Negative Interest Rates and the Coming Monetary Flood

On March 31st, 2021, the US Federal Reserve Bank is widely expected to allow its temporary Supplementary Leverage Ratio (SLR) exemption for US commercial banks to expire. The SLR exemption enabled U.S. commercial banks to absorb a nearly $4 trillion increase in U.S. money supply in 2020 by channeling much of it into U.S. Treasuries as well as their reserve accounts held at the Fed. 

Without the SLR exemption, US Commercial Banks will not have the balance sheet capacity to absorb the additional $1.83  trillion additional cash being pumped into the financial system through June 2021, not to mention an additional $1.9 trillion stimulus debated in the US Congress.

Most US commercial banks do not have the balance sheet capacity to absorb an additional $4 trillion flood of money supply coming down the pipe in 2021. This means many banks will be forced to start turning large new deposits, including money market funds, insurance companies, and corporate treasuries, by charging negative interest rates on new deposits.

This government-led flooding of money markets, combined with a broad-based inability of commercial banks to absorb such liquidity, is expected to have the following near/medium-term results:

  • US commercial banks to adopt negative interest rates.
  • Reverse repo rates between commercial banks will also go negative.
  • Fed will aim for interest rates just above zero on bank reserves it holds for U.S. banks. 
  • Substantial increase in U.S. monetary inflation rate 
  • The substantial weakening of the U.S. Dollar relative to other global reserve currencies
  • The continued bull market in commodities including gold, Bitcoin, and Ethereum