Ron Paul: Brace for a Negative Rate and Bond Bubble!


Sep. 18 2019, Updated 11:53 a.m. ET

On Sunday, in an interview with CNBC, Ron Paul, a former Congress member, said that the US will join the negative interest rate club. Currently, the Eurozone, Switzerland, and Japan have negative interest rates. Israel might also join the club soon. Ron Paul added that there are around $17 trillion worth of securities globally with a negative yield. He termed it as the “biggest bond bubble,” which will ultimately burst. However, Ron Paul isn’t sure about the timing.  

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Ron Paul also warned that negative interest rates will cripple the global economy. In the past, the ECB’s (European Central Bank) negative deposits rate wasn’t enough to boost the economy. Germany’s economy fell 0.1% in the first quarter. Notably, Germany is the single largest economy in the Eurozone. On September 12, the ECB reduced the deposits rate from minus 0.4% to minus 0.5%. Today, the Fed will announce its key interest rates. There’s a high probability that the Fed might reduce interest rates by a quarter percent.

What are the side effects?

Negative interest rates will boost lending and increase consumer demand for goods and services. Banks can either lend or lose the money—the principle behind negative interest rates. However, negative interest rates have side effects. As cited by the Federal Reserve Bank of St. Louis’s economy blog, someone has to take the burden of the negative rates payment. If banks take the burden, their profits will be reduced, which will impact share prices. If the burden is passed to depositors, they’re left with less money. Ron Paul said that the credit created with each reduction in interest rates below market levels is a bubble.

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If Ron Paul is right, where should the money go?

Similar to Ron Paul’s views, Morgan Stanley also sees interest rates falling to zero. On September 6, at the University of Zurich, Jerome Powell said that if there’s a downturn, central banks have less ability to support the economy. The rates would be close to zero. Powell thinks that the slowdown is due to uncertainty in the trade policy. So, the interest rates might turn negative if the slowdown bites the US economy.

In the future, possible negative interest rates could have a negative impact on the Financial Select Sector SPDR ETF. However, stocks like Netflix (NFLX) and Amazon (AMZN), which have secular trends, could be important to watch. On a year-to-date basis, Netflix and Amazon have risen 11.6% and 21.3%. Apart from these stocks, gold could be a perfect hedge against lower interest rates. Central banks have bought a record amount of gold in the first half of 2019. So far this year, gold prices have risen 17.7%—2.2 percentage points below the S&P 500 Index’s (SPY) rise.


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