In theory there is no difference between theory and practice. In practice there is.
Negative interest rates. I consider myself above average at sorting out what an economic policy might mean to my bank account (and to some extent the future of my family). When it comes to “negative” interest rates I am at a near complete loss.
I somewhat understand that if I put my money in a bank, instead of “paying” me (interest), they will now “charge” me (negative interest) for the privilege. The concept of negative interest rates was once thought to be essentially impossible.
“No one will lend at a negative interest rate; potential creditors will simply choose to hold cash (“hoard” cash – RF), which pays zero nominal interest,” said Ben Bernanke in 2009. “I think negative rates are something the Fed will and probably should consider if the situation arises,” said Ben Bernanke in December 2015. Thus it appears that the Fed plan to slowly “increase” interest rates will soon turn into the Fed plan to “decrease” interest rates. But, say you, interest rates are at zero. Indeed, answer I, going “lower” means going “negative.”
I understand the concept of raising interest rates to quell inflation. But lowering interest rates below zero to quell deflation is nonsensical. Hoarding cash is the “definition” of deflation.
Yesterday the President touted, “the U.S. economy exhibited substantial strength throughout the year…” Apparently, our economy is the “envy of the world.” So, I ask, Mr. President, if our economy is “the envy of the world” why is the Federal Reserve contemplating NEGATIVE INTEREST RATES? Our President may be the worst Chief Executive to hold the highest office in the land, but he will go down in history as the most adept a putting lipstick on a pig.
Bernie wants us to “be like Denmark.” Denmark has a negative 75 basis point interest rate. Wow! Am I ever stoked to “be like Denmark!” Denmark is not alone (Footnote).
My friends, the Federal reserve is playing with fire again. They actually believe that they can manipulate an $18 trillion economy with 316,000,000 individuals all trying to “look out for themselves.”
Sweden (Benchmark Rate: -0.35%)
Sweden’s interest rate fell below 0% in February 2015 and it then steadily declined toward the current rate of -0.35%. The Executive Board of the Riksbank announced it would be purchasing government bonds until the end of 2015, and inflation is expected to rise.
Denmark (Benchmark Rate: -0.75%)
Denmark has held its negative interest rate of -0.75% since March 2015. It reflects an effort on behalf of the National Bank of Denmark to control inflation rates. The rate was once above 5% in 2009 and has declined in conjunction with the government budget, which has also shrunk since 2009.
Switzerland (Benchmark Rate: -0.75%)
The beginning of 2015 marked the fall of the interest rate in Switzerland from 0 to -0.75%. Before the fall, the interest rate had been kept steady at 0% since the third quarter of 2011. An overvalued Swiss franc has been cited as being a partial culprit for the consistently low interest rate.