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What Would Negative Interest Rates Mean For Consumers And The Economy? - YouTube
Channel: CNBC
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President Trump is a big
fan of low interest rates.
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Frankly, if we ever got interest rates
down where they should be and if
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they weren't raised so fast, you
would see another probably ten thousand
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points on the Dow. The
Fed acted too soon.
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I turned out to be right. They
acted too soon and too violently.
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The Fed moved, in my opinion, far
too early and far too severely.
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It puts me at
somewhat of an advantage.
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We'll see what happens with the
Federal Reserve, whether or not they
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finally get smart and
reduce interest rates.
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Like many other places around the world
that we have to compete with.
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If you look at what the other
Fed equivalents are doing all around the
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world, they're at a much lower rate.
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And it makes us harder to compete.
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Recently, Trump even went so far
as to praise Germany's zero percent
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interest rate. In Germany, they have
zero interest rate, and when they
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borrow money, I mean, when you look
at what happens, look at what's going
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on over there. They borrow money, they
actually get paid to borrow money.
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And we have to compete with that.
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Then he went even further on Twitter,
referring to the Fed as "boneheads".
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But what if Trump got
what he wished for?
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What if interest rates were actually
zero, or negative, like Sweden or
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Japan? What if instead of a bank
paying you to hold your money, you
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theoretically had to pay the
bank to keep it there?
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It could happen with
negative interest rates.
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Negative interest rates first appeared in
2009, when Sweden cut its rate
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to -0.25
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percent. The move was meant to provide
a short term jolt that would
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stimulate a stagnant economy and encourage
banks to lend, since holding
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onto money meant financial institutions would
have to pay interest to
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Sweden's central bank.
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But there was a fear the move
could also impact savers who could be
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charged by the banks
holding their money.
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Economists feared savers would hoard cash rather
than pay the bank to hold
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it. But that's not what happened.
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Instead, Swedish savers spent
or left it there.
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That's not surprising, since Sweden has one
of the higher savings rates in
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the developed world, according to
the Organisation for Economic
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Co-operation and Development.
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Since then, central banks in
Denmark, Switzerland, Germany, Japan, even
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the ECB have followed suit,
taking rates into negative territory.
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So what exactly are
negative interest rates?
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Interest rates are generally thought of
as the cost of borrowing money.
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Central banks raise interest rates to cool
off an economy that's close to
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overheating.
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zero or negative interest rates, on the other
hand, are seen as a way to
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stimulate an economy.
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In theory, negative rates force
banks to lend more.
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But it doesn't always work that way.
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Instead, negative rates can actually
have the opposite effect.
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They can squeeze profits so much
that financial institutions actually lend
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less. They can also have
an impact on government funding.
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For example, Germany's economy is on the
verge of a recession, so its
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lowered interest rates to -0.31
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percent, which means investors could be
charged for keeping their money in
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the bank. But the country still
needs to fund the government.
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So in August 2019, Germany attempted to
sell 2 billion euros worth of
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30-year bonds, which would mature in 2050
and they had a negative yield.
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As a result. Investors only bought 869
million euros worth with a yield of
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-0.11 percent.
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In other words, investors will in theory
pay to have the German government
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hold their money. Anybody who holds this
bond throughout its full life, is
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guaranteed to lose money and they're
guaranteed to lose money over a
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period of 30 years.
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Now, what this is telling us really
is that anybody who thinks that this
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is a good investment is factoring
in an extremely bleak economic outlook.
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You're talking about no growth, no
inflation for the next three decades.
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In the end, the German government was
forced to buy the remaining bonds
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itself, which could push down
interest rates even further.
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At the same time, the European Central
Bank, or ECB, has continued on its
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own negative rate path.
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The ECB recently lowered its
main deposit rate to -0.5
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percent, a 10 basis point cut.
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It also reintroduced quantitative easing as
a means to try to stimulate
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the economy. Negative yields and low
interest rates in Europe have also
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had another effect. They've driven
investors to the U.S.
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bond market in search of
safer investments with a yield.
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Negative rates cause uncertainty
in the markets.
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Many experts believe negative rates in
Europe have only had a modest
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impact on Europe's growth.
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While it lowered the cost to borrow
money, it didn't do anything to
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increase demand for goods.
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As a result,
businesses didn't invest.
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Lowering rates even further could put
the entire global financial system
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at risk. Negative rates cause a
decrease in margins, which decreases
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profitability for banks, and that can cause
a bump in fees for loans,
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including home mortgages.
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They also make it more difficult
for countries institutional investors to
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find appropriate opportunities
for clients.
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If markets shift, bondholders seeking gains
in price rather than yield
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could get stuck holding
too much risk.
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Germany's negative interest rates have
dramatically pushed up prices.
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Recently, traders paid the
equivalent of $195.87
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for $100 and 20 year German
bonds, which translates into a technical
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negative yield of .386
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percent. Former Fed chief Alan Greenspan
has said that he doesn't believe
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negative interest rates in the U.S.
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would be that big of a deal.
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But others disagree, saying negative rates can
be a trap, that they may
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not boost flagging economies and
can even become the norm.
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And that hurts banks, savers and
companies in the long run.
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It is the financial sector, the
banks, the insurance companies, the
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pensions, the security settlement is
all structured, invented on one
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assumption: positive interest rates.
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Marginal reserves.
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Marginal reserves. Everything is
on positive interest rates.
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You take those away and now the
investment decision loses your money in a
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negative interest rate world? The
banking system doesn't work.
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Pensions don't work==.
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How does the European system work?
They're doing a little fudging, aren't
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they? Some creative movements, you
are telling me about?
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Yeah. The European system works because
we, the reserve currency, are
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still positive. Banks like Deutsche
Bank are restructuring their entire
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worldwide reserve system to
invest in U.S.
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dollars because they've
got positive yields.
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If we go down that road and go
negative yields with them and cut everybody
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off from positive, I think the financial
system is at severe stress then
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at that point. There's also a
concern that negative rates encourage
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governments to borrow more without concern
for growing debt until the
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rates go up and the bill comes due.
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Meanwhile, trade wars have taken their
toll on the global economy and
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there's a growing concern because rates are
so low now, the next recession
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could force the Fed's hand.
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Then negative rates could
be the only alternative.
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Larry Summers, former Treasury secretary
under President Bill Clinton,
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says that once rates go negative, it
could be extremely difficult to get
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out and the global financial
system could get stuck.
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And I think the great concern is
with what I've called the monetary black
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hole, that zero rates appear to be
where we're stuck in Europe and Japan
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and we're one recession away from
a situation of that kind.
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It's a very different world when
everyone's stuck at zero interest rates.
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We've got to think
about stabilization policy.
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Institutions are going to have to think
about their investment policy in a
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very different world, in a very different
way when we have a black hole,
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zero interest rate world.
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And that's what I
fear we're headed into.
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And Morgan Stanley CFO Jonathan Pruzan
agrees, saying that negative rates
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provide little relief.
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Clearly, the negative rates have not
really been helpful to spur the
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economy in some of these markets.
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And we'll have to just
see how it plays out.
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But this negative rate dynamic continues
to have investors searching for
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yield. And I think that's a trend
that's going to continue because not
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only there are a
lot of negative rates.
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If you look at this stack of debt
products out there, there is not that
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much inventory that's yielding
over 5 percent.
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So on the one hand, you have a
lot of negative rates and on the other
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hand, not a lot of places
where you can find yield.
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And that's why Harvard Professor of
Economics Ken Rogoff believes negative
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rates will eventually make their
way to the United States.
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But he also says there are more
challenges involved for the US than just
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the rates themselves.
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I think eventually it will come
here to the United States.
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It may happen sooner
rather than later.
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However, the United States, beyond
the Federal Reserve, the government
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would have to take a lot of steps
in changing tax laws or regulatory laws,
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and particularly how to deal with
cash hoarding to really have negative
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rates dip very far.
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So Trump may get his wish of
zero or negative rates, but the economic
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slowdown that led to them would
dampen the president's prospects of
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re-election, and the end result could
be even worse for the U.S.
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economy. Well, I am terrified if we
go negative rates in the United
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States, it will virtually destroy the banking
system as it is doing in
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Europe as we speak.
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That would be a major, major crisis.
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I continue to think there'll be consequences,
you know, in the long term
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for negative rates as an experiment.
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I certainly hope in the US there's
never a consideration of negative rate
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policy here in the US.
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I think it's interesting to see where
we are in the economic cycle, where
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we are from a job perspective and
just balance the policy that we have
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today. You know, personally, I'm not
a Fed governor, but personally I've
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been surprised still by the amount of
monetary policy or kind of the low
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rate environment that we still have
at this point in the cycle.
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I would've expected something slightly
different, but negative rates are
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not something that I think when we look
back on history and write the book
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on that, I'm not sure
that'll be a good chapter.
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