So I’ve been reading an article on AP about negative interest rates and it really didn’t seem so bad. There were a bunch of quotes in it that basically sounded like “NEGATIVE RATE BAD!! SCARY!!” but without actually having any content pertaining to the possible risks.
It seems totally intuitive to me that you would do this if you wanted to punish people for huddling up avoiding investment and keeping every cent in the bank instead of stimulating the economy. It also seems like an efficient tool for battling capital strikes.
What is the massive risk that people are afraid of there?
In: Economics
With negative interest rates there are no incentives for banks to lend money since there is no return this unless is is government funded. But if it is not banks will lend no money at all and there will be less consumption/investment in the economy worsening economic growth and unemployment etc.
I assume you’re talking about monetary policy. This relates to the issue of the “zero lower bound” (ZLB). Central banks can TRY to set funds rates below 0. Their policy models might even tell them that’s exactly what they should do in order to stimulate growth. However, it’s very hard to set a rate below 0 because at that point banks and citizens start to have better outside options. If you can either hold cash at a 0 interest rate or bank with the Fed at a -1% interest rate, you just hold cash. Central banks have found some creative ways around this problem (like quantitative easing), but they have downsides.
Because policymakers can’t achieve negative interest rates, they try to avoid situations where negative interest rates are called for. If the ZLB wasn’t a thing, you could keep rates higher even when there were fears of recession. If the recession actually happens, you can adjust to negative rates to compensate. In actuality, you could find yourself stuck in recession for a long time with no way to get out. Instead, policymakers favor lower rates in the hopes it will keep them from ever wanting to use negative rates.
If there is a negative interest rate the economy will stop. Banks won’t lend money (a truly negative interest rate means that they’d have to pay their customers to borrow money), which means that people will quit buying things that they can’t afford to pay cash for, which will absolutely and totally destroy the economy.
Houses won’t be built, because almost nobody will be able to pay cash for a house, so the people who build things for houses will lose their jobs. Cars won’t be built at anywhere even remotely close to the same scale, for the same reason as houses, which means that all the supporting industries for automotive manufacture will dry up and go away, which means that all the support industries for all those companies will be hurting. Banks will go out of business quickly, because without a way to earn money, why exist? It will all fall like dominoes from there.
When holding cash the most liquid of any investment, losses you money there is a serious issue. Add to the fact that once in negative territory you can’t lower them any further to stimulate growth.
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