Care for a Subzero Danish?
Denmark just made history – and, no, it didn’t sell Greenland to the United States. A Danish financial institution just launched the world’s first-ever negative interest mortgage. This is some sort of a gimmick that has a catch, right? Nope. It is real, and it is happening.
Jyske Bank, the nation’s third-largest bank, will offer borrowers 10-year mortgages at -0.5%. One of its competitors, Nordea, might soon offer the same thing as it is promoting 20- and 30-year mortgages at 0% and 0.5%, respectively. What this means is that Jyske is paying borrowers to take money off its hands, which allows the clients to pay back less than they have been loaned. While customers will not be given a check each month, their monthly debt payments will be reduced by more than the amount they pay.
The obvious question is: why? Well, Jyske Bank can saunter into money markets, borrow from institutional investors at subzero rates, and then pass this on to its clients. While this is great news for debt-ridden consumers, it is bad news for savers. In a negative-rate environment, depositors will have nothing paid in interest or they may endure a haircut. Don’t think that can happen? Take a look at what just took place in Switzerland: UBS investment bank informed its wealthy clients that it would slap a 0.6% annual charge on deposits more than $550,000.
You can thank the central banks for this upside-down transformation of global financial markets. Myriad nations, such as Sweden, Japan, and Switzerland, have slipped into a negative-rate territory, selling negative-yielding bonds. With the White House demanding the Federal Reserve impose a 1% cut in interest rates, there are fears that the central bank might adopt negative rates should a steep economic downturn unfold. The Fed has already conceded it would be ready to employ this measure.
When the witches in William Shakespeare’s Macbeth said, “Fair is foul and foul is fair,” they were really prognosticating today’s topsy-turvy market.
Pin a Medal on ‘Em
Gold prices are trading at their best levels in six years, topping $1,500 an ounce. What is driving this bull run? Many experts have different opinions: the US-China trade war, subzero interest rates, threats of a recession, geopolitics, and the list goes on. But what we do know, and have known for the last few years, is that central banks are on a gold buying spree.
Russia’s gold reserves topped $100 billion in June, but Moscow added another 300,000 ounces in July. The Chinese hold about $80 billion. Hungary increased its holdings 10-fold. Kazakhstan, India, Iraq, Poland, and Turkey have boosted their gold reserves. Ultimately, central banks are buying gold at their fastest clip since 1971. What is with central banks’ love for the precious metal? It is a strategy to ditch the US dollar.
LN has previously reported about countries trying to transition out of the greenback. China has been incrementally reducing its share of US sovereign debt. India is participating in currency-swap agreements. Iran is turning to the Indian rupee and bartering arrangements instead of the dollar. Russia stopped trading the dollar at domestic seaports.
Purchasing gold is just another tactic of moving away from the dollar as a foreign reserve currency. Does this mean gold will be money again in the future? It’s possible, but unlikely. Right now, the US dollar is one of the strongest currencies in the world, mainly because of the incompetence of other governments and central banks. So, there is a lot of faith in the Federal Reserve Note, but for how much longer?
I Happen to Hate New York
Empire State residents are no longer singing the classic 1930s Cole Porter tune, I Happen to Like New York. Stephen Moore, Heritage Foundation chief economist, thinks the demographic figures being crunched in the “four states of the apocalypse” might be “the biggest economic story” in the US today. As taxes go higher and budget deficits balloon, residents in New York, New Jersey, Connecticut, and Illinois are heading to the nearest exit door. Where are they going? They are leaving for Florida, North Carolina, Tennessee, Texas, and Utah – low-tax jurisdictions. Considering that you can purchase a home with the money you save on taxes, says Moore, the state migration makes sense.
LN recently compared Illinois’ situation to similar problems in Baltimore: High tax rates pushing residents and their capital out the door to neighboring states with better tax conditions. It turns out that when Americans have the option of forking over a larger portion of their hard-earned money or trying to save it from the clutches of the Leviathan, Americans will choose to adopt the Charlton Heston approach to public policy: You can take my money from my cold dead hands.
While it does serve as an indictment on big government, it is bad news for the left-behinds because they will be burdened with a hefty tax bill to cover the shortfall. As we all know, politicians refuse to make tough decisions, deciding instead to keep spending like drunken sailors and to raise levies on households.
So, what is Moore’s idea? It’s simple: “We should make America look more like Texas or Tennessee.”
All these issues share the same theme: Unintended consequences. When Denmark introduced subzero interest rates that never seemed to return to normal, the banking industry responded by hurting savers and benefiting borrowers. As Washington continues to engage in reckless spending, with a Federal Reserve enabling the binge, the rest of the world gasps and seeks out alternatives. As for New York … Well, Gov. Andrew Cuomo’s (D-NY) policies summarize the situation in Albany.