The Federal Reserve is now looking closely at negative interest rate policies (NIRP). Fed Chairwoman Janet Yellen recently admitted this in front of a Congressional panel. Europe and Japan have already announced their own negative interest-rate policies and it looks like the United States banking system is not that far away from their own form of NIRP.
The idea behind negative interest-rate policy is to stimulate bank lending by charging banks to park their cash. Unfortunately, this action could cause savers to park their cash under the mattress. If savers do this it would likely result in further deflation. Currently, we hear that the European Central Bank is looking to do away with the 500-Euro note. This action by the ECB is being done to simply make cash hoarding much more difficult. Last week, former Treasury Secretary Larry Summers suggested that the U.S. should get rid of the $100 bill. Does anyone see a pattern here? This is one of the primary reasons for the recent surge in gold. Generally, gold will decline in a deflationary environment, but gold is a hard asset and that is what people want to hold if they can not hold large amounts of cash.
We can only wonder what the negative effects will be on savers, retirees, pension funds, and insurance companies. Only time will tell what is going to happen when NIRP is implemented, but it looks like it is coming soon and there is nothing anyone can do about it.
