A Negative Real Interest Rate Means Losses for You
Financial oppression and negative real interest rates – these terms are good for everyone to learn. This already happened in many parts of the world since the 2008-2009 depression. It may even intensify because of the coronavirus crisis. It means people only receive interests and yields below inflation for their savings. So, their savings lose their value. (Many people also question the reliability of official inflation data. Not only believers of conspiracy theories, but also serious economists, based on their calculations.)
Our chart shows, negative real interest rates, financial repression existed before the coronavirus crisis. After searching in vain for reliable real interest rate data, we compiled our own table. There is plenty of data available on interest rates and inflation. But the government offices, central banks don’t calculate all indicators. They don’t calculate how many people lose on their savings. I wonder why? (Or, what they calculate, is sometimes hidden on page 176 of a 200-pages report.)
Repression in 20 of 32 Countries
We compared the most recent year-to-year inflation rates (CPI) of March for many countries, with the one-year government bond yields. Since inflation refers to the past 12 months, we looked for the one-year yield valid a year before.
The chart shows us that in 20 of the 32 countries analyzed, real interest rates were negative between March 2019 and March 2020. In some European countries, money has lost 2-4 percent of its value. But countries with a high real interest rate are struggling with other serious problems. Mostly with high inflation and high foreign debt. They are also heavily exposed to low commodity prices and their currencies fluctuate sharply. Examples are Russia, Brazil, Turkey, and South Africa.
Real Interest Rates, March 2019-March 2020. Click for higher resolution. (Difference of one-year maturity government bond yields in March 2019 and inflation of March 2020.)
Government Bond Yields in Free Fall
Our table also contains one more interesting thing. One-year government bond yields have fallen a lot in many countries over the past 13 months. (To the end of April 2020 from the end of March 2019.) Decreasing in 25 of the 32 countries analyzed. For example, in Brazil, Canada, or Chile, only mentioning countries at the beginning of the table. We don’t know how inflation will change in this crisis. But even if inflation declines moderately, real interest rates in many countries are likely to stay in the negative or near zero in the coming years.
Is There a Defense against Financial Repression?
How to protect us against negative real interest rates? We can buy “real assets”, such as real estate, farmland, precious metals, other raw materials. Company stocks can also result in a good choice in the long run. Most companies can raise their prices with inflation. So, their profits, dividends, and the value of their shares can also increase. We wrote more about inflation protection methods here: Eight Ways How Inflation Threatens Your Income and 13 Ways to Fight It And about financial repression, expected continued negative real interest rates and precious metals here: Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?