Saturday, February 20, 2016

The Frugal Planner's Weekly Dispatch, Volume 2, Issue 8

See the message below from Bloomingdale resident and Certified Financial Planner Chuck Donalies:

From: Chuck Donalies, CFP®
Sent: Friday, February 19, 2016 8:59 AM Subject: The Frugal Planner's Weekly Dispatch, Volume 2, Issue 8

The Frugal Planner's Weekly Dispatch

Volume 2, Issue 8
February 19, 2016

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Yes, I own a Superman cup. It's perfect for my morning protein shake.

Read on to find out how Superman and the villainous Bizzaro relate to the world of finance.

Entering Bizzaro World

Time for Comic Book History! This will make sense, I promise:

Bizzaro World was first introduced by DC Comics in the 1960s. This world's "hero" is actually a supervillain named Bizzaro and he's the complete opposite of Superman. For example, Superman has heat vision and Bizzaro has freeze vision.

Apparently, the Bizzaro World is bleeding into our universe because positive interest rates are being replaced by negative interest rates.

What Are Negative Interest Rates?

You probably understand how traditional (positive) interest rates work. You lend money to someone, like a bank, and receive payment(s) for the use of your money.

Negative interest rates (henceforth known as Bizzaro Rates) are the complete opposite: You pay someone, like a bank, for the privilege of holding your money. Crazy, right? I don't know about you, but paying a bank to hold my emergency fund* just doesn't seem right.

*You have an emergency fund, right??

Why Use Bizarro Rates?

Bizzaro Rates may be a foreign concept to us, but their rationale makes sense. People and businesses should have a greater incentive to lend, spend and invest when there's a fee for sitting on cash. Bizzaro Rates are one more way central banks can stimulate an economy.

In fact, the European Central Bank, Swedish Riksbank and Bank of Japan recently started using Bizzaro Rates and Janet Yellen, Chair of the U.S. Federal Reserve, hasn't ruled out using Bizzaro Rates in the future.

So What's the Problem?
Aside from being weird (one might even say bizarre), the problem is that no one really knows how Bizzaro Rates will affect the economy or the behaviors of consumers and businesses. There are bound to be many unintended consequences of using this financial tool. For example, high Bizzaro Rates might cause consumers to hoard large sums of cash in their homes (not exactly a safe practice).

Should You Be Afraid?

Of Bizzaro? No. He's a comic book character.

Of negative interest rates? No. Other countries are being extremely cautious when using Bizzaro Rates. I'm sure the U.S. Federal Reserve is monitoring the implementation and results. For now, I would not expect to see this tool of monetary policy used in the U.S anytime soon.

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