Negative Interest Rates Aren’t Working Because They Haven’t Been Tried

By Federalreserve (00491) [Public domain], via Wikimedia Commons

There is a lot of chatter about how central banks and their member banks have moved from lowering interest rates to negative interest rates and just as much talk about why it is accomplishing nothing. No one seems to notice that negative interest rates never actually happened!

Sounds preposterous? Think about it: As the recession went on, interest on loans like mortgages went lower and lower in order to entice people to buy things with loans in order to stimulate the economy. Talk was that that low interest didn’t stimulate the economy enough, so central banks might have to go from lowering interest to the zero bound to taking interest all the way negative. Nope. Never happened anywhere.

With lowering interest, the central bank makes moves that attempt get interest rates in the general economy down by taking the rate that banks borrow money down. Eventually, central banks took that rate all the way down to zero. Following that progression, if interest was going to go truly negative, banks would have to get paid for borrowing money. Given that the goal is to take interest down even lower in the general economy, central banks would have to do this in ways designed to make mortgages and other loans go all the way down to zero interest and then to where banks switch to paying people to take out mortgages.

None of that ever happened. Banks did not switch from paying little to no interest for the loans they take out from each other or from central banks to getting paid to take those loans.

“Negative interest” 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 all kinds of economic activity! But that is so far outside of a bankers way of thinking that it was inconceivable, so the central planners of our economies got confused about what going negative meant and changed the rules of the stimulus game entirely. They changed the whole playing field from loans to savings.

Instead of taking interbank loans all the way into the negative zone by paying banks to take the money, central bankers said they were going to start charging banks interest on their reserve savings.  Suddenly the game changed entirely from being all about going beyond the zero bound with interest on loans to simply finding one more thing banks could make money on.

That’s not negative interest! That’s positive interest. Banks are still in the business of charging interest. Only now, instead of just charging interest on the money they loan out, they ALSO charge interest on the deposits entrusted to them. 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.

What central banks have really done is CONTINUE to charge people interest on loans (loans never went negative in order to stimulate people into taking on more debt) and, at the same time, attempt to charge people interest on their savings (believing that banks would pass the interest charged on bank reserves on to their customers savings so that people would move their money out of savings). Central banks have done the twist.

Then economists puzzle over why people are not taking out more loans as things move below the zero bound. Really? Why would they? I’ve even read one economist suggesting people aren’t moved by negative interest because people have all the debt they can handle; but, hey, if loan interest truly went negative, people could readily handle all kinds of it because they’d get paid to take on the loan.

Negative interest is a no brainer. By Charlie Llewellin (Flickr: Occupy Austin) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsLeave it to greedy banksters to find a way to make sure “negative interest” really is just one more way for them to make money! It’s just one more fee that goes to the banks. Somehow they duped their entire populations — all zombie economists and politicians included — into believing this was a move into the negative interest zone. No. In the negative interest zone, the flow of interest reverses to where the bank pays the debtor to take on debt. The bank doesn’t just find one more thing to tack a fee onto!

True negative interest (on loans) would certainly stimulate the economy … enormously! I’m not saying its a good idea. It’s really a form of “helicopter money” and 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 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!”

Odd nobody realized that! The entire world is sleep walking. Negative interest has never been tried.

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  • Brockland A.T.

    Huh?

  • MrLiberty

    Mises, Rothbard, Salerno, DiLorenzo, and countless other Austrian School economists have already shown in great detail the mechanism by which artificially low interest rates (below what a truly free market would generate) create mal-investment throughout the economy that initially creates bubbles that inevitably burst. Savings is the engine that fuels a sustainable economy, NOT spending. Indeed, those saved dollars are eventually spent, but in the future on projects that are then sustainable because those savings are available. Interest rates ultimately need to be tied to savings rates in order to send the proper signals to both short and long-term project entrepreneurs. (The Austrian Business Cycle Theory – very abbreviated) Indeed, a bank paying people to borrow money would certainly be “stimulating” to the economy, but at what future cost (or indeed even present cost)? ONLY a truly free market economy, FREE of any central bank manipulation of interest rates, purchases of bad debt, creation of money out of thin air, fractional reserve banking (aka – fraudulent ownership of money by multiple owners) can create the foundation for a truly prosperous and equitable society. This confusing piece makes me really wonder if the author gets these basic economic truths (and this article is simply written for its shock value) or if there is that level of ignorance of these basic concepts that have been well-exposed by literally hundreds of great authors and economists since the creation of the Federal Reserve and other central banks.