US Negative Interest Rates Would Be a Disaster, El-Erian Warns

Allianz economist notes decline of yields and worries they might crop up in America.

Could it happen here? No, not the imposition of a dictatorship. Negative yields. Mohamed El-Erian thinks so, and that the results would be as bad as a political upheaval.

As the yield curve inverted, El-Erian, chief economic adviser at the financial powerhouse Allianz, noted the decline of Treasury yields with alarm. Negative rates are a reality in Europe and Japan, and some say they have held back economic advances in those places. Savers have been hurt and banks have had a tough time generating profits.

Essentially, negative rates are where people pay banks to store their money. The idea is that they will prefer to spend it or invest it in some more economically helpful endeavors. But in practice, that hasn’t worked out as well as in theory.

If negative rates come to American shores, El-Erian told Yahoo Finance last week, “I’m going to be really worried because negative yields in the US, the world’s biggest financial market, will break things. The system is not built to operate with negative yields.”

Meanwhile, former Federal Reserve Chairman Alan Greenspan told Bloomberg News that as bond yields fall, there will be “no barrier to Treasury yields going below zero.”

The US’s financial institutions are set up to only handle positive rates, El-Erian argued. Banks, retirement plans, and life insurers all depend on positive rates, he said. He criticized the European Central Bank for allowing negative rates to occur.

The ECB “made that mistake and they can’t get out of it,” El-Erian said. “And the Fed has to be careful not to make the same mistake.”

Last week, the stock market freaked out when the two-year Treasury yielded more than the benchmark 10-year. That inverted yield curve is viewed as more dangerous than the inversion that has been in place since late May, with the three-month Treasury out-yielding the 10-year.

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