Negative interest rates are no longer a thing of the future. The past several months have seen a slew of negative interest rate announcements from global central banks and financial institutions — most notably by the European Central Bank, which cut its main refinancing rate to negative 0.1 percent in November 2017 and announced that it would do so on a monthly basis beginning in January 2018. Negative rates are when banks charge customers to keep balances in their accounts instead of paying them directly. They’re typically reserved for situations where banks can’t make money from offering loans (like when people won’t pay back loans). The idea is that these loans will attract more deposits and eventually lead to an increase in lending overall. But there’s nothing necessarily special about this phenomenon: It happens all the time with fixed-rate mortgages, savings accounts, and small business loans. When your savings or loan rate goes up, you move your money into checking or savings accounts that aren’t as affected by rising fees or higher interest rates later on. With CDs (certificate of deposit), for example, you might find it makes more sense to re-balance your funds into money market deposit accounts or high-yield savings accounts instead — which tend not to offer much in the way of interest or stability but rather just higher liquidity if you need to access your funds quickly. There are plenty of ways you can prepare for a potential dollar crash at little expense beyond locking up some extra cash via an emergency fund
Table of Contents
Create a diversified, low-risk portfolio
The best way to weather a dollar crash is to create a diversified, low-risk portfolio of investments that makes sense for you.
Questions to ask yourself: What will I use this money for? Will I need all of it at once? What are the risks associated with my investments? How much money should I want to make in a year on average?
You should also keep in mind the types of products and investments you’re considering. For example, if you own stocks, you might want to consider investing in ETFs (exchange traded funds) which offer liquidity — meaning they are traded on an exchange and can be sold or bought at any time during the day.
Dump high-risk debt
, invest in things that are less risky
The global economy is still on shaky ground. The U.S. stock market has largely recovered from its 2016 crash, but the European and Japanese markets have been much less fortunate. If you want to protect yourself from another economic meltdown, one way to do so is by getting rid of high-risk debt and investing in things like cash or very short-term bonds. These investments may not be as exciting as stocks or high-yield savings accounts, but they can provide a degree of stability if the dollar crashes again.
Sell non-performers and actively manage your remaining holdings
The best way to avoid a dollar crash is to sell non-performing assets and actively manage your remaining assets. This will require you to be more disciplined in selecting investments that are likely to continue performing well, as well as being able to identify the changes occurring in the market so you can react accordingly.
If your portfolio includes some stocks and bonds, it’s best not to hold too many of either. The stocks often fluctuate too much and bonds are sensitive to interest rates (and other market factors). If you feel like your portfolio is at a comfortable level, then hold broadly diversified investments that offer solid returns — both tangible and intangible.
Some investors might want to consider using a robo-advisor platform or an automated ETF trading platform. These tools allow you to use algorithms rather than relying on your own judgment, which can help limit risk while still giving you exposure to the markets without having to constantly monitor them yourself.
Save more now
The most important thing to do is put away an emergency fund.
In a paper by the Federal Reserve Bank of New York, authors write that “saving more now could make it easier to invest in the future.” This means starting early and making sure you’re saving at least three to six months of your take-home pay. Whether you save money in savings accounts or stocks can make a big difference in how much you actually end up with. Also important is not overextending yourself financially. If you borrow money for big purchases, make sure to consider how much you’ll owe if interest rates go higher and might not be able to make your payments.
Stocks to hold on to after a crash
You don’t want to keep stocks that may be affected by a dollar crash, but you also don’t want to completely sell them off. The best thing you can do is diversify your portfolio as much as possible with stocks that aren’t going to take a hit.
One good idea is to hold shares of companies like gold miners, which tend to do well during times of financial uncertainty. In fact, we saw one gold-related stock soar 36 percent in the week after the U.S. election in November 2016, when investors feared a Trump presidency would lead to economic instability and higher taxes, which would hurt earnings for many companies.
Bonds to hold on to after a crash
If you want to hold on to your assets, including the dollar, it’s always a good idea to diversify. A good way to do this is by holding bonds that offer fixed-rate interest and a stable value over time. These bonds typically pay a fixed amount of interest per year or have a set maturity date in the future.
When you invest in these types of bonds, you know exactly how much you’ll get paid back at certain times whether or not the dollar is valued at $1 or $100. When we say that the dollar will crash and cause negative interest rates, we’re talking about an extreme situation where the value of the dollar simply crashes into nothingness. In this scenario, your bond payments would stop because there wouldn’t be any dollars left for them to be paid out in. But with these kinds of bonds, your original investment doesn’t go down in value as well — meaning that if everything goes horribly wrong and there’s no US Dollar left on paper (or even digital), your bond won’t be worthless either.
Gold and other precious metals to hold on to after a crash
What would you do with a dollar if the value of that dollar was suddenly cut in half? For some people, that question might sound like an easy one to answer. If you’re an investor or business owner who depends on cash flow, your answer might be different. In the event of a dollar crash, it’s important for investors and businesses alike to have other ways to get back what they lost. Fortunately, gold is one way to hedge against a possible dollar crash.
FAQ’s
What is a negative interest rate?
A negative interest rate is when a bank charges you to keep money in your account. Banks do this to make money, so they can keep their doors open and continue giving you their products and services.
The most well-known example of this is when the European Central bank cut its base rate to zero and put in place negative interest rates on savings accounts. This means people would be charged to hold money in their accounts at the bank instead of getting interest on their balance. The idea is that banks can still turn a profit off of lending money instead of holding deposits for people.
Lower interest rates encourage people to borrow more, which can spur economic growth but also mean that more debt gets created, which is dangerous because it creates more economic pressure. It’s really really important to pay down debt as quickly as possible so you can live debt-free, working only on creating passive income streams from your own property and possessions or from your occupation or business because the national debt our government has amassed is absolutely insane and unsustainable for us all to keep funding it like individuals and households are doing with our own debt. Government can be supported by everyone through taxation if we’re not willing to pay for anything ourselves like prop $15/hour minimum wage through a card swipe machine in your supermarket or fast food restaurant…
How does a negative interest rate work?
Negative interest rates are when banks charge you to keep your money in their bank account.
Banks can recover the cost of holding customer money by charging a fee on a customer’s balances or by making less money from loans and investments. The result is that banks are charging customers for the privilege of doing business with them.
Negative interest rates generally last for two reasons: 1) They’re implemented to help reduce risky lending, 2) They’re temporary, like a short-term ban on interest-bearing accounts. The ECB has put in negative interest rates primarily to help reduce borrowing as a way to stimulate economic growth, and then they will be lifted.
Why did the European Central Bank announce a monthly negative interest rate?
Following the global financial crisis, central banks around the world slashed interest rates to record lows to stimulate the economy. This created flood of cheap money into the financial system, leading to excessive borrowing and lending and facilitating a boom in asset prices. When asset prices began to collapse and the economy slowed, central banks had no choice but to raise interest rates. Their aim was not just to rein in borrowing but to set a floor for prices that would not fall any further but gradually recover and eventually reach their previous levels. Uncontrolled price declines are painful for all concerned: individuals, businesses and government finances.
So negative interest rates were inevitable in some degree, even though an extremely low 0.1 percent is still relatively high. If you borrow from a bank, it’s supposed to be profitable for them to lend you money at such a low rate unless you’re creditworthy for some other reason, such as your firm is in extreme financial distress or you have completed your education at an extremely expensive university that has no need of funding.
Negative interest rates are primarily a new tool in central banks’ efforts to balance price stability against economic growth under normal market conditions. When no one will lend you money at any real amount of interest, then the only way they can make money is by charging you interest on your existing holdings or on your funds left available for borrowing before presumably going out into the real economy or maybe buying some exotic asset like bitcoin or something.
