It’s a fond memory for many: the first time you made a big, life-changing purchase. Maybe it was a car, or perhaps your first home. You had finally arrived. You were now… a grown-up. It felt pretty good, didn’t it?
It wasn’t all flowers and happy faces, though. Accompanying this milestone experience was an unpleasant process: Getting a loan.
Debt. It’s a necessary evil, for most of us, anyway.
So when interest rates started to plummet about ten years ago, the opportunity to buy that shiny new car or beautiful new home became a reality — something that was within your reach. With lower interest rates, you could afford more home, more car, more… debt.
Drop the keys and walk away
Some might recall the enormously high interest rates of the 1980’s and the devastation they caused. Carrying a mortgage that charged borrowing rates in the range of today’s high-fee credit cards was a surefire way to cause consumers to walk into the bank, drop their keys on the counter, and walk away.
And they did. Housing prices collapsed with nobody left to borrow from the banks to buy property. High interest rates slowed the economy to a crawl. It turns out that carrying a mortgage with nearly 20% interest rates was not such a great idea.
Yet, the cycle continued. As interest rates dropped in an effort to stimulate the slumbering market, more consumers were able to borrow more money and spend more on whatever they wanted. And housing prices, along with pretty much everything else, rocketed upwards once again.
Is it just a cycle?
So, ultimately, it’s just a cycle, right? Interest rates started climbing back up in the last couple years again, so things should just balance out in the long run…
It’s not quite that simple. The flipside of all of this easy to access debt is that for anyone to save up money, to store up wealth in an effort to avoid debt, low interest rates really are not all that great.
Say for example, you want to save up cash for a car instead of borrowing money. It would take time, but if successful, you could avoid paying interest on your car and instead make interest on your savings. Your car would end up being thousands of dollars cheaper than it would be if you had to pay monthly interest on it.
The problem is, with really low interest rates, people are willing to borrow more, so the price of pretty much everything on the planet goes up. Your dollar, sitting in your bank account, is worth less than it was just a few years ago. As you save up for the car, the car itself becomes more expensive to buy. The lower interest rates are, the harder it is to responsibly save money for the long term and the easier it is to incur debt and spend. It feels like it’s just not worth the trouble of being disciplined and waiting patiently while you slowly save your money.
Might as well spend it!
This brings us to our “might as well spend it” modern mentality that sees consumers worldwide under ever-greater debt loads. And when interest rates crawl up — just a little bit — it’s a huge problem for those who are heavily burdened with that easy to acquire debt.
Thus, central banks must keep interest rates low in order to keep things afloat. In fact, more countries are heading toward interest rates of zero or even lower.
Lower than zero?
Yes, negative interest rates are a thing.
A few European countries lead the way when it comes to negative interest rates: Sweden, Switzerland, and Denmark.
So what does it mean for a bank to have negative interest rates exactly?
It’s pretty simple, really. If you store your money in the bank, you pay for the privilege. Not just in bank fees, but in interest charged on the money you hold in your account. Your savings gradually dwindle over time as you are forced to pay interest, just for saving your money.
So what does the average person do in this scenario?
Borrow money and spend it. After all, it’s cheap to borrow it. What’s the point of saving it?
And everything on the planet that can be bought gets more expensive because everyone would rather spend money than save it. Thus, the economy is “stimulated”.
You might think to yourself, I’ll just take cash out of the bank, stuff it under a mattress and save up that way. There’s a couple problems with this, besides the fact that this is a highly insecure way of storing large amounts of money. First, your cash is gradually diminishing in value as it sits there, with everything becoming more expensive. Secondly, these same countries that have continued to move further into negative interest rates are halting the printing of paper cash altogether, going completely digital.
You can’t store digital money under your mattress. Or anywhere, for that matter.
Except in your bank account. You know, the account where your money continuously dwindles due to negative interest rates.
It’s a killer combo: negative interest rates and cashless money.
In this real-life dystopia, you can’t save your money in a bank because it’s gradually confiscated by the bank and you can’t withdraw your funds as cash because there is no such thing as cash any more. Inflation is rampant and will only accelerate in this scenario, especially when combined with the “quantitative easing” approach that countries are taking to print ever-greater amounts of money. This continuous addition of more money to the pool further dilutes the value of every single dollar bill.
If you’re wealthy enough, you already know what to do in this situation, and have probably already been doing so. Accumulating assets. Real estate. Gold. Silver.
… And cryptocurrency (you had to know I was going to get to this point eventually).
Bitcoin, the most prominent cryptocurrency of all, could offer a solution to this money-trap conundrum. For many who can not simply snap up property or store away gold wafers, saving up a little Bitcoin might be the way to store up some wealth without losing it to negative interest rates and inflation.
It is definitely a risk. No question. Cryptocurrency is volatile and unpredictable. But if you are counting on saving up your money in a system that is set up to gradually take away your funds through tools that are carefully designed to shift wealth from the many to the few, you might be taking a bigger risk already.
This is definitely not professional financial advice. Ultimately, nobody really knows what will happen to the world’s economy or to the long-term value of Bitcoin and other cryptocurrencies. Having said that, it seems like doing nothing to hedge against this problem is a greater risk. Consider this writing food for thought.