Monday, September 28, 2015

Negative interest

Sweden has been using negative interest rates.
Cut rates too deeply, and savers would end up facing negative returns. In that case, this could encourage people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy.

What is happening now should not – according to conventional thinking – be possible.

As central bank rates have turned negative, the rates offered on bank deposits have followed. Yet rather than stuffing cash under mattresses, people have left their money in the bank or spent it.

Later on the article says

Pension funds might be among the first to abandon banks if things get too painful, because of what in effect can look like a tax on holding money.

One solution is to give savers nowhere else to go. This idea was floated by the Bank of England’s chief economist in recent weeks, who made the case that sub-zero rates will be needed in the near future.

Andy Haldane, a member of the Monetary Policy Committee (MPC), the UK’s equivalent of the FOMC suggested that to achieve properly negative rates, the abolition of cash itself might be necessary.

The first point about negative interest rates is that they've been tried in Japan and Sweden, two countries with strong social cohesion and trust. The second:

I find it useful to translate proposals into simple models. It gets around a lot of obfuscation.

I put my paycheck in the bank. The bank takes some of it away. I automatically lose money.

I'm not allowed to not put money in the bank.

The only way the bank doesn't get my money is if I spend it right away.

If everybody knows I have to spend money right away, they will raise prices.

No matter what I do, I get less for my hours of work.

Cui bono?

  1. The State. They overspend and need to borrow. Negative interest rates force us to subsidize their borrowing: they benefit. I notice that all the happy-joy talk about this comes from government types, who grimly warn that cash is used for drug deals and other evil trades. Like paying the kid next door to mow the lawn while I'm on vacation.
  2. The bank, as long as they can make sure my rate is worse than theirs

I conclude that this is, at minimum, a disingenuous way of raising taxes.

1 comment:

Assistant Village Idiot said...

Prices would rise especially on purchases with liquidity, less so on things harder to cash in quickly.

Swiss banks, and other foreign banks would do well. So would methods of protecting cash.