Yes, you read that right. Bloomberg Business recently reported that the Federal Reserve “wants to test how banks would handle negative interest rates.”
I’m not shocked by much in today’s financial world of stock markets going haywire, giant economies like China’s teetering on the edge of disaster, and the ever-present threat of the government raiding our tax-deferred retirement accounts.
But negative interest rates?!?
That means that if you have money in an interest-bearing savings account, CD, or a money market account in a bank, you would pay the bank interest, not the other way around…. which is the way it usually works.
If you think, “that’d never happen,” think again. It’s happening “around the world.” Bloomberg reports that “several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year.” The article lists Switzerland, Sweden, Denmark, and “now Japan is trying it.”
Actually, I’m more than shocked. I’m astounded…. and disgusted. The European banks that have tried this have done so to “invigorate their economy” in times of “severe global recession.” Proponents of this drastic move say that it will deflect inflation going out of control (remember the 1970s anyone?), but the jury is still out on whether this will work in the long-term.
But why would they do it, really? As I dug a little deeper into the whole scenario, it became clear. It has to do with how much banks are lending. As one article bluntly put it, negative interest rates, “punish banks that hoard cash instead of extending loans to businesses or to weaker lenders.” Ah ha! There it is. This hackneyed thinking goes that people will flock to banks to take out a loan, because instead of the banks charging you interest, they have to pay you. (and how, exactly, do you qualify for something like that? Maybe you have to see if the bank qualifies under your criteria.)
This really is a desperate measure to stimulate the economy. You take out a loan. You spend the money. The economy grows. If there were ever a financial house of cards, that would be it.
Some banks, the article points out, aren’t playing. They’re being charged a negative interest rate by their central bank, but they’re not passing it on to their customers—meaning those who have their money in savings in these banks. These banks, rightly so, are afraid if they say, “you’re going to have to pay us to hold your money,” the consumer is going to pull their money out.
I don’t blame them. Cash under the mattress all of a sudden sound like a viable option. But the problem is, if banks are absorbing the difference between what the central bank is charging them versus what they’re giving you in interest, then their profit margin goes down making them even less willing to lend.
While that might sound all nice and good for the central banks, including our own Federal Reserve, I think it’s nonsense.
Americans don’t save money. In a survey done in late 2015, 62% of Americans have less than $1,000 in their savings. That means basically six out of ten people don’t have a “rainy day” cushion to see them through hard times, like if they got really sick and couldn’t work for a while. These six out of ten Americans will rely on their friends, family, and retirement accounts to see them through.
But how many of them really have retirement accounts that they could use? Another study showed that 45 percent of working Americans don’t have retirement accounts. So how many people have nothing to retire on except their Social Security? (and Social Security isn’t going to give you a nice, comfortable retirement.)
So why would these people, who don’t save in the first place, be enticed to save if they have to pay the bank for the bank to hold their money?
Interest is how you make money on the money you’re put into a savings vehicle. If you know you’re not going to lose any money in an account earning interest, then you know you’re money is going to be protected. Most of the people I come in contact with prefer their money is safe.
I’m in that same group. I don’t like losing money.
There are alternative ways to keep your money protected, savings vehicles that earn interest for you, at a decent rate without risking your money.
The stock market used to be the biggest risk for your money. At least when the market is good, you get a reward. If negative interest rates come home to roost here in the U.S. you’ll get all the negative impact of the stock market without any of its benefits. That’s just plain crazy.