In a normal economy, banks pay out interest to their depositors, use the deposited funds to make loans, and take in interest that’s charged to the borrowers. But when economies go off track, those rules can be thrown out the window. You might have to pay the bank a fee for holding your money, and a lender might pay you to take out a loan. Welcome to the topsy-turvy world of negative interest rates.
For example, you might be offered a 15-year mortgage with a negative annual interest rate of -0.5%. By the time you finish repaying the loan, you’ll have paid less money than the amount you originally borrowed. Wow, that sounds great! But, imagine you just earn $1,000 from your hard work, you put the money in the bank, a year later you only have $960 left – you lost about $0.11 a day – not so great. You don’t lose too much per day, but still a loss. Will that change your way of thinking when it comes to money? Governments and central bankers are hoping it will – they are probably right.
The IMF (International Monetary Fund) is already preparing the way. Central banks have reduced policy interest rates in the past in order to fight economic downturns. Historically they have required a 3 to 6% cut in policy rates. If another crisis happens, from where we are at today, we go into negative rates. Some countries are already there.
A recent IMF staff study shows how central banks can set up a system that would make negative interest rates a feasible option. One of the issues would be that people would start to hoard cash – leaving it in the bank you lose. Hence a recent push to a go-to a cashless economy. Forcing people into a cashless economy would also allow governments to track money better for tax purposes. There are other ways to manage this, expiry dates on physical cash.
Negative interest rates are not the only way to combat faltering economies. Use of helicopter money in the form of UBI (Universal Basic Income) is another. This approach just showers money on to an economy, hoping to induce people to spend it, thereby energizing an economy. Despite what this would do to a merit-based economy, many feel that this would still be insufficient. Perhaps some combination of UBI and negative interest rates would need to be applied.
Let’s be clear here. All these schemes are about currency debasement. It is governments trying to manipulate economies to benefit specific players in an economy and their political constituencies. Currency debasement tends to favor rich against the poor – rich can hedge the negative effects, even profit. The poor tread water – creating more wealth inequality. There are real solutions that require fiscal discipline (politically unsaleable), but solutions are out of the purview of News Forecasters. Politicians need money to bait their voters.
So what is the real problem with all this? These schemes are nothing more than market distortions. These distortions will cause bad investments in activities that are not productive. At first, it can work, but in the long run, whole industries are built up that are totally subsidized by these schemes. Remember in the old Soviet Union when they said, “We pretend to work and they pretend to pay us?” This is all a house of cards in the making – market realities eventual come, whether you have a capitalist or socialist form of an economy – it is a matter of when.
Regardless of all this analysis, News Forecasters believes that eventually UBI and negative rates are coming in full strength – perhaps in the next 5 to 10 years. Management of your money, as well as your consumption, will get far more complicated in the future. The bottom half of the people in the economy won’t be able to handle it, becoming effectively wards of the state. These coming radical changes to our economy, when it goes wrong (not if), will have results that will be disastrous at many levels.
A video presentation of this subject: