Economy

Negative Interest Rates Will Damage an Already Crippled Economy

Some economists believe that a negative interest rate policy will stimulate the economy by reducing the cost of loans. That isn’t how it has worked in practice.

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The Federal Reserve Bank of St. Louis just published a paper suggesting the Federal Reserve should use negative interest rates to buoy the economy in the wake of the COVID-19 lockdowns. But negative interest rates have never worked before, and it's foolish to expect them to work now.

In normal times, you expect to receive interest income on a bank deposit. That lets your savings grow. Negative interest rates turn that idea on its head. With an annual interest rate of -1 percent, for example, if you deposit $100 in the bank, a year later your savings will have shrunk to $99. 

Some economists believe that a negative interest rate policy will stimulate the economy by reducing the cost of loans, thus making it easier for businesses to grow. That isn't how it has worked in practice.

"The first central bank that went to negative interest rates was the Riksbank in Sweden, and they were an utter failure," says Steve Hanke, an economist at Johns Hopkins. The policy, adopted in 2015, didn't help economic growth in any way. In fact, it seemed to hurt it.

In 2019, a team of economists that included Larry Summers, the former U.S. secretary of the treasury, published a study of the Swedish experiment. It found that cutting interest rates to just -0.5 percent reduced economic output. The reduction was just a fraction of a percent. But it wasn't an increase, and increasing economic growth was the goal of the policy.

Worse still: While the official borrowing rates set by the Riksbank were negative, the cost of borrowing money from a commercial bank actually went up, since banks can set their own rates. So it didn't help the business community get cheaper loans either.

The reasons the policy failed were not peculiar to Sweden. The same problems would probably afflict any similar effort in the United States.

First, let's deal with the reduced output. It's simply wrong to assume that the cost of borrowing money is related to how well the economy performs.

"What makes the economy expand is increased productivity," says Robert Wright, a senior fellow at the American Institute for Economic Research. Productivity growth means producing more of the same stuff, but with the same level of input, he says. That might include using better, more efficient machinery, or hiring workers with better skills. A productivity breakthrough usually requires businesses to try new production methods to see which ones work and which don't. In other words, there is a lot of risk and a lot of failure.

In the COVID-19 environment, most entrepreneurs are rightly averse to risk. If your company makes a breakthrough that would increase productivity, it isn't entirely clear whether any profits would result from it. "Many business people do not feel secure about the future prospects of them being able to keep the fruits of their labor," he says. "Negative interest rates will absolutely not help change those perceptions and incentives."

The other big problem with negative interest rates is that it messes up the banking system. Banks make money from the difference between what they pay savers and what they charge on loans made to borrowers. When depositors get 2 percent on their money and the bank charges 6 percent for a loan, banks make a lot of money. "As a result, the bank will want to make a lot of loans," Wright says. Such loan growth does help businesses expand, and it benefits the banking system with increased profits.

But when interest rates get pushed into negative territory, that simple but effective banking model gets destroyed. If your savings account is guaranteed to shrink, Wright asks, "why would you put your money in the bank?" You'd have a good reason to prefer putting your money in a safe instead. And with lower deposits, the bank would have less money to lend. This is no way to buoy an economy.

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  1. But negative rates make it easier to finance budget deficits, so we can give away more stuff for free forever

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  2. Pay somebody to take my money…wait isn’t that what I’m doing with taxes now?

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  3. “Negative Interest Rate” was my nickname for my ex-wife’s sex drive.

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  4. A negative interest rate is the most nonsensical thing ever. It’s ludicrous. It barely even registers as a valid English phrase. It’s like saying something has negative weight or negative duration. Interest rate is a price for a loan. Negative price. It brains squirms uncomfortably under the concept.

    This is of course not the interest rate banks charge to you for a loan, or what they pay you for a deposit. That would mean they charge you to make a deposit (which is different than a service fee for a checking account). It means they pay you for your outstanding loans. Instead, this is the interest rate the Federal Reserve applies to banks. It still barely makes any coherent sense.

    I can’t think of the mechanism for it. Is it an accounting fiction so banks can hold negative reserves?

    1. A negative interest rate is the most nonsensical thing ever. It’s ludicrous. It barely even registers as a valid English phrase.

      It does have meaning (and value) as a general concept, though. As an official policy, however, I am inclined to agree with you.

    2. There are plenty of reasons to have a negative interest rate. If I pay you to store my money, because I believe it will be safer with you than in my house, that is essentially a negative interest rate. Briefly during times of severe financial uncertainty, T-Bills will get a negative yield. That is basically saying, “I’d rather spend $100 to get $95 in a month than invest in ANYTHING ELSE that will probably be worth less”.

      But arbitrarily SETTING interest rates, positive or negative, has always been a fool’s proposition. Interest is merely another price- the price of borrowing money from someone. If there is one thing economics has taught us, it is that when you set prices rather than letting the market set them, you create shortages and/or surpluses. It happens when you set prices for agricultural products. It happens when you set prices for Rent. And it happens when you set prices for money.

      1. Essentially this. During times of extreme economic unrest- including government nationalizing or extracting monies directly from people’s savings, it may be worthwhile to pay a third party to temporarily store money or assets to keep them safe from unstable or untrustworthy institutions.

      2. Paying you for storage is NOT an interest rate! Money is not goods to be warehoused. As a physical item, where it still exists as such, it’s NOT stored in bags of gold or anything like it. Clearinghouses exist to tally up the accounting so a minimal amount of specie actually moves.

        1. lolol look at SQLSRY pretending you understand this lololol

          1. “Dear Abby” is a personal friend of mine. She gets some VERY strange letters! For my amusement, she forwards some of them to me from time to time. Here is a relevant one:

            Dear Abby, Dear Abby,
            My life is a mess,
            Even Bill Clinton won’t stain my dress,
            I whinny seductively for the horses,
            They tell me my picnic is short a few courses,
            My real name is Mary Stack,
            NO ONE wants my hairy crack!
            On disability, I live all alone,
            Spend desperate nights by the phone,
            I found a man named Richard Decker,
            But he won’t give me his hairy pecker!
            Decker’s pecker is reserved for farm beasts,
            I am beastly, yes! But my crack’s full of yeasts!

            So Dear Abby, that’s just a poetic summary… You can read about the Love of my Life, Richard Decker, here:
            https://www.washingtonpost.com/nation/2019/10/11/farmers-kept-refusing-let-him-have-sex-with-their-animals-so-he-sought-revenge-authorities-say/#comments-wrapper
            Farmers kept refusing to let him have sex with their animals. So he sought revenge, authorities say.
            Decker the hairy pecker told me a summary of his story as below:
            Decker: “Can I have sex with your horse?”
            Farmer: “Lemme go ask the horse.”
            Pause…
            Farmer: “My horse says ‘neigh’!”
            And THAT was straight from the horse’s mouth! I’m not horsin’ around, here, no mare!

            So Decker the hairy pecker told me that, apparently never even realizing just HOW DEEPLY it hurt me, that he was all interested in farm beasts, while totally ignoring MEEE!!

            So I thought maybe I could at least liven up my lonely-heart social life, by refining my common interests that I share with Richard Decker… I, too, like to have sex with horses!

            But Dear Abby, the horses ALL keep on saying “neigh” to my whinnying sexual advances!
            Some tell me that my whinnying is too whiny… Abby, I don’t know how to fix it!

            Dear Abby, please don’t tell me “get therapy”… I can’t afford it on my disability check!

            Now, along with my crack full of yeasts… I am developing anorexia! Some are calling me a “quarter pounder with cheese”, but they are NOT interested at ALL, in eating me!!! They will NOT snack on my crack!

            What will I DO, Dear Abby?!?!?

            -Desperately Seeking Horses, Men, or ANYTHING, in Fort Worth,
            Yours Truly,
            Mary Stack / Tulpa / Mary’s Period / “.” / Satan

            1. ahahahhahah YOU’RECTOTALLY NOT BRANDYBUCK AHAHAHAHAAH

              NO NO YOU JUST MAGICALLY FUCKING APPEAR AS SOON AS SOMEONE ACCUSES YOU OF BEING BRANDYBUCK AHAHAHAJAJAJ

              1. As if there’s some rule of the universe, that one ONE person at a time, can totally detest the Evil-One-worshipping, baby-eating, kitten-strangling waste of troll-poop known as Tulpa…

                1. ahahahhahah YOU’RE TOTALLY NOT BRANDYBUCK AHAHAHAHAAH

                  NO NO YOU JUST MAGICALLY FUCKING APPEAR AS SOON AS SOMEONE ACCUSES YOU OF BEING BRANDYBUCK AHAHAHAJAJAJ

                2. You’re obviously Brandybuck.

            2. THE HORSE SAID “NEIGH”…THAT MADE ME LAUGH OUT LOUD

    3. Interestingly enough there is negative em force

      “Negative electromagnetic plane-wave force in gain media” Kevin webb

      1. Is it a physical reality, or just stuff that makes the maths work? Sort of like an imaginary number. It makes the maths for electronic circuits work, but doesn’t actually exist.

        1. you could just read the paper SQLSRY…

          Ah i see the problem youre an idiot. and you know it. and you know you need it explained to you.

  5. I can just see this snowballing … bank tells its customers they will be charged for savings … customers yank their savings … banks have to call in loans to be able to pay out those savings … government bright boys and girls decide the only way to stop people stuffing their mattresses with cold hard cash is to change bills every few months so bills more than a few months old are no longer valid cash ….

    Damn these guys are smart.

    1. Even better- People yank their savings, so the banks cry to Daddy Fed who says, “Let me fix this mess!” and they start buying up loans on the Bank’s balance sheet to “inject liquidity”. Everyone wags their finger at the “Too Big to Fail” banks, and another Antifa thug gets his wings.

    2. Hi Brandybuck why are you still socking you outed yourself

      1. Fuck off. I have one and only one account. Reason knows who I am.

        1. Sure SQLSRY I don’t know why you bother lying.

        2. “Reason knows who I am.”

          Yeah you’re that pathetic loser who begged us to censor people who were making him and his sockpuppets look dumb

          And the answer is still “fuck off”

    3. No, they would just make cold hard cash illegal. All transactions would have to go through a debit or credit card. Then you wouldn’t be able to take your money out of a bank. Beware people advocating for a cashless society.

      1. Heh, I have no doubt they’d like to make cash illegal, but that’s too much technical and practical work to happen in a short time, and there’d be way too much pushback to make it happen now. In the meantime, just revamp the currency, possibly with some made-up alarum over Iran or China counterfeiting the current stuff.

        1. Ok Brandybuck now tell us why you eat shit.

        2. “Reason knows who I am.”

          Yeah you’re that pathetic loser who begged us to censor people who were making him and his sockpuppets look dumb

          And the answer is still “fuck off”

  6. I don’t know much about interest rates. But I know the economy is terrible because Reason.com’s benefactor Charles Koch is only worth $54.5 billion. That’s just unacceptably low.

    In fact it was unacceptably low when he was hovering around $58 billion to $62 billion earlier this year. Someone who’s worked as hard and achieved as much as Mr. Koch deserves, at minimum, a $70 billion net worth.

    #HowLongMustCharlesKochSuffer?

  7. As is, we are enacting MMT in all but name now. Negative interests rates are just another aspect to it.

    I hope the big brains really have a grasp of what they are doing. If this ends like the 2008 financial cries of “we didn’t know”, I see big game banker hunting becoming the national pastime, with Patagonia vests mounted like antler horns on people’s walls.

    1. Of course they don’t know what they’re doing. It’s completely uncharted waters, entirely theoretical. These decisions are being made by people who are so insulated from the actual affects of what they’re creating that they don’t care. It’s not like they’re sitting on giant warehouses of cash that they don’t know what to do with. They’re going to increase supply to purposefully create a surplus to justify giving the banks not just free money, but money we’re PAYING them to in order to loan it back to the citizenry. All while increasing taxes.

      This won’t in practice end up meaning that banks start lending money to their customers at negative rates, it’s a way of maintaining or increasing their profit margins during uncertainty when people don’t want to assume risk. More importantly, it’s to keep the banks dependent, not on good service and reputation to get capital for lending, but purely on being completely intertwined with the Federal Government. Allowing the dollar to go off the gold standard and become a fiat currency made us become a fascist country decades ago. Money is worth whatever the Fed says it’s worth, not determined by the market. They have the power to give themselves and all who get in bed with them infinite money for their loyalty. They can devalue your savings on a whim and make sure you can never retire without asking Uncle Sam for bread and diapers.

      As per usual, if it all comes crashing down because it’s unsustainable on its face, they’ll have just enough saved to keep power and water coming into their fortresses and pay the armed guards (armed with the weapons you bought them) to keep you away from them and the consequences while we have keep ourselves safe during the riots.

      1. >>These decisions are being made by people who are so insulated from the actual affects of what they’re creating that they don’t care.

        this. we’re the zoo.

  8. “Negative Interest Rates Will Damage an Already Crippled Economy”

    No, they won’t . . . because negative interest rates are just a clinger fever dream.

    1. ahaahahahaha your financial analysis parallels your political analysis ahahaaahaha

      1. Don’t do that. We shouldn’t make fun of retards.

    2. Clingers have money?

      Weak effort, old man. You’re useless.

  9. Its like Mises didn’t painstaking explain this shit over a hundered years ago.

    Trump needs a Paul Volcker.

  10. Negative interest rates would help us to borrow money to pay ALL of those filthy-high, abusives TAXES (oooops, I mean tariffs, which aren’t taxes, according to Der TrumpfenFuhrer) that idiot trade-war-mongerers have subjected us to! THIS is how we’ll make The Trumptatorshit work, sorta, maybe, for the next few days or weeks at least…

    1. ahahahahaha you said you eat shit BRANDYBUCK AHAAAHAHAHAH

      1. ahahahahaha you said you worship the Evil One by smearing “666” on the tombstone of Mother Teresa, spelled out in yeast-infected twat juice from your unspeakable void (well, one of several of your unspeakable voids, when we include your skull-case), mixed with pureed maggots, after you gargle the mixture of the two…

        Exorcisms ARE available, you know! M. Scott Peck, Glimpses of the Devil https://www.amazon.com/exec/obidos/ASIN/1439167265/reasonmagazinea-20/

  11. Robert Anton Wilson was interested (heh) in the monetary ideas of someone whose name I can’t remember, but involved notes that depreciated. Shea and Wilson incorporated this idea into Illuminatus! in the form of hempscrip.

    Dollars have no maturity date but also no expiration date. Hempscrip depreciates linearly over time to 0% of its issue value. This is equivalent to negative interest, except for being linear rather than logarithmic; if you keep rolling it over into new loans, then it becomes logarithmic.

    The idea is deliberately inflationary, to increase the velocity of money because it’s a hot potato that you want to spend ASAP. Same idea as Keynes that people save too much for the good of the economy.

  12. How is this for a voice of “reason” ?? Who cares what kind of rates are they lending at? Positive, negative?
    The question is- what exactly are they lending?
    Fake computer generated money? They dont even have any reserves nor are central banks required to have any to back “their money” up.
    Why is it that central banks allow to do this and then everyone else has to pay it back with their blood sweat and tears- with “real” money, their value, or their time.
    This whole system has been rigged, that enslaved the whole populations.
    So in the sense this “debt” isnt really debt at all! Cause those faggots up top dont really lend you anything other than monopoly money anyway! So would anyone even feel compelled to pay it back at any level!
    Just like donald trump did with his casinos! He knew it and was playing the (their) system! At some point they were just giving him money cause could not- not to!
    Cause all of it is a scam and has been from the beginning! Fractional banking? What kind of scheme is that?
    What happens to fractional banking if all depositors decide to get their money at once and go to another bank( that doesnt exist Since there is only one bank!).
    Yet everyone somehow has played along with all this and trying to find some logical solution out of this mess!
    The only logical solution is to put money back where it belongs on gold. And have everyone be held accountable for every ounce of it!
    Its not just police that needs overhaul. Banking needs same thing. Thieves have to be put in jail for kneeling on peoples financial necks! Yet everytime they keep getting away with more and more and everyone just keeps going along with it as if nothing ever happened! ????

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    2. I have a hard time believing that money in the future will be tied to anything tangible. Crypto currency is the best bet, but it is still in the intro phase. A government can’t just print more crypto currency. But give it another 50 years for crypto currency to shake out its bugs and become more widespread. But, in any country you can name, the game is rigged to favor the rich over the poor, Or the connected over the non connected, so it doesn’t really matter if money is pegged to an independent item. Most of us, who aren’t rich and/or connected, will get screwed any which way this goes. A true meritocracy would be a great thing, but I don’t think such things are possible. Better luck with a perpetual motion machine.

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