Negative Interest Rates Would Be Another Disaster To The Economy

The United States is in a recession, even if we'll have to wait for official confirmation at the Bureau. With tens of millions of Americans out of work and many of these jobs not coming back, we're witnessing the most unprecedented economic event of our lifetimes.

I have said before that this is my generation's greatest economic challenge. And, by the time it is over, it will fundamentally shift almost every industry in the United States. We will see great moves by the government to raise taxes and redistribute capital. But, those matters are largely fiscal.

What about monetary policy?

Right now, the U.S. central bank has moved interest rates to zero. The April FOMC meeting was largely dedicated to preserving the Fed's benchmark rate to a range of 0% to 0.25%.

That said, there is a distinct possibility that interest rates could turn negative very soon in America. I am not among the merry band of economists who embrace negative interest rates. In fact, I believe they will be disastrous.

Listening to History

There are 16 Laws of Investing, according to the great Collaborative Fund. Law No. 6 reads: "The biggest risk is always whatever no one is talking about, because if no one's talking about it, they're not prepared for it."

I began talking about negative interest rates last fall, when the risks of a recession began swirling. At the time, most people dismissed the possibility of negative interest rates. Now, we're starting to hear some buzz again because of the Fed's recent meeting.

Last fall, I flew to Manhattan for an emergency meeting with two hedge fund managers and a colleague from Northwestern. We focused on one thing: What would negative interest rates do to the financial markets? The key takeaway: Financial models completely fall apart.

And I think they would cause one of the greatest shifts in financial theory in 120 years. Every way that we value assets goes out the window when interest rates go negative.

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