Negative Interest Rates by Governments May “Stimulate” Investors Into Pulling Out Their Money

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January 31, 2016 by JImbo

Japan Introduces Negative Interest Rate to Stimulate Economy

No, this isn’t new.

Europe has been doing it for awhile now. (see graphs below)

The news is that it is growing into a global “financial strategy.”

That is scary.

Here in the States economists keep saying “We can’t go any lower than zero interest rate.” They’re lying. We CAN go lower.

What this amounts to is the bank TAKING YOUR MONEY for putting money into it. We have been told for ages that banks did three things.

  1. They held your money safe from theft. Much safer than hiding it under your mattress anyway.

2. They had money for you to borrow in case you needed a loan.

3. They gave you money in interest for putting it in there… your money put in for Reason $1 being loaned to other people for reason #2.

 

What this does is essentially explode all three reasons for using a bank.

If you LOSE money if you put it in a bank, then you aren’t making money.

Reason 3 gone.

If you are losing money, then it’s NOT better than keeping it under your mattress.

Reason 1 gone.

If you’re not making money you pull it out of the bank. Therefore it’s not there for other people to borrow.

Reason 2 gone.

The banks have essentially destroyed most of the reason for their existence.

Yes, I understand that this is only bank-to-bank transactions… right now. However, banks need to pass on losses to their customers. If the banks are LOSING money by trading with the Central Banks (in our case the Federal Reserve), then they won’t.

However, even if they don’t trade with them, the Central Banks still use government powers to make them follow the RULES. So, banks are not allowed to offer higher rates than a set amount. Otherwise you would see some banks offering much higher interest rates to attract business from the other banks.

This is the dark side of government regulation. The central idea behind regulation is that “if it’s bad for everyone then no one has an advantage.” To put it another way… “If it’s bad for everyone then EVERYONE LOSES.”

That could be Bernie Sanders’ election slogan if he was being perfectly honest. Socialism is just government regulation taken to the extreme. It’s basically a sliding scale.

Progressivism = The government regulates what private companies can do. (Roosevelt)

Fascism = The government tells the private companies what to do… or else. (Hitler)

Socialism/Communism = The government OWNS all the companies. (Stalin)

And of course what really happens in real life is “Cronyism.”

Cronyism= The government does any of the above but if you are rich enough and well connected you can pay/bribe to ignore the rules. (Trump)

Anyway, back to the negative interest rate.

It’s a TERRIBLE idea. It won’t necessarily cause people to run out and spend money, as the government economists think. In fact, evidence says the OPPOSITE may happen.

It’s all basic human psychology. If you are scared to put your money in the bank, you pull it out. However, if you are scared the economy sucks (which is the reason for the negative interest rate) you aren’t going to then SPEND that money. You will simply put it under your mattress (figuratively or literally.)

Without money in the banks, how will people get loans to expand businesses? Answer… they won’t. No business expansion= no new jobs. No new jobs = more unemployment, etc.

You get the picture. The OPPOSITE happens, as with many well meaning government policies. They try to stimulate the economy and end up hurting it.

As it is, the central banks are losing money fast as local banks are yanking their investments out. This is scaring the markets. Faith in banking is tanking.

If this trickles down to the local bank level and THEY go negative interest rate, then you will see REAL panic. People will mob the banks to pull their money out. Right now the Federal Reserve is trying to raise the interest rate, not lower it.

However, if the rest of the world goes the opposite way they may be convinced to “go with the crowd.” In fact, if the economy keeps slowing down it may come very quick. As soon as the Feds raised the interest rates a fraction of a percent, the economy went from 2% growth to .7% growth.

That is NOT a good sign. Do you think they’re gonna keep it up? Will they keep raising the rate to a “normal” level even if the economy dips into negative growth?

Pray that our politicians let the economy dip and rise normally. That is normal for an economy. Hope they don’t go negative on the interest rates here.

TERRIBLE IDEA.

It ranks right up there with what Greece did in the recent past… ‘Bail ins.” Yes, a bail out is when the banks go outside (to the government or other banks) to get more money. A “Bail in” is when they go inside (into your savings account) and pull the money they need out.

If you’re LUCKY they put an I.O.U in there and say “We’re good for it. Trust us.”

But, sometimes they just call it a “deposit insurance fee” or something like that and POOF the money is gone. No warning. No apologies. You just paid for the privilege of having your money in a failing bank.

And can you guess what happens then?

You guessed it. Same thing. LOTS of people taking their money out of the banks!

See a theme here?

I haven’t even mentioned yet that if inflation keeps falling (due in part to negative interest rates, ironically) then we may get NEGATIVE INFLATION.

Essentially, your money is worth more next year than it was today.

This is in large part the big reason why they are doing these policies. They want you to NOT save money. Politicians see saving money as BAD. There are many reasons for this, but the big couple are:

  1. If you save money, you’re not spending it. They can’t tax money under your mattress. They like taxing you.
  2. If money is worth MORE over time, then loans become VERY hard to get and VERY expensive to repay. Many governments work on borrowing money. Deflation is terrible if you are borrowing money.    Example: If you borrow $100 today and pay it back next year at 10% interest and no inflation, then next year you pay $110. It costs you 10% more than you borrowed.

If inflation is 10%, then $100 next year is like $90 this year… so paying $110 is about the same in purchasing power as the $100 you borrowed. You break even.

If you have DEFLATION of 10%, then that $100 you borrowed is worth $110 and you only have about $90 worth of money now. Effectively you have a 20% interest rate. You LOST $20 in actual value.

Politicians like to borrow more money to spend. With inflation, they get to borrow now and get “cheap money” later. With deflation, they are PENALIZED for borrowing money, and in many ways the taxpayers won’t WANT them to borrow that money.

A government that can’t tax more… and can’t borrow more… can’t SPEND more money… unless…

That’s right. They then PRINT MORE MONEY!

However, that has limited use too. Only the Federal government can print money, meaning the States are still screwed. They still have to balance their budgets with less money. So, they will have to cut programs which politicians HATE to do.

Meanwhile, people would still not be putting money into the banks because there is still no reason to. They are still being charged to save money and no matter what inflation is, money under the mattress is STILL not getting taxed or paying bank fees.

So, all the government has done by negative interest rates THEN printing money is just fight against itself. Nothing has been accomplished except the destruction of banks and the economy while people hoard money at home. “Stimulus” programs will end up crushing the economy.

The whole basis of Capitalism is having “capital” (money) to expand the economy. Simply keeping it under the mattress doesn’t do anything with it. You need some sort of system to get all those small individual deposits in one place for other people to borrow.

This is what happens when you let lawyers set economic policy… or ANY policy. They’re not economist. They’re not businessmen. They’re not doctors.

Although, that is a positive in Rand Paul’s favor this election cycle. He IS a doctor as well as a Senator. Perhaps politicians should follow the Hippocratic Oath. ”

(in part: “Also I will, according to my ability and judgment, prescribe a regimen for the health of the sick; but I will utterly reject harm and mischief”)

Instead, they follow the Hypocrite’s Oath… “Do as I say and not as I do.”

  • Interestingly enough, this phrase appears in the original Hippocratic Oath: “Nor shall any man’s entreaty prevail upon me to administer poison to anyone; neither will I counsel any man to do so. Moreover, I will give no sort of medicine to any pregnant woman, with a view to destroy the child.”
  • (no abortion or assisted suicide there)
  • and
  • “Whatsoever house I may enter, my visit shall be for the convenience and advantage of the patient; and I will willingly refrain from doing any injury or wrong from falsehood, and (in an especial manner) from acts of an amorous nature, whatever may be the rank of those who it may be my duty to cure, whether mistress or servant, bond or free.”
  • (Does that count for the White House or Congress too? No falsehoods or amorous affairs in the White House???)

Well, there are two doctors in the Presidential race still (Ben Carson and Rand Paul)

And they did take the Hippocratic Oath.

Just sayin’…

 

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One thought on “Negative Interest Rates by Governments May “Stimulate” Investors Into Pulling Out Their Money

  1. Anonymous says:

    Wrongheaded idea. Anyone on fixed income will lose money. No reason to put it in the bank. Banks will be forced to actually make bad loans! Housing bubble. Would it even be legal?

    Like

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