Interest rates are the price that a bank or other form of lender charges to borrow its money. It is also the rate of money a depositor generates on when keeping money in a bank. Negative interest rates exist when the bank charges the depositor for keeping their money in the bank.
Individual depositors become banks themselves in these situations, similar to the actions of local banks when they hold their unused funds at a central bank like the European Central Bank, the Federal Reserve or the Bank of Japan. Negative rates cause fees to be charged by central banks to the local banks which then are charged to individual depositors.
Why have Negative Rates?
The idea behind these rates is often touted to encourage depositors to use their cash in more productive use cases. Local banks are encouraged to lend to promote economic growth by businesses and households.
Despite the reasoning for negative rates of interest, there has yet to be an explosion of bank lending. Businesses find themselves unable to find enough profitable uses for the cheaper funding at their disposal. Lower rates do not address real economic problems which are weak consumer demand and weak business investment.
The Real Reason for Negative Rates
The real reason behind negative interest rates is unfortunately more critical than a simple hope to promote growth; it has become a desperate attempt to keep the entire banking system afloat.
Denmark, Sweden, Switzerland, the European Central Bank and the Bank of Japan have all introduced negative rates to combat deflation and stagnant economic activity. A prime example for investigation is the German banking giant Deutsche Bank, who has seen their stock lose more than half its value this year.
A report by the International Monetary Fund in June observed Deutsche bank to be “the most important net contributor to systemic risks”. In a pattern similar to American and Asian banks, many European banks are highly interconnected with each other. Due to this interconnectedness the report stresses the high level of importance there is to manage risk and continue intense scrutiny of all globally systematically important banks (G-SIB’s). The scrutiny leads to increased oversight that leads to the continued war on cash as banks attempt to real in more income to pay their debts.
Deutsche bank is the extreme example in the case of global banks, but ultimately banks everywhere are connected. A failure of the largest bank in Germany would have reverberations felt around the world; the effects would be more disastrous then the collapse of Shearson Lehman Brothers Inc. due to the current leverage (debt compared to equity/capital) levels which are significantly higher.
The economic experiment enacting negative interest rates is uncharted and dangerous. Consensus among experts bemoans the long term use of negative rates as it sets the stage for individual investors and institutional investors to take large, irrational risks as desperation for higher returns sets in. Enacting Negative rates for an extended period of time could ultimately lead to banks raising fees on checking and savings accounts.
A situation similar to what has occurred in Japan is realized; individuals and businesses take some of their money out of banks and stash it in safes or under mattresses which in the end decreases the stability of central banks.
Bitcoin as an Alternative Way to Save
Gloom and doom is not the goal, for once there is a real answer to the looming fiat-backed financial debacle. Gold, silver and other precious metals have often provided security in the past, but technology is moving the world forward. We live in a new age and our modern world demands advancement beyond the trading of metal coins that are limited in their reach and scope.
Like gold or silver, bitcoin provides the 3 main functions of money; Medium of exchange, unit of account, and a store of value. It provides the groundwork for a financial system independent from central bank coercion; it is inclusive by its nature and global in its connection. It is the best version of money our society has created and it can transform what money means to each other in our society. Money does not have to be controlled by nations, it instead can become the tool that advanced civilizations need to sustain and operate to achieve the next level.
Latest posts by Richard Schultz (see all)
- Capital Flight and the Investigation into Chinese Bitcoin Exchanges - January 18, 2017
- Quantitative Easing - January 4, 2017
- Negative Interest Rates Make Bitcoin Appealing - December 18, 2016