Your Mortgage May Be Cheaper, but Your Savings…

It was on a summer day in Strasbourg, France that Frau Troffea began to dance.

She was on her own, on the street outside her house.

Nothing really prompted the dancing. There was no music.

And it wasn’t a happy dance, either.

Frau was flailing her arms, twitching her body and her eyes were glazed over.

Soon a crowd started forming around her.

Her husband, worried, begged her to stop. But Frau didn’t — or couldn’t — listen. She kept going for hours, until she finally collapsed from exhaustion.

The next morning, she woke up hungry and thirsty. Her feet felt sore and swollen.

But it didn’t matter. She stood up and kept on dancing.

And this time, more people joined her.

Within days, there were hundreds of people hopping from one leg to another, jerking and jiggling, as sweat dripped from their bodies.

It was as if they couldn’t control their need to dance.

For weeks they danced, night and day. They didn’t eat, drink or sleep. They danced until they collapsed…and then started all over again.

The authorities at the time, in their infinite wisdom, decided they had the perfect cure for Strasbourg’s dancing plague: more dancing.

So, they built a stage, brought in musicians and professional dancers. All to incite people to keep dancing.

This only made it worse. Soon enough people fell sick, and many died.

All of a sudden, in September, it stopped. The whole thing had lasted two months.

The dancing plague is a true story. It happened back in 1518.

What caused it?

To this day, no one knows.

Theories range from demonic possessions to the stresses of the time and food poisoning.

But the whole thing makes no sense.

I mean, if people are collapsing and dying from exhaustion, you don’t encourage them to keep on dancing.

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You don’t solve a debt crisis with more debt

The same way that if you want to put out a fire, you don’t pour gasoline over it.

And, you don’t solve a debt crisis with more debt.

But that’s what our genius central bankers are trying to do.

In 2008, we saw a huge collapse in the system from too much risk and debt taking.

Since then, central bankers have resorted to unconventional stimulus like low interest rates and quantitative easing.

Now with interest rates at zero, the European Central Bank is looking at more stimulus and rate cuts as early as September.

While the US Federal Reserve had started to normalise rates, it hasn’t lasted long. Interest rates are still at lows and there are already talks of an interest rate cut.

I mean the whole story is absurd if you think about it.

Why is the US Federal Reserve thinking about lowering interest rates when unemployment is at a record low and inflation around their target?

It doesn’t make any sense.

They are going towards zero bound and even negative to keep the expansion going.

Vern Gowdie has a great analogy, one I have heard him use a few times: ‘High tide, low tide, inhale and exhale, expansion and contraction. This is the balance of life.

We need both, expansion and contraction.

What happens when you only inhale? We could be about to find out.

Record low interest rates are great for mortgage holders, but bad news for savers.

And going to negative interest rates…well, only a few years ago economists deemed them impossible, something that you would never see in the real world.

But here you have them.

Negative interest rates act like a tax

This means that your savings in the bank lose money while people taking on debt get rewarded.

It’s supposed to incentivise people to spend rather than save.

But it hurts savers and people in retirement. It hurts the profitability of the banks, who may be more hesitant to lend.

It encourages more risk taking.

For a long time, low interest rates have fuelled an asset bubble. It has increased stocks and property prices around the world.

Central banks claim they need lower rates due to low inflation. But you and I both know that that’s not exactly true.

Food costs are rising, so are healthcare costs, power costs…you name it.

But salaries are staying put.

What’s unbelievable too, is that governments have been increasing their debt during the ‘recovery’, instead of taking advantage of the good times to lower it.

Higher debt means higher interest rate payments and cutting interest rates is a way to keep debt cheap.

Central banks around the world are looking to go lower for longer.

All rationality is gone.

We have all seen what negative rates has done to Japan over the past years.

They’ve built the stage. They are bringing in the musicians and the dancers.

Coincidence that gold and bitcoin are rising? I think not.


Selva Freigedo,
Contributing Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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