negative interest rates and the effects on the average Joe


negative interest rates and the effects on the average Joe

In: Economics

Low interest rates on loans and mortgages. Possibly easier to get loans as banks don’t want to hold cash. It has an upward effect on (the already very high) stock prices – so investors in equities should do well.

Although this is harder to measure, it probably also increases employment in general (if businesses invest in capacity due to low interest loans)

When you borrow money, you usually have to pay back that money (the principal) and a little extra (interest).

So a negative interest rate means that instead of paying a little extra, you pay less than the original amount! Free money!

Now for obvious reasons such loans shouldn’t exist: after all, people would just loan all the money available, knowing that they will never have to pay back the full amount.

But in certain situations, countries DO want to give out money to people, because they believe giving people money will allow them to do business and grow a country’s economy.

So what these governments do is offer negative interest loans to institutions like banks, who will then use that money as part of their business. This money is used to offer commercial loans to regular people, or for investing in businesses.

So what does this mean for an “average Joe”? Well, when he applies for a loan at the bank, his interest rates will be lower (since the bank got free money, it can offer its services for a better price). Or maybe he gets to keep his job instead of being fired (since the bank used the free money to invest in his employer) etc.

Now this is all a bit of a simplification, but it illustrates how negative interest rates can be used as a tool.

Interest rates are one of a handful of tools in a Central Bank’s toolbox, used to keep an economy stable and healthy. These tools all generally do the same thing: tighten and loosen the money supply. Traditionally, when times are “good”, CB’s tighten the money supply by raising rates and stopping quantitative easing, that way when times get “bad” they have somewhere to go with those things. Hard to lower rates during a crash if you didn’t raise them back up after the last crash was over, right?

But central banks aren’t a one-man army – monetary policy has to work hand-in-hand with fiscal policy, which the government controls, in order to ensure a stable and healthy economy. Right now, global governments aren’t doing their part, leaving central banks in a bit of a bind. The tools they have at their disposal (rates, QE, etc) have diminishing returns the further they go with them, and without matching fiscal policy it doesn’t necessarily go where it’s meant to go. This is why stock markets are at such extended highs and the rich are getting much richer at an accelerated rate, while many markers of the overall global economy are suggesting poor health for “the average Joe” – negative rates for extended times without matching fiscal policy has potential for abuse by the already-wealthy by offering access to easy free money, without providing any incentive to ‘trickle down’ that money into things like raises, bonuses, R&D, etc. Instead, they are using that money for things like record stock-buybacks to help stockholders and various other financial risk instruments (equities, real estate, bitcoin, junk bonds)

TLDR: Negative interest rates are the result of central banks not acting to raise rates when they should have, in part because governments were not doing their part with fiscal policy, and is dangerous because it both widens the wealth gap and leaves central banks poorly positioned to deal with a future recession. Short term, maybe your mortgage rate is a point lower. But long term, at the very least, far more wealth inequality and corporate influence on government along with it.

A negative interest rate is literally the opposite of receiving savings from storing cash. It’s a strategy that a central bank (in most recent history I think Japan had a negative interest rate) to encourage spending and lending to encourage economic growth.

ELI5: When you put money in a savings account, it generates interest and eventually you get more money. Banks have the same thing – but a central bank can enact negative interest rates – meaning when they leave cash in their banks it loses value – meaning it’s more economical for the bank to offer loans instead of hoarding cash.