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There has been attempt at reducing the interest rates. Apart from, elderly and savers depend on the bank interest and Stock market is driven by interest rates, the true cost of money if becomes negative has impact on public.

I see lots of countries in Europe has negative interest rate.

What can be the result of it, if it happens in USA and how a common investor can protect him/her self.

  • Note that one viewpoint of negative interest rates is that they are a sign of desperation, severe desperation, as government/quasi-government (central banks) try harder and harder to get a certain outcome that they are proving unable to obtain. Some view this as an extreme warning sign that any country doing that is showing a high risk for 2008-style financial collapse, or worse, a run-up to something bigger because the central banks are running out of options to fight their fears. A common suggestion is cash and metals in mattresses and consider a small-percentile short position, etc. – BrianH Jul 29 at 22:02
  • I don't understand why it is closed, I see similar money.stackexchange.com/questions – Raj Aug 23 at 19:18
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If you want to protect yourself from negative interest rates, the best way is to invest into long enough government bonds.

The value of a bond increases as interest rates decrease, and decreases as interest rates increase.

Essentially, by buying long government bonds, you are "fixing" the interest rate you are getting for the bond part of your portfolio. Then, if the rates decrease, the value of your bonds increases so that the effective rate you're getting based on the new increased value is the market rate.

But, that "fixing" of interest rate has a cost. If the interest rates increase, you will still get the old rate, meaning your assets are worth less after the interest rate bump.

But I wouldn't consider negative rates necessarily bad for the investor. If you're young, you can take a small loan for investing into stocks, should the bank be willing to give a loan. I did that; I loaned 23% of my annual gross income, at a true rate of 1.3% (including all fees). Ok, the rate is not negative, but it's significantly below the dividend yield which is probably around 4% for the local stock market currently where I live. 10 years ago, the interest rates were so high that I wouldn't have invested borrowed money. (And in any case, I'm not going to let my equity ratio fall below 40%, so nearly half of the money I invest is my own.)

In the US market, situation is different from Europe. The interest rates are higher, above 2%, and the S&P 500 dividend yield is below 2%. So, borrowing money in the US and investng it into US stocks doesn't make much sense unless you are doing it for the very long term (let's say for 40 years), and willing to take the risk.

For someone old and going to retire soon (or already retired), the situation of negative rates can be bad, because they should keep most of their money in bonds, not stocks, due to expecting to spend the money soon. But, as a person who's not going to retire soon, I do enjoy the negative interest rate environment.

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For the US to accomplish negative interest rates it has to drastically increase the money supply - which it has several ways to do - but the outcome is that assets become more expensive. More practically "it costs more money to purchase the same value". Think of it like rapid inflation. Owning assets would then be the best way to preserve your wealth. Real estate, stocks and metals are the primary "inflation linked" assets.

Regarding your question of protecting yourself as an investor, what do you think you need to do differently? Certificates of Deposits (CDs), and Savings accounts will become more expensive, but thats not exactly an investment, in the realm of what people say "investors" do.

If the negative rates yield curve went steep or flat enough across all levels of risk, people that don't own their houses yet but only have mortgages will be getting paid by the bank to have them. Its more of the banks problem and wondering if banks will stay in the business of offering mortgages.

Government treasury bond owners would be the only people subject to the steepest negative interest rates, but buying those bonds now if you expect rates to go negative would still be a lucrative move, as the bond premium has to increase substantially for the yield to go negative, and you can always sell the bond at a capital gain before you take losses from the interest rate.

Those are results, not clear if you need to protect yourself from it, as it creates many investible opportunities.

  • Wouldn't increasing the money supply decrease its value, thereby literally increasing inflation? – Money Ann Jul 30 at 8:53
  • @MoneyAnn yes 100%, without any counteracting force a single dollar will purchase less – CQM Jul 30 at 16:27

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