Notably, the Fed Funds Rate was 7.25% prior to the 0.5% rate cut in October 1987, yet that 0.5% rate cut proved to be an effective tool to stimulate the economy even though it only represented a 7% drop in the Fed Funds Rate.

Compare this to the current 0.5%
rate cut, which represents an approximately 30% drop in the Fed Funds Rate. And consider that it was ineffective.

The emergency rate cut was meant to provide immediate stimulus this week, rather than waiting two weeks for the March Fed meeting. That’s despite the fact that the stock market fell only about 10%. That’s compared to 1987 when the Fed waited 10 days to do a rate cut despite the stock market crashing into a recession.

The Fed’s behavior reeks of desperation at a time when the Fed shouldn’t be desperate since the economy is not in a recession.

The most important takeaway about this news is that, this time, the rate cut didn’t work. Indeed, the stock market is already pricing in another 0.5% of rate cuts in March when the Fed meets again. This means the stock market will absolutely crash when the Fed meeting comes if rates are not dropped to 0.50-0.75%. Even President Trump is demanding a rate cut down to 0.5%.

Another historical factor important to note is that, in a typical recession, the Fed usually cuts rates by an average of 5%. In the past, the Fed had enough room to do this without dropping the Fed Funds Rate below zero, but this time, it looks like the Fed Funds Rate could be at zero before the Spring is over.

That’s because the Fed is about to run out of room to keep cutting, and this is set to a backdrop of President Trump calling for negative interest rates since last year.

Negative interest rates are really not good for anyone. Anyone saving money in US banks will have to pay for the privilege. That’s aside from the fact that inflation already causes saved USD to lose purchasing power at a rate of 2-3% per year, according to official data. 

Further, corporations and banks will get paid to borrow money, making it a profitable business just to take out loans, removing the incentive to ever pay back borrowed money. In general, this gives corporations and banks free money no matter how inefficient they are. 

Negative interest rates will lead to a zombie economy where corporations and banks get all the money they want and are paid to borrow that money, even if their businesses are doing poorly. This is quite the opposite of free-market capitalism. Banks and corporations will no longer have an incentive to be efficient. 

Ultimately, zombie corporations and zombie banks will pave the way for an extremely severe economic collapse, especially since a significant fraction of people who typically save money with banks will pull their money out, drying up bank liquidity and credit.

The Fed’s only remaining tool at that point will be money printing, which would weaken the US dollar and fiat currencies worldwide.

For these reasons, negative interest rates are bad for everyone — except perhaps Bitcoin (BTC) HODLERS. Indeed, a significant number of people may choose to hold money in Bitcoin (BTC), where they are not charged a negative interest rate for saving That stands in stark contrast to them leaving money in the bank and watching it slowly evaporate. 

Also, when the negative interest rate-induced zombie economy collapses, even more people to flock to Bitcoin (BTC) as a currency safe haven.

Considering the events of this month, with a 0.5% Fed funds rate cut and the markets pricing in another 0.5% cut before the end of this month, and the fact that the Fed usually has to cut rates 5% during a recession, it seems likely that negative interest rates are coming to the United States. This may lead to far worse economic conditions, but it could be the factor that finally causes large scale Bitcoin (BTC) adoption as citizens flee banks to protect the value of their money from inflation.

_

Don’t Miss out on top crypto trade secrets

join crypto iq
Essentials Package
only $9/month

Retail $97/month

JOIN
close-link
_