What happens when interest rates fall below zero?
While this used to be a theoretical concern (and most people felt that it would never happen), interest rates in Europe have started to dip below zero. The two month Euribor is currently at \( - 0.0004 \% \)! The Wall Street Journal wrote an article explaining some effects of this.
Here is some food for thought:
1) What does a negative interest rate mean?
2) If you borrowed money from someone, do you get to repay them less in a year?
3) If you have a bank mortgage, does this mean that they should pay you for the privilege of loaning you money?
4) If you had money saved in the bank, should that amount decrease over time?
5) Should you go out and spend all of your money today, since it would be worth less tomorrow?
Note by
Calvin Lin
6 years, 2 months ago
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You can also look at this from the actual return or real rate of return which factors in inflation rate. If the prevailing rate is negative, whilst the inflation rate is even more negative, then the real rate of return is positive! ( real rate of return= interest rate- inflation rate. Example is -0.0004%- ( -0.0008%) = 0.0004%!!!!
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A sign of stagflation in the horizon?
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You are predicting that inflation will be high (and economic growth is already low and unemployment is arguably high)?
I do not think that inflation will be high as a whole (except in certain specific cities).
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@Calvin Lin , let me retract on the stagflation bit. I think I meant to say we might be headed for the opposite of an inflationary outcome.
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These days with the rise of the huge financial players, and traditional companies like GMAC and G.E. have made more profits from their financial arm than their old brick and mortar factories, these financial giants are less interested in repatriating profits back into the company but instead award huge sums of dividends and profit sharing towards their shareholders and directors. This is why unemployment is arguably high, aggregate demand is low, and if this is coupled with a financial hiccup, the tax payers, again, will to cough up more to clean up this intangible financial mess. Back then, before the financial deregulation and proliferation of exotic financial products and services, brick and mortar banks sole purpose was to take care of its commercial customers. They wouldn't allow anything to happen to its commercial customers by betting in unknown risky areas of the business. There was a sense of a long run relationship with their partners. Unlike today, financial houses don't really care about anything other than making a quick buck, even if it takes ruining the entire economy. You can blame this to the lack of a regulatory oversight, and partly too to those who utilize these financial models don't know the extent of what they were up against.
1.In my opinion, negative interest rate means lender pays the borrower the interest, opposite to the usual where the borrower pays interest.
4) Yes, as the bank pays us in positive interest, for negative interest they will take money from us.
PS - No idea about 2, 3 5!
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What is the difference between 4 and the rest? You can think of it as you are "lending" the bank money, though you can the option of taking it back at any time, so should accept a lower rate than a mortgage.
It is also interesting ( at least for me) to note that the financial sector/industry has accumulated financial assets worth many times over the GDP of the world, collectively. In the case of the U.S. alone, post financial deregulation, the total fianancial assets over it's GDP is over 900%. With the profileration of new financial products, such as indices of derivatives and betting on a bet betting on a bet, you are only limited by our own imagination.