On Dec. 8, 2015, the Globe and Mail, and just about every other newspaper, reported that the banks in Canada are once again preparing the groundwork to, [in my own words], “screw depositors out of their money”. But the articles are more polite than I am. They report that something the banks label as “NEGATIVE INTEREST RATES” are coming. [Source: “Bank of Canada opens door to negative interest rates as oil, dollar sink” by David Parkinson and BARRIE McKENNA. GLOBE AND MAIL. Dec. 8, 2015.]
Let me speak to what that is and then what that means to you and me.
We have come to expect that to attract our money, our cash, such as our pay cheques, banks turn around and pay us, the depositors, a sum of money called interest. That’s the way finance is supposed to work. Let’s take a few examples working the other way around, borrowing and lending money.
If you want to buy a house, you go to the bank and ask for a mortgage. The mortgage is a chunk of money that the bank will give to you under several conditions: you pay back the original amount of money over a period of years AND you pay the bank for their confidence in you doing so, that I will term “Level of Risk” or “Riskiness”. The more riskiness, the more the bank will tack onto that interest. So the higher the risk the higher the interest rates the bank will charge you. Today, that formula is acting nuts.
Today, the banks will encourage people to assume mortgages at interest rates not seen since before World War II. Today you can buy a house using a bank mortgage on which interest rates payable to the bank are as low as 3%-ish. Those of us who have followed the economic trends know that the world is in big trouble right now. Because of all the baby boomers exiting their peak spending cycles demand for goods is dropping like flies zapped by RAID. Fewer and fewer people are buying goods, almost all goods: cars, houses, appliances, electronics, clothing…you name it. This is a global phenomenon. But countries have not turned down their manufacturing output dials quickly and responsively enough. So, the world is awash in everything from all kinds of manufactured goods to every commodity imaginable such as iron-ore, zinc, copper, etc. Prices are falling everywhere on everything, including the cost to borrow money, to encourage more consumption. But people are getting too old to consume too much. So prices keep going down on everything, including the cost to borrow money.
This puts lending institutions, banks, in an awkward position. They are becoming stuffed with cash because too few people want to take that cash to buy expensive things. To entice people to borrow more, the banks have lowered interest rates, the cost of borrowing bank money. Still, too few takers. Because the banks are becoming too flush with cash, the banks are preparing to PENALIZE YOU AND ME FOR KEEPING OUR MONEY IN CASH IN A BANK ACCOUNT. The Bank of Canada just got legal permission to make you pay the bank if you want to put your money into a bank account. Though the BoC has not yet flipped the switch to make you pay, just yet, the legal groundwork is done and the BoC can do so whenever it wants to. Oh, it won’t be much, we are told. It’ll be merely a half-a-percentage that you’ll have to pay the bank, at first, if you want to keep your cash in a bank account. So, yes, it will begin innocuously enough to attract minimal attention, at first. Nonetheless, it begins a new trend. You pay the banks to leave your money there, instead of the old traditional way of banks paying you and competing by paying higher interest rates to you to attract your cash.
To DISCOURAGE more cash coming into the banks, the BoC has officially laid the groundwork to PENALIZE CASH. This is frightening to me though the BoC has NOT YET invoked this privilege.
By penalizing your deposits held in cash, by charging you interest that you must pay to the bank, the Bank of Canada hopes to FORCE YOU TO SPEND your money instead of saving it. But if we don’t need to buy the volume of goods and services required to re-ignite a growth economy what do we do with our cash if placing it in a bank is no longer a good idea?
I get it. Either we buy goods we don’t need or we seek an alternative, smarter place, in which to sink our cash savings.
The only place that pays a return on that cash would be a financial instrument. Still there are risks by placing money into any financial instrument. Risk varies by financial instrument, but nonetheless choice of instrument and decision about risk tolerance are critical factors to consider. Investing is certainly not the playground for part-timers to the finance world.
If you are CANADIAN, then my advice to you: talk to a qualified CERTIFIED FINANCIAL PLANNER or ANALYST right now. Discuss the subject of “bail-ins” and suitable alternate places to hold your savings SAFELY. Have this discussion BEFORE a bail-in is ever invoked.
Mind you, the Bank of Canada might never invoke a bail-in. But the way the world is going, and with the increasing number of loans being made to people losing their jobs, I’m pretty certain that legal permission to do bail-ins now exists in Canada for a good reason. The challenge from China is increasing. The signing of TPP and TPIP is going to worsen the unemployment problem in Canada. Tax payers will go nuts if they learn they have to cover the high risk loans made irresponsibly by banks. So, a bail-in is the perfect tool for BoC to have at the ready. No politician need be asked. No announcements to the general public to attract undue criticism. No convincing tax payers to act contrary to capitalism once again–think the $700 Billion bail-out forced upon USA tax payers under TARP.
A bail-in is the perfect tool to screw those holding cash since no politician need be involved or embarrassed.
[Note: I am not an expert in finance. So, go talk to one. Go talk to a certified, qualified PROFESSIONAL FINANCIAL PLANNER or analyst before making any changes to your investments, bank arrangements, etc. But do so SOON. It is always smarter to prepare before a disaster strikes.]