Friday, March 13, 2020

Negative interest rates would steal from your bank account

Back in 2016, the Bank of Japan shook up the markets when it announced that, for the first time, it would impose a negative interest rate on financial institutions. The move smacked of desperation as the once-proud archipelago continued to struggle against deflation, an economic battle it had waged since the 1990s.

The move didn’t help. In the year that the negative rates were launched, Japan’s growth in gross domestic product was 0.61%. Two years later, in 2018, it was only 0.79%, basically nothing.  

Despite similar failures throughout the history of negative policy, we’re guaranteed more nations and central banks will jump on the bandwagon as what’s looking like a coronavirus-driven global recession intensifies.

Among the countries entertaining such an idea is our own.

For months now, President Trump has been pressuring the Federal Reserve for lower and negative interest rates as economic policy.

Last week, amid declining markets, he ramped up the pressure, taking to Twitter - his sounding board - to say, “Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations. They now have as much as a two point advantage, with even bigger currency help. Also, stimulate!”

By “competitors” he must not mean our biggest competitor, China, because their rate is well above ours, currently a smidgen over 4% (we’re at 1.25%). So, he must mean Japan (-0.1%) and the European Union (where the European Central Bank has the rate pegged at -0.5%)

This consideration by the President, and one that’s echoed by Wall Street, proves that the coronavirus economy is and will remain a mess. Policymakers and financiers pull out negative rates only when they feel that all other attempts to resuscitate an economy have run their course. It’s a last-ditch effort. 

They believe that an economy is enticed to grow under a negative interest rate because banks are penalized for holding reserves and, therefore, are encouraged to lend in volume at lower rates and with looser reins. Allegedly, businesses intent on growing or, in this case, resuscitating and recovering will take them up on that offer and investment in people, plant, and equipment.

Given that doomsday scenario, it’s counterintuitive that Trump has been pushing for negative rates for months, even before the coronavirus hit, because businesses haven’t been too keen on borrowing for reasons which he would likely admit he created: Businesses weren’t asking banks for help because they were flush with cash -- the economy was in great shape, consumers were spending and corporate tax rates allowed small businesses to keep more of their money and be less reliant on banks. Main Street didn’t need Wall Street.

And maybe that’s why the push is on. The bankers want relevance again.

When that happens, you’ll pay the price.

The banks will penalize their clients for saving and a negative interest rate will be charged on all savings and checking accounts, and certificates of deposit will become more irrelevant than they are now.

You -- the average account holder – will be charged a fee for keeping your money in the bank. Economists believe that this encourages people to take their money out of banks and spend it, thus exciting the economy.

Any businessperson or head of household worth their salt will tell you this is economic suicide.

It was our nation’s corporations, banks, governments and consumers spending beyond their means and not saving that led to the economic collapse that fed the Great Recession. Here we are just twelve years removed from the start of that horrific event – and heading into another one -- and the “great minds” who are the puppeteers of our monetary policy and economy have magically forgotten that.

Saving is a critical part of creating personal wealth and it’s been the only true financially secure means for a family to set aside money. So, why penalize people for being thrifty and saving and not going back into the old, bad habits of spending like mad?

What would negative interest rates do for the American economy? Would you really be spending more if you were hit with a penalty for saving? Many of you wouldn’t, and you would lose money for that very reason. If you took it out of the bank to forgo losses it’s certainly not safe under the proverbial mattress or in the dying stock market.

Simply put: Negative interest rates are insane.

They would be deadly if they worked according to plan and led people to blow their money and businesses to borrow in unusually-high volume. It would encourage the same behaviors that led to the economic chaos of 2008 and 2009. We don’t need that in this crazy coronavirus economy and whatever comes from it.

From the 16 March 2020 Greater Niagara Newspapers and Batavia Daily News

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