How to Handle Negative Interest Rates – Episode 076

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[00:00] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, with has bestselling financial author, need to learn how to talk today. And my co-host, Kim Butler, with us today. Welcome, Kim. Thank you, Todd. Happy to be here. Learning to talk is a daily activity sometimes, I find. Oh, super. It’s been really a big thing here lately. So we’re going to be talking today about negative interest rates. And first of all, are we experiencing them?

[00:51] And second of all, is that a good or a bad potential thing? What do you think? Awesome questions, both, for sure. So my first reaction to the are we experiencing them was, well, no, not really. We’re hearing about Japan and Europe and some other places charging negative interest rates. But as I believe has happened to you recently, my son got notification from his bank that the inactivity on his account, no deposits, no withdraws, was going to cause a five dollar per month service fee. And this is on a simple little savings account that he had that he had put, I don’t remember, three or four hundred dollars in wanting to just leave it there and let it sit at the bank. And so I think the answer is yes, we are experiencing negative interest rates

[01:45] because we all know the bank’s not paying anything on that savings account. I mean, I think it’s listed on the statement as point one percent or something like that. That’s taxable, by the way, point one percent. And then to have them also charge this inactivity fee is, in effect, causing what we could say is a negative interest rate on these personal savings accounts. Now, I think you’ve got an additional perspective on that. Yeah. Super. Yeah. My first reaction. And of course, this is the Bank of Japan has actually gone to an official negative interest rate. And it turns out they’re the third country to do that, not the first, but for some reason they’re catching a lot of the attention. And my first reaction was, is that, you know, why do they do this?

[02:33] And they said is that they want to penalize savings and to stimulate spending because they feel that it is spending that boosts the economy, increases employment or decreases unemployment, however you want to say it, increases tax flows and increases the government’s ability to provide benefits that it has agreed to provide to the citizens. So my immediate reaction was, wow, I don’t really like the idea of telling people that savings is bad. So my first reaction on a consumer level was I didn’t like it. What about you? Well, I had a similar reaction and it actually took me a long time in helping families with their finances to understand why, especially governments in the U.S., talk about savings

[03:28] as bad. And it’s a distinction that we need to make between long-term thinking and short-term thinking and also between the methods that governments do use because they have the ability to print money versus that of the common citizen and, of course, all of our clients that don’t have the ability to print money. And so the distinction that I want to make is that when we save money as consumers, you and me on a daily basis, when we save money, that is good for our personal balance sheets. And we need to be in the habit of savings. We’ve talked on this show a lot about the difference between saving and investing. We need to be in the habit of saving probably for our whole life because, first of all,

[04:14] as we get older, we want more savings. And second of all, if we’re not feeling like we need to add to our savings anymore, then we are possibly borrowing against that savings and so we need to be paying it back and so consequently we need to add to it. It’s kind of the same thing. So regardless of what age or where you are in life, you probably should be saving. And that’s a good thing for your own personal economy. If our government also took a long term view of things instead of this short term quarter by quarter view, they too would believe that savings is a good thing. The verb, the act of savings, then to go with the noun, having savings. But because they’re so short term, they, the government, does not want us, the consumer,

[05:05] to put away money for later. They would rather have us spend it in the economy. So the distinction is the difference between savings and spending, which on the short term, if we spend money, that will bolster the economy. Think about 9-11. George Bush came out and said, we need to get back to spending money. And that’s actually what happened and that helped the economy. But that’s on a short term basis. And again, did it help the economy or did it help your own personal balance sheet? So the distinction is savings short and long term versus spending short and long term. And we also know that it can apply to the corporate environment. Corporations also, unfortunately, very stuck in this quarterly cycle, whereas if

[05:49] they viewed things long term, they too could benefit from savings, but they don’t tend to view them long term. But since we’re covering corporations, let’s pick back up your side of the story. Super. Okay. So number one, I’m on a consumer level because I didn’t fully understand what it meant by what the Bank of Japan was actually doing. So the Bank of Japan is not penalizing any consumers. What they’re actually doing is they’re penalizing the banks themselves that park money at the central bank. So in other words, the consumers are saving money and then the banks that have that money are taking that money and instead of investing it back into businesses and making business loans, are parking the money at the central bank

[06:38] and being paid to keep that money there. What the Bank of Japan was actually saying is, is that we’re going to penalize that behavior in an effort to say we want to take the cash that’s already being saved and get it back in the hands of businesses so that it’s actually out there growing the economy. So in my initial opinion was consumer level, it’s bad. Now at the bank level, if it’s my savings that I’m putting in there anyway, and that money could be out there creating jobs for my children and you know, helping to create a tax base that’s paying into retirement accounts, that’s savings and building other businesses. Wow, that’s kind of a good thing. That’s a forward thinking idea on behalf of the government.

[07:30] And the stimulus for them to do this is that they’re afraid of deflation. So they want to try to increase production, increase inflation by taking the money that’s already saved and putting it back in the hands of businesses to grow the economy. So all of a sudden, at that point, I was back on board again. Well, it’ll be good for our listeners to think for themselves about this situation and what they feel is best and do some, if you’re curious, some light reading about what’s out there, always pay attention to the author of the article. You always want to look at the source and figure out where they’re coming from, what side, if you will, that they’re coming from. Because it is interesting now as we pick up this additional word of deflation,

[08:21] one of the questions that I think often gets asked is, well, do I need to change my investment strategy if we are truly going to be in an era of deflation? Again, that could be arguable in and of itself, but just setting the argument aside for a moment, I want to just address the issue of changing strategy in an inflationary versus deflationary environment. I’m having trouble talking, too. So when we have an inflationary environment, which is really what we’re in most times, that’s the normal thing, is that prices are going up. However, we need to remember that there’s this corollary, I guess, if you will, of deflation when prices aren’t really going down unless you’re at the gas pump, right?

[09:03] Didn’t you say if we’re at the gas pump, then we think we’re in deflation? Did I hear you say that? Well, I would think if the definition of deflation is something that costs less today than it did a certain time in the past, then we would have to say that we are the money that we’re currently paying for fuel, and that’s jet fuel, heating oil, natural gas on all levels is certainly much less than we were paying a year ago. Absolutely. My husband wanted to create a huge underground storage tank for diesel for our tractors and plop it in the ground and fill it up. Diesel at $2 a gallon is incredible. Yet we do realize that most everything else, food and other things, are going up. But again, the point being, what do we do with our

[09:52] investments if we are truly, whether we are or not, in a deflationary environment? And the answer is nothing. You still need your investments to grow. You still need to have a savings account. And so we, like always, stick with our tried and true method of savings, which again, is both a verb and a noun. So savings as a verb means a place to put money consistently. And that’s a beautiful thing about whole life insurance is that premium notice comes into your mailbox or online system either monthly or annually. And so it forces the verb saving and then it creates the noun savings in terms of an existing dollar figure that right now in today’s world is earning between 3% and 4% every single year and that’s without taxes.

[10:43] So you’re in a savings environment that is not going to be affected by negative interest rates, not extremely so, and is not going to be subject to extra fees for quote non-use. I have tons and tons of clients that have their cash value sitting unused forever and ever and ever. And it’s just fine that interest that the insurance company pays, which is technically in the form of a dividend, just keeps right on growing and there’s no other form of fee assessed at all. So that’s an important thing on the savings side. And then on the investment side, both of our bridge loan investments as well as our life settlement investments are not really impacted by inflation or deflation. Of course, the bridge loans may adjust their interest rates

[11:30] a little bit rather than the 10 to 12. Maybe it’s 8 to 10 or something like that. Life settlements, as you know, have nothing to do with inflation or who’s in the presidency or what the Bank of Japan is doing. So they are completely disconnected from the environment at all. And that’s obviously a big difference from your typical stock market investments, which are more impacted by inflation and deflation. Super. So as I would say, I felt like I was watching myself in a tennis match. I just kept changing my head back and forth as I was watching the two different sides of this. And then finally, what I made up my mind was is that I’m against the government manipulation of the markets altogether.

[12:11] And it’s the functioning of the free markets, whether they be inflationary or deflationary, the ability to freely go in either direction. And in fact, as I researched it further, I’ve decided that there are certain areas of our lives, like electronics that are constantly in deflation because we’re consistently getting so much better. But yet there’s other areas of our lives that are constantly in inflation. So we have deflation in some areas like electronics and we have inflation in other areas. Like every year there’s more people consuming the same amount of food or whatever. So maybe the price of food is going up. And what we really look at and call inflation or deflation is really the sum of all of those together.

[13:01] And what’s most important to me is to not have a government manipulating those one way or the other and to allow those markets to function without the manipulation. And I think you still would see inflation and deflation, but they would not be in manipulated cycles. Very well said. I’m in complete agreement with you. I love the conclusion that you came to and I also love the thought process. So again, encouraging people to think about it themselves, make up their own decision. But then, as you know, we focus on what we can control. And this is not an area that we can control. However, we can control that we continue to save money and that we continue to protect our investments from the roller coaster ride that this arena can cause.

[13:51] So take a look at the things that you have, make sure you’re saving on a consistent basis, make sure your investments are protected, and then continue to focus on what you can control. And a big, big part of that is your own thinking about it. And first of all, just turning your brain on and actually proactively thinking about it, but then also realizing that it’s not an area you can control. And so you should switch gears again, back to the tennis match and go towards things that you can control. I want to, just as we’re finishing up here, bring up something that you mentioned on the technology side. So many people feel out of control around the area of technology. It can seem overwhelming.

[14:32] And we’ve covered it before, but I just want to give a shout out to Peter Diamandis. And if you’re not following him in the technology front, I would encourage you to because it’s all about the positive things that technology is impacting us in and around and about and how and why and the benefits that will be there. So Peter, the last name is Diamandis, D-I-A-M-A-N-D-I-S. Peter Diamandis.com has a great weekly blog with an email service really that provides you four or five pieces of technology that are positively impacting human beings’ lives all over the world. And it’s a very valuable tool to have that consistent message of confidence around technology coming into your mind because there can

[15:22] be an overwhelming percentage of negative impacts of technology out in the regular news media. Super. Well, again, just to kind of wrap it up from the No BS Money Guy perspective, prefer to have a free market. And when I look at the stock market, I feel there’s just as much manipulation in the stock market as there is the interest rate market. And in fact, they’re tied pretty well together. So, again, very, very proud of the work that is being done at Partners for Prosperity in helping to find investments that are non-correlated, that are on a value-based track separate from the stock market, from interest rates, from government manipulation. And again, I certainly do appreciate the ability to work with you, Kim, on those, because

[16:12] that’s that’s your area of expertise. So we’re going to wrap up today here at No BS Money Guy Todd Strobel for the Prosperity podcast. And once again, thanks, Kim Butler. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.