Posted on 09/20/2019 8:00:30 AM PDT by SeekAndFind
Dear Chuck,
I can’t wrap my head around negative interest rates. What does this mean for my savings accounts in the bank? Can you help me figure this out?
Confused about Rates
Dear Confused,
You are not the only one who finds this a challenge to understand. Simply put, it inverts the model that we have known and practiced for years: putting savings (money) in the bank to earn interest not to pay interest!
Some History and Bigger Picture
Negative interest rates have historically been used to combat deflation. Finance writer Justin Kuepper explains,
“...deflation causes people and businesses to hoard cash rather than spending and investing it, which reduces demand for products and services and puts downward pressure on prices. Lower prices can lead to reduced profits and less economic growth, which in turn leads consumers to hoard even more cash.”
The European Central Bank introduced a negative interest rate policy in 2014. The Bank of Japan did it in 2016. Bloomberg reports that negative rates have been available on short-term mortgage bonds in Denmark since May, but only recently made directly available to consumers.
Now, Denmark’s third largest bank is offering a 10-year fixed-rate mortgage at an interest rate of negative 0.5%. Other lenders there are offering 0% on a 20-year fixed-rate and 0.5% on 30-year fixed-rate mortgages.
Why is this seemingly upside down practice gaining ground and may be coming to the US? Nervousness about the economy. There’s uncertainty in the US-China trade war, Brexit and a generalized economic slowdown.
Lise Nytoft Bergmann, the chief analyst at Nordea’s home finance unit in Denmark, reflects:
It’s an uncomfortable thought that there are investors who are willing to lend money for 30 years and get just 0.5% in return. It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.
Stimulus for Economic Growth?
“The goal of negative interest rates is to put economic stimulus on steroids.” Policy makers and bankers are incentivizing you and I to stop saving and do more spending or investing.
Neuberger Berman for Seeking Alpha reports:
What we have learned so far from the short history of NIRP (Negative Interest Rate Policy) is mixed at best. Economies that implemented this policy approach experienced an initial bounce in financial conditions, economic activity and inflation dynamics, but the gains did not last long.
Considering such middling results, we are left wondering whether we are witnessing the limitations of monetary policy...
John Tobey at Forbes reports that negative interest rates are already here as evidenced by the loss in the dollar’s purchasing power.
So, a $100,000 investment in July 2009 would have grown to $105,076 by July 2019. However, $1.00 in July 2019 dollars is worth only $0.823 in July 2009 dollars. That means the current $105,076 investment is worth only $86,480 in 2009 dollars, a purchasing power loss of $13,520.
How to Respond
I believe that negative interest rates means those that are trying to jump start the economy have very limited options remaining or this would never happen. However, there are always two sides of the coin to consider.
Pros:
Cons:
How will the government address future problems? How will negative rates impact taxes?
My friend, Jerry Bowyer, offers an informative look at Theories Driving Economics Today. It’s worth the read.
If our government could build consumer confidence we would see real economic stimulus. But, in light of America’s political and cultural polarization, questionable journalism practices, and fear that policy makers have very limited options at their disposal, that may be difficult to achieve.
What to Do
If your financial institution implements a negative interest rate policy that impacts your existing savings, remember the following:
Regardless of what happens with interest rates and monetary theory, we must keep our eyes focused on the Lord, walking in humility, integrity, and faith.
Thus says the Lord: “Let not the wise man boast in his wisdom, let not the mighty man boast in his might, let not the rich man boast in his riches, but let him who boasts boast in this, that he understands and knows me, that I am the Lord who practices steadfast love, justice, and righteousness in the earth. For in these things I delight, declares the Lord.” (Jeremiah 9:23-24 ESV)
Negative interest rates means your mattress is giving a better APR that you bank.
In some cases, it is even deflation. For example, when we moved backed the USA in 2002, a liter of milk at the local Dai-Ei supermarket (similar to a Kroger's) was 128 yen. When I visited my daughter in Tokyo in March, the same liter was 92 yen at a mini-market type store which dominates her neighborhood.
Anyone have any ideas?
Regards,
Gee, I was hoping it meant that they’d PAY ME to borrow their money!
8^)
Buy guns and guitars. They always appreciate.
However, the rebates for using our credit cards are very nice.
Charging people for saving money. Paying people to borrow money.
Conclusion: economists are stupid and insane.
Will my credit card company pay me to run a balance?
Islam forbids lending at interest. Negative interest rates are part of the destruction of the banking system.
They’re trying to fight the deflationary effect of massive debt loads and declining worker populations.
I’ve heard people use this to say buy gold. I say follow Dave Ramsey and pay off your debt. Guaranteed rate of return equal to your interest rate.
The messed up thing is that the merchant winds up paying for all those miles, rebates, free-stuff. None of that comes out of the Credit Card company pockets. All that money comes out of small businesses across this great country.
A senior trying to live off Soc. Soc. & maybe a savings is now going to pay somebody to handle a savings?? I don’t think so. The same person is not likely to be buying anything on payments either. This is one of the craziest ideas I ever heard. Crazier yet is the notion that my banker says they’ve not heard about this. Time for a new banker?
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