Negative interest rates, How do they work?

Negative interest-rates turn capitalism inside out. As Heraclitus, a Greek philosopher (c.535–c.475 BC), said: The way up is the way down. Negative interest-rates are when you pay the bank to keep your money. 

Scary, huh? In Europe, this is what commercial banks—and very rich corporations or individuals—have to do.
Commercial banks pay to keep their money in central banks, instead of being paid in the form of interest. The central banks impose this, to force the commercial banks to lend their money at low cost to other banks, businesses, and consumers, as well as charging some clients to deposit cash.

The goal is to push people to borrow more—spend more—save less. The goal is to stimulate the economy until negative interest-rates are no longer needed. (Because who knows, really, where negative interest-rates lead?)

The trouble is, negative interest-rates squeeze down pensions, blow out real-estate bubbles, and do not eliminate future deflation. European banks are now struggling with weak interest-income and thin margins on loans. They lag behind their American counterparts.

There is also the problem of the European Union, which constrains every economy to the same rules. Germany and Switzerland do not necessarily need negative interest-rates. But countries that do, see no benefit—profitless companies remain afloat, sucking resources away from profitable ones, while general productivity is drags down.

Negative interest rates, How do they work?

You cannot blame people for wriggling. Major depositors park their cash in vaults. (A rich man’s version of keeping it under the mattress.) Cash as “a thing” does not incur negative interest, whereas electronic deposits do. The central banks hate that. If they could, they would eliminate cash altogether. Because, that money is not being loaned out to be spent.

Next, European individuals whose pensions are tied to bonds, are saving more, in order to maintain their retirement income while bond yields drop. That money is not being spent either. In Switzerland, people are putting their money into real-estate, leading to overbuilding. Which means, ruining the environment, as well as preparing a housing bust.

The European Central Bank is undeterred!

Its deposit rate is likely to stay at -0.4% through 2021. The Swiss may cut their rate from -0.75% to -1% next year. Denmark (one of the first with negative interest-rates, in 2012) may likewise cut its rate to -1%. By contrast, the US Federal Reserve pays American banks 2.35% interest on excess reserves!

Negative interest rates, what is the point of this perverse enforcement?

Cheap credit is useless for people without jobs. The jobless are in the double digits in Italy, Spain, and Greece; they are nearly 9% in France. In the eurozone, the under-25 jobless rate is 16%.

Inflation in Europe has sagged below the annual 2% growth-rate that central banks need. Low inflation means consumers and businesses delay spending, since goods become progressively cheaper.

The system is on the brink of disaster. When people riot in the streets in France and elsewhere, they are responding to this.

A crisis is coming, and it will be big.

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