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Illustration: Aïda Amer/Axios

The basic principles of investment are being upended, perhaps irreversibly, as the world enters an era of ultra-low and even negative interest rates.

What's happening: American consumers have seen the interest rates they're paid on savings accounts, bonds and CDs tumble this year, and in places where central banks have actually set negative rates — like Japan and the eurozone — some consumers are actually being forced to pay in order to save money.

Driving the news: The European Central Bank will meet this week to consider lowering its interest rate on deposits, which has stood at -0.4% since 2016.

  • Fearing that negative interest rates will soon mean average customers have to pay to keep money in banks, financial authorities from Germany, Denmark and Norway are independently speaking out against them.
  • “In the long run, negative rates ruin the financial system,” the CEO of Deutsche Bank, Christian Sewing, said at a conference last week, according to Bloomberg.
  • While the goal is to spur people to spend or take financial risk rather than save, the policies haven't worked, and new data shows that negative rates may be doing more harm than good.

The Federal Reserve is gearing up to cut interest rates for the second time this year when it meets later this month, and banks are already cutting rates on savings accounts.

  • Former Fed Chair Alan Greenspan said last week that it’s "only a matter of time" before negative rates come to the U.S.

The big picture: The low-to-negative interest rate environment poses a major problem for people looking to save for retirement. The traditional 60/40 portfolio (60% stocks and 40% bonds) that fund managers have used to craft retirement accounts for decades doesn't work in the long-term if bonds yield nothing or have negative rates.

"Young people ... are going to have to substantially increase their contributions" to retirement accounts if they hope to actually retire one day, Alicia Munnell, director of the Center for Retirement Research at Boston College, tells Axios.

  • Future retirees will also likely have to put more of their funds into stocks and other assets that are riskier and more likely to result in a loss of principal, meaning retirement assets will be less secure.

Between the lines: U.S. pension and retirement funds are currently underfunded by trillions of dollars, and states are already in a position where they’re either going to have to raise taxes or cut benefits for future retirees — or both, notes Jeffrey Hooke, a finance professor at Johns Hopkins University.

Negative interest rates will likely worsen that problem, forcing state governments to make some "tough decisions."

  • “Retirees, most of them think they’ll always get their money, but it may be the case in 5-10 years that some of them don’t,” Hooke tells Axios.
  • “It won’t be pleasant, but it may be necessary."

The bottom line: A fundamental element of our entire economic system — saving earns money and borrowing costs money — is being unhinged before our eyes.

Go deeper

Biden signs bill making Juneteenth a federal holiday

Biden speaking before the signing on June 17. Photo: Oliver Contreras/Sipa/Bloomberg via Getty Images

"Great nations don't ignore their most painful moments," President Biden said before signing legislation Thursday that establishes Juneteenth as a federal holiday, just two days before the occasion.

Why it matters: The holiday, which will be known as Juneteenth National Independence Day, is now the 11th annual federal holiday and the first one established since the creation of Martin Luther King Jr. Day in 1983.

Dan Primack, author of Pro Rata
39 mins ago - Podcasts

House antitrust chair discusses the bills to bust up Big Tech

House lawmakers last week introduced a series of five bipartisan bills designed to curb the power of Big Tech, targeting Apple, Amazon, Facebook and Google in all but name.

Axios Re:Cap speaks with Rep. David Cicilline (D-R.I.), chair of the House antitrust committee and a sponsor on most of the bills, to learn how he plans to get these measures over the finish line. The congressman from Rhode Island also faces a slate of other priorities and in the wake of a spending package to bolster the U.S. tech sector’s ability to compete with China.

Why online games have a shorter life span

"Grand Theft Auto Online" will join a growing list of obsolete games on older platforms this December when Rockstar Game shuts down the PlayStation 3 and Xbox 360 versions of the game.

Why it matters: Video game preservation is one of the biggest challenges when it comes to video games, physical or otherwise.

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