In this article, we deep dive into the financial contagion of negative interest rates, which have been proliferating worldwide and destroying the middle class while sustaining inefficient zombie corporations and governments. Simultaneously, in areas where negative interest rates are already a problem — Europe and Japan for instance — Bitcoin (BTC) is becoming an increasingly favorable way to save money for the long term.
Before the middle of 2014, negative interest rates were extremely uncommon, with little to no negative-yielding debt in the world. Then the Swedish Central Bank dropped its interest rate below zero and maintained negative interest rates for more than five years.
Notably, even though Sweden was the birthplace of the negative interest contagion, it raised interest rates back to zero in December in response to obvious negative impacts caused by the policy.
Following in Sweden’s footsteps, the European Central Bank dropped its interest rates below zero in mid-2014 and has since then pushed its interest rate as low as -0.5%, where it stands currently.
There is also a tremendous amount of negative-yielding debt in Japan, where the Central Bank interest rate has been negative since 2016. And the negative interest rate contagion is spreading to North America, with $200 billion of negative-yielding debt in the United States and Canada.
With interbank interest rates dropping below zero in Europe and Japan, the amount of global negative-yielding debt proliferated to as high as $17 trillion in August 2019. Since then, negative-yielding debt has leveled off to $11 trillion, but this is still a tremendous amount of money, equivalent to 75 times the Bitcoin (BTC) market cap.
The theory behind negative interest rates is that they force people to spend and invest instead of saving money. Central Banks theorized that this would increase economic activity and consumer spending.
However, the reality is far darker. Negative interest rates are destroying the middle class by giving people no option to save money for the long term. In areas with negative interest rates, like Europe or Japan, people who try to save money will watch as their savings are slowly burned up by the negative interest rate long term, and this adds to inflation.
Essentially, due to negative interest rates, people who save money in a bank in Europe and Japan not only lose purchasing power due to inflation, but the amount of currency they have is slowly eaten up as well.
On the flip side, banks and corporations literally get free money and are paid a fee just to take that free money. This ruins the free market system. Instead of inefficient corporations, banks, and governments having to change their policies and practices in order to be profitable, they can be total failures and subsist off free money and the fees they are paid to borrow that free money.
In other words, negative interest rates are creating zombie corporations that should be dead but are kept alive due to negative interest rates. This causes negative interest rates to spread the disease of inefficient and unprofitable corporations and banks.
Further, the cost of buying or renting a home is rapidly rising due to this situation since banks and corporations can buy as much real estate as they want, forcing out regular citizens who do not get free money for buying property.
The statistics from Sweden speak for themselves. During the five years of negative interest rates, real estate prices increased 50%, but household consumption and real wages have stagnated. This is creating a worsening situation for Swedish citizens, which is why the negative interest rate policy was finally ended.
Ultimately, negative interest rates are transferring wealth from regular citizens to banks, corporations, and governments. Essentially, regular citizens are penalized for trying to save in a negative interest rate regime while banks and corporations get paid to take free money.
Making it impossible to have savings creates a society where either people have tons of property and savings or none at all.
Standing on the sidelines is Bitcoin (BTC), which has become a favorable way to save money for European and Japanese citizens. Instead of money slowly burning away in a bank account due to negative interest rates, citizens can save their money in Bitcoin (BTC). And their Bitcoin (BTC) will never be taken away since Bitcoin (BTC) is decentralized.
Further, Bitcoin (BTC) has been gaining tremendous amounts of value long term, rising from pennies in 2010 to near $8,000 currently. Thus, people who choose to save in Bitcoin (BTC) can actually gain tremendous amounts of purchasing power while not worrying about their money being siphoned off by negative interest rates. Compare this to a German bank, for example, where fiat savings lose purchasing power long term due to inflation and money is siphoned away by the negative interest rate.
Although the United States’ Central Bank has not decided to push its interest rate below zero yet, there have been some rumors that it is being considered as a possibility. Indeed, President Trump has called for the Fed to drop interest rates below zero. If that happens, it could lead to a stampede of Americans choosing to save with Bitcoin (BTC) instead of with banks.