Skip to comments.Negative interest rates, explained — and how they could turn the world of banking upside down
Posted on 03/21/2020 10:38:28 AM PDT by ConservativeMind
What are negative interest rates?
A negative interest rate is exactly how it sounds its when an interest rate (or a yield) falls below 0 percent.
It seems counterintuitive. After all, how can a rate actually fall below zero, a number thats literally meant to be a floor for traditional borrowing and lending activities?
Take Germany, for example. Its government bond yields are trading in the negative territory all the way out to 20 years. Bond yields are negative in France, Denmark and the Netherlands right now, and they were once sub-zero in Belgium.
The Riksbank of Sweden, the oldest central bank in the world, was among the first to implement whats now known as a negative policy rate, when it announced in 2009 that it would charge banks to hold deposits. Technically, however, the central bank of Denmark in 2012 became the first to bring its key policy rate below zero.
Today, the European Central Banks (ECB) interest rate for deposits is minus 50 basis points, while the Bank of Japans (BOJ) short-term interest rate target is minus 10 basis points.
Negative rates have been one of the unconventional policy tools [used] since the global financial crisis, says David Lebovitz, executive director and global market strategist at J.P. Morgan Asset Management. If you look at any traditional income textbook, there is no mention of negative interest rates. This has been an experiment over the course of the past decade, with the main players being people like the ECB and the central bank of Sweden.
How negative rates work
If a yield on a savings account is negative, youll (theoretically) have to pay a bank to hold your cash. Think of it like a storage fee.
(Excerpt) Read more at bankrate.com ...
If a yield on a savings account is negative, youll (theoretically) have to pay a bank to hold your cash. Think of it like a storage fee...
Get a safe and a gun.
Negative Stock Prices next.
Negative interest will cause everyone to try to withdraw their money, and it ain’t there.
The US is the where everyones money flies to when their countries are deemed risky. Yet, those countries are able to get all the investors they need to prop up their governments through negative interest rates.
If the US is more solid than any other country in the world, we should be able to have the deepest negative interest rate.
No, it wont, because negative interest rates are still a hedge to inflation.
Just not an excessive hedge.
Well they DO have to make some money!
Gold and Silver back on the up-tick. It’s been a wild few weeks; glad I have a strong heart! :)
Negative interest rates wont work here as well. Its actually a tax. The government sells their bonds at a higher price than they give back. So why would people buy them. They would buy them because the laws in those countries force banks to buy government debt. So they do. Its a tax on the banks which is paid for by the people. All the European banks are unprofitable. If we want to destroy the banking system here, thats a sure way. But who is it helping? Government employees and government retirees keep their jobs and pensions while savers and 401K people pay for it. Its not a tax on the banks as much as its a tax on everyone who does not get a government check. And don’t think your poor little Social Security check counts. Its a small fraction of a government pension. This whole thing wipes out the private employees in favor of government employees and their unions.
I have been benefiting for years from negative interest rates. When I use my Discover card they give me a 30 day loan to buy anything I want including down payments on cars and furniture up to my limit. If I pay back the loan in that time they give me 1-3% cash back depending on the promotions they are running.
From a consumer’s perspective I don’t see a problem.
If inflation is 2%, it still pays to have a bond at -1.75%.
This is not a hidden tax.
I’m still waiting for bank fees to come done after they introduced ATMs and stopped returning checks.
Maybe I missed it during my quick scan of the article. But I did read somewhere that these European negative interest rates are being applied to huge accounts only. They are not being applied to small personal accounts (yet).
You call your bonds and reissue them.
>>Yet, those countries are able to get all the investors they need to prop up their governments through negative interest rates.
That’s because those countries banned cash first, so there’s no way for the investors to actually withdraw their money to get the higher zero interest rate of cash.
Negative interest rates are also the result of massive government deficits and the accumulated debt that accompanies those annual deficits. I am old enough to remember a 3% interest rate on a savings account and with little or no inflation-a real return and REWARD for savings.
Good point. The real rate of interest, r = i + inflation rate when i is the nominal or stated interest rate you receive. So if i = 0 and the inflation rate is -2% (deflation actually), the real rate of return is +2% not counting taxes on the interest income.
Is there a bank out there that will lend me a billion dollars at -1% interest (with no fees)? I did some quick budget calculations and I think if I watch expenses that I could get by on $10,000,000 per year.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.