Negative Interest Rates Aren't Working Because They Haven't Been Tried
By: David Haggith
The economics world is all a-chatter about how central banks and their member banks have moved interest rates beyond the zero bound to charging negative interest rates. There is just as much brainless talk about why this is accomplishing nothing. No one seems to notice that negative interest rates never actually happened!
Sounds preposterous? Think about it:
Think about it in terms of the central banks' stated objective, which is lowering the rate at which banks loan out money. As the recession went on, central banks tried to drive interest on loans like mortgages lower and lower in order to entice people to buy things with loans in order to stimulate the economy.
Because that didn't stimulate the economy enough, central banks started saying they might have to go from lowering interest (for banks) to the zero bound (zero interest rate policy -- ZIRP) to taking interest all the way negative (negative interest rate policy -- NIRP). Nope. Never happened anywhere.
In order to get interest rates in the general economy down, central banks made moves that would take down the rate at which banks borrow money from each other and from the central bank. Eventually, central banks took that rate all the way down to zero.
Following that progression, if interest were going to go truly negative, the central bank would need to start paying banks for borrowing money from each other or from the central bank. (In the context of talking about ZIRP, that would be true negative interest rate policy.)
Given that the actual objective is not what happens between banks but to stimulate the general economy, central banks would have to do this in ways designed to make sure their member banks pass that negative interest on to mortgages and other loans. Negative interest, instead of just low interest on your loan, would mean the banks pay you to take the money. Hallelujah!
That would put some adrenaline in a dying economy!
Of course, none of that ever happened. Banks did not switch from paying little to no interest for the loans they take out from each other toward getting paid to take those loans. Naturally, they didn't pass that negative interest on to the consumer because negative interest rates never happened.
"Negative interest rate policy" was really just a bait and switch move
I guarantee you, if your bank started paying you to take out a loan, negative interest would have stimulated the economy like a whore on crack! But that is so far outside of a banker's way of thinking that it was inconceivable, so the central planners of our economies apparently got confused about what going negative meant and changed the rules of the stimulus game entirely to the only move they could get their heads around. They switched the entire playing field from talking about the interest rate on loans to the interest rate on savings.
Instead of taking interest on interbank loans all the way into the negative zone, central bankers said they were going to start charging banks interest on their reserve savings. Instead of going beyond the zero bound with loan interest, banks simply found one more thing they could make money on by charging interest on savings.
Loans, either from bank to bank or from bank to consumer, never went negative in order to stimulate people into taking on more debt. Instead, central banksters started charging their member banks interest on the reserve deposits those banks are required to maintain at the central bank. They said they did that in hopes that there member banks would pass along that positive interest charge to their customers' savings deposits. That, they hoped, would prompt people to move their money out of savings and into the economy. Central banks have done the twist.
Don't kid yourself. Banks are still solely in the business of charging positive interest. Only now, instead of just charging interest on the money they loan out, they ALSO charge interest on the money they take in. They get you coming and going and then wonder why that isn't helping the economy any. My gosh, we've become stupid. Entire nations are letting banks get away with this bait and switch where there is truly no bound at all to their greed.
Then our zombie economists puzzle over why people are not taking out more loans as interest moves below the zero bound. Really? Why would they? The price of the loans hasn't gone below the zero bound. I even read one economist suggesting people aren't moved by negative interest because people have all the debt they can handle. Sure they do; but, hey, if loan interest truly went negative, people could readily handle all kinds of additional debt because they'd get paid to take it on. What a happy refi world that would be! This is why people long said zero interest was impossible because it is Wonderland.
Central banksters make a bloody muddle out of negative interest rate policy. "Trust us; we have everything under control. Now, give us your savings."
True negative interest (on loans) would certainly stimulate the economy ... enormously! I'm not saying it's a good idea. It's really a form of "helicopter money" that would cause hyper inflation; but charging positive interest on savings is just another form of wealth transfer that makes certain even more money moves from the poor and the middle class to the top one percent.
With this thing they are calling "negative interest," central banksters are just saying, "Spend your money now, or we'll take it away from you and make it all ours!" And their populations and politicians let them get away with this robbery ... without even wincing!
Odd nobody realized that its just another wealth transfer to the rich! The entire world is sleep walking. Negative interest has never been tried, yet everyone talks about it as if it were actually happening! We are truly walking dead through a zombie epocalypse -- an economic apocalypse in which all brains have apparently been eaten.
I don't know what kind of weed economists are smoking these days, but they need to stuff this article in their pipe and smoke it.