The Sub-Zero Club: Getting Used to the Upside-Down World Economy of Negative Interest Rates

The Sub-Zero Club: Getting Used to the Upside-Down World Economy of Negative Interest Rates, by Simon Kennedy.

In Europe and Japan, negative interest rates are common. With negative rates, borrowers get paid and savers get penalized.

Negative interest rates encourage more money manufacture — money is created out of thin air in our current money system when a loan is taken out. (When you take out a loan, a bank doesn’t lend you someone else’s money, but creates new money for you by typing a number into your bank account.)

Central banks are becoming desperate to crank up inflation, and near-zero interest rates in most of the western world haven’t been enough. They hope to reignite economic good times by injecting more money into the economy.

Video from Feb 2016, when only banks, not consumers, were subject to negative interest rates.

One of the criticisms of gold by the banking community is that gold doesn’t pay interest. (Actually it does if you lend it out, just like paper cash, but never mind.) But even if you have gold sitting under your mattress, it now pays more interest than cash in much of the world.

One way or another the central banks need to cause hidden inflation to whittle away the value of the huge debt overhang the world is laboring under. The one thing central banks really can do is create inflation, but they have to resort to printing to do it. Printing will be here soon, under some euphemism like “debt free money creation” —  the previous euphemism was “quantitative easing.”

Japanese families seem to have a sudden affinity for home safes. According to the Tokyo-based manufacturer Eiko, shipments have doubled since last fall. And in Germany, insurer Munich Re has stashed some 10 million euros ($11.4 million) worth of its own cash into vaults.

Why the squirreling? One possible reason is the creeping imposition of negative interest rates across the world, which could make it more rewarding to bypass banks—and a safe or vault is, well, more secure than a mattress. …

ECB President Mario Draghi currently charges 0.4 percent on the euros deposited by banks in his coffers overnight.

It is hard for banks to make profits under negative interest rates — when they create new money and lend it out, they have to pay interest to the borrower!

The policy isn’t without risks. Bank profits could be squeezed, money markets may freeze, and consumers could end up with bulging mattresses to avoid paying to keep money in a bank account. The whole effort could wind up leaving inflation even weaker—hence the tiptoe approach to cutting rates. …

Financial markets are already feeling the effect. Bonds worth about $8 trillion now offer yields below zero. Japan paid investors to buy 10-year debt this year for the first time…

A more existential worry is that by embracing a policy they once declined to countenance, central bankers are signaling they’re finally running low on ammunition. Such an admission would suggest the tepid economic growth of recent years is beyond their control—and perhaps a permanent state of affairs.