INTEREST RATES WENT NEGATIVE | GOODBYE SAVINGS

Guys, this is the stimulus check and stimulus package update as of Wednesday, May 13th. We're gonna be covering the stimulus checks and paycheck protection program. And wait a second, wait a second guys, this is the wrong intro. I'm gonna be, I'm gonna be right back.

Anyway, what's up you guys? It's Graham here. So first of all, I want to give credit where credit is due, and this is a topic that I wanted to discuss based off of a video posted last week by Me Kevin, who announced that interest rate futures just went negative and what that would mean for everyone watching.

This is a topic that's so interesting because negative interest rates have never happened before in the entire history of our economy. Bringing interest rates negative would have such a profound effect on everybody watching. Just imagine getting paid to borrow money, where you end up paying back less money than you owe. Or imagine putting money in a savings account where instead of the bank paying you interest, you have to pay the bank interest.

Imagine what it would be like if spending your money automatically saves you more than putting that money in a checking account. Because if this happens, it's truly unprecedented. Even right now, today, as I'm filming this video, it's currently being priced into the markets as of January 2021.

So let's go over exactly what's going on, what negative interest rates would mean for you and me, the likelihood of this actually happening, and also the likelihood of you destroying a like button for the YouTube algorithm. Judging by my previous video, it looks like I have about an 8% chance of you actually destroying the like button. But if I'm lucky, and I agreed to do a drum cover at the end of this video, then maybe we can get that up to like a 20 to 30% like ratio.

So if we can do that, you got a drum cover at the very end of the video for you guys to watch and enjoy. I'm not that good, but anyway, I'll give it a shot. I'll do anything for a like at this point. So basically, enjoy the drum cover, like the video, and let's begin here.

Alright then, so let's start here. On May 8th, Market Watch published an article on what's known as the federal funds rate. This is the interest rate that banks charge other banks anytime they lend money to each other. See, banks are required to keep a certain amount of cash within their system at all times, and if they have less money than they need to at the end of the day, they could borrow that money from other banks to meet the minimum requirement.

If a bank has more money than they need to, than what they could do is loan that extra money to another bank and get paid back a little bit of interest. The federal funds rate is really just a guideline as to how much banks charge each other anytime they borrow money. This is going to indirectly influence how those banks pay you in terms of your savings account, how much you pay in a loan, and even how much you pay for a mortgage.

Well, for the first time ever, those interest rate futures just began to go negative, which would be like you depositing ten thousand dollars in a savings account, and instead of you getting paid interest, you would owe interest to the bank for holding on to your money. When it comes to this, we could somewhat see this happening right before our eyes when we look at what's known as the federal funds rate futures.

Try saying that five times. Anyway, this is basically just the price that represents the interest rates that banks pay anytime they lend money to each other, and this price is gonna fluctuate over time and then settle at the end of each month, basically just locking in that price. This might sound kind of confusing, but trust me, it's really simple when you start breaking it down.

Each contract is priced at a hundred minus the amount listed right here. So as we could see, the June 2020 contract is ninety-nine point nine five five, so it's believed that interest rates at that time were going to be zero point zero four five percent.

In other words, you could buy this contract for $99.95 and then get paid back $100 when that contract settles. But in January of 2021, that's where things begin taking a bit of a negative turn, pun intended. That's because these contracts are now trading at over $100, meaning that at these levels you would invest $100.02 and then get paid back only $100, working out to be a negative 0.02 percent return on your money.

The longer we go out from January, the more we could see that interest rates are going even more negative. So that then lends the question: why would anyone ever go and invest in something like this, knowing that the outcome of investing money is that you're gonna get paid back less money than you invested? Because seriously, something like this is completely counterintuitive to what you would ever expect.

But here's why people do that. See, when you have a lot of money, and I'm not talking about like a few thousand dollars here, I'm talking about like hundreds of millions or even like billions of dollars, where do you put it? Like, there's no possible way you could go and withdraw all of that money from the bank and then stuff it under a mattress somewhere.

Like Pablo Escobar tried that, and look how well that turned out for them. There's also no way you could just keep a cool billion dollars sitting in your bank account in cash or in CDs because what happens if the bank goes bankrupt or something happens and you're well above the FDIC-insured limit, and then you just lose all your money?

You could go buy bonds, but bond prices fluctuate in value and there's no guarantee that they're actually gonna be worth more or at least the same price at the time you need the money. You can't really go and put all of that money in the stock market because you might end up losing money in the short term.

So for a person or a company to keep like a billion dollars in cash somewhere, where do they put it? Well, the answer is in US Treasuries. That's right. You could go and loan the government money and get a guaranteed rate of return depending on how long you invest with them for. It's pretty much a given that the United States is always going to be paying off their debts, so there's really no risk of them ever defaulting and you losing any money.

That's typically where a lot of large hedge funds, banks, investors, pension funds all put their money, so they don't just leave it sitting in a bank account somewhere. But if banks and investors believe the economy is probably not going to do so well in the short term and they're looking for a really safe place to go and put their money, they're gonna be buying up all of these US Treasuries.

The more demand there is to buy these Treasuries, then the less the government needs to pay in interest. When rates go negative like this, it's basically as though you're paying the government for the convenience of them holding money for you and guaranteeing that you'll get it back safely.

This is also very similar to the oil futures turning negative, where the cost to go and store the oil is going to be more expensive than buying the oil itself. So these people who bought oil contracts found it cheaper to go and pay someone else to take it off their hands than it was for them to try to figure out where they're gonna store it all, which is gonna end up being more expensive than just paying someone else to deal with it.

So think of negative interest rate futures like this: it's somewhat like a safety deposit box where you have to pay $50 a year to store your valuables, except now you pay the government a small fee to safely hold your money, and that small fee costs you 0.02% a year.

So keep in mind, even though negative interest rates are currently being priced into the market, it does not mean it's actually going to happen. Investors right now are pricing in the likelihood of this one day happening or speculating that one day interest rates are gonna drop below that and they could profit the difference. But only time is going to tell how this plays out.

Although if it does happen, here's the most likely outcome: if negative interest rates hit people like you and I, it's going to change the entire game of investing and saving money a hundred percent. If that happens, it's going to incentivize people not to save their money but instead spend it. The goal is to penalize people for saving too much money and try to get them instead to go and spend their money, reinvest it back into the markets.

Therefore, negative interest rates in theory would help lift up our entire economy from that perspective. Now, if you think this is such a wild, crazy concept that should never exist in the first place, well, you have countries already that are experiencing negative interest rates.

Switzerland is negative 0.75 percent. Denmark is negative 0.6%. Japan is negative 0.1%. Sweden is totally zero, and so is Spain. This was done in an attempt to get banks to lend more money into the economy and try to get people to finally spend more. After all, if banks are forced to pay a half percent fee on the money that they hold, it would be cheaper for them to go and lend that money to its customers instead at, let's say, a point 1 percent interest rate. Then the customers can go and spend money on whatever they want to buy.

Think about like having a tenant in a property who's not paying their rent. You could either go and evict them, which is gonna take months of your time and is gonna cost thousands of dollars, or you could just go and pay that tenant five hundred dollars to leave the next day. Even though in both scenarios it's gonna be costing you money, you would much rather it cost you less money up front than more.

Banks see it very much the same way. The pros of doing this, like I mentioned, is that it punishes people for holding on to too much money without spending it and pushes people to go and reinvest back into the markets and back into our economy to help kick-start growth.

It also makes the value of the currency cheaper relative to the other currencies out there, and that means what we make is going to become more affordable to other countries out there, which should drive demand. It would be like Americans going and taking all of their money to Canada, where every one of our dollars buys a dollar forty worth of theirs.

Our president has also pushed for negative interest rates by saying that the Federal Reserve has been holding us back. To him, negative interest rates would cause other countries to stop investing in the United States because it doesn't yield as good of a return, so it would drive the value of our dollar down, but it would make our own exports priced better relative to everything else out there.

From that perspective, one could argue that maybe that's a benefit to our economy. The downside though, is that as we all know, lending money is a risk, and there is no bank out there that's gonna want to take a risk to lend someone money who has a chance of not paying back that loan and pay the borrower for the privilege of doing so.

Which means that if rates go negative, either that means the banks stop lending money, or they end up charging a whole bunch of fees up front to make up for their loss. To mention it, people begin withdrawing their money from the banks to avoid paying interest on it. That would mean less money circulating throughout our economy.

With less money in the banking system, interest rates might have to be raised just to get people to put their money back into the bank, which really just defeats the entire purpose of this to begin with. At the end of the day, the entire purpose behind this is just to avoid deflation, which is where money becomes more valuable the longer we hold on to it and don't spend it.

Which is really just the opposite of inflation. See, when deflation happens, it causes people to hold on to all of their cash, to hoard their money, not to spend it, and that could cause us to spiral down into another Great Depression.

So to fight back against that, interest rates are lowered. People can borrow more money. Interest rates don't pay as well, so people are more incentivized to spend their money instead. That helps to keep a steady, predictable amount of inflation while boosting our economy.

When it comes to this, all you really need to know is just this: deflation is bad, mild inflation is good, and that's what our economy runs on.

But realistically, here's what we know and what we can expect: Some investors believe that negative interest rates are gonna be a really strong possibility. So by them going and buying these negative interest rates right now, they're basically betting that interest rates are going to be even lower by the time this date actually comes around.

If they're right, they're gonna end up making money, and if they're not right, well, then they end up losing money. And that's just speculation for you. But keep in mind, you can still buy negative interest rate futures right now, and then by that time if interest rates turn out to be even more negative, you could end up making money by profiting the difference.

It sounds weird, but it's pretty much like two negatives just canceling each other out. It would be like if you are guaranteed to lose a dollar, but the other guy over here is guaranteed to lose five dollars. Well, that five dollar guy would rather pay you three dollars to the privilege of only losing a dollar.

In that case, you end up making money, and the other guy ends up losing a little less. Well, that's exactly why you're finding investors even buying negative Treasury bills right now. But that doesn't mean that interest rates are actually going to be negative by the time that date comes around, and a lot of this is really speculation.

So too, if we get negative interest rates, it's probably unlikely to affect the average person unless you're holding on to a ton of cash. Take Denmark for example. They're only charging their customers interest to have a cash balance of over a million dollars. Anyone else just gets to keep their money in there for free, and negative rates are never passed on to them.

So I think if interest rates eventually turn negative here in the United States, then I think realistically it's not going to impact anybody other than checking and savings accounts not paying any interest whatsoever. Maybe you'll end up paying a small fee if you end up having a ton of money sitting in cash.

After all, if banks go and charge someone like half a percent in interest to go and hold $10,000, that person can very easily just go to the bank, withdraw their money, and keep it in cash. But if you charge someone a half percent interest on under one million dollars in cash, I think it's very unlikely that person is actually gonna go and take out a million dollars in cash and go and keep a million dollars in their house in cash.

That would just take a lot of time, a lot of effort, and it's not gonna be worth it. So I think in those circumstances, banks would probably very easily get away with charging people with a lot of money just a small amount of interest.

There's definitely the idea that you might be able to get paid to borrow money, although I think it's going to be rather unlikely of ever actually happening. What I think is possible of happening, like we've seen in other countries, is just getting a really, really low interest rate like 1 to 2 percent on like a 30-year mortgage, which really just works out to be free money anyway, when you account for tax write-offs and inflation.

I've made videos about this already in terms of borrowing free money or actually getting paid to borrow money, so this is really nothing new right now. In Switzerland, it was never found that negative interest rates actually translated over into mortgages and loans, but it did mean that people were able to borrow money at really, really cheap rates that ended up driving up asset values like houses.

It was found that after a certain point, low rates only make so much of a difference before they become ineffective. So all in all, yes, negative interest rates are concerning, but on a small scale, this is mostly going to apply to banks, governments, pension funds, insurance companies, and people with hundreds of millions or even billions of dollars—not people like you and me.

If it does end up trickling down to the average person, then I have a feeling it's either gonna be in the form of zero percent interest paid on checking and savings accounts or maybe even a small fee if you hold a whole bunch of money in cash, like let's say two hundred fifty, five hundred thousand, or even like a million dollars in cash at the most.

I do think it could translate into lower mortgage rates or auto loans, but I don't think the actual rate itself will ever actually turn negative. Not to mention, the Federal Reserve has been openly opposed to ever resorting to negative interest rates, and I tend to agree with that stance. Things will just have to be really bad in order for them to ever consider doing this, and we would almost have to see our entire economy collapse with the fear of deflation for this to ever really be a talking point.

But then again, they did say that they would do anything within their power to help lift the economy, and who knows if one day that might include negative interest rates?

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, if you have not already destroyed the like button, make sure to destroy the like button, subscribe button, and notification bell. Feel free to add me on Instagram. I post here pretty much daily, so if you want to be a part of it there, feel free to add me there as well.

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