Negative interest rates, effectively charging citizens to save money, has had mixed success in European countries and has some, including former Fed Chair, Ben Bernanke asking if it could work in the United States.
While negative interest rates could cause anything from banks just making more loans all the way to people stashing cash in mattresses, they could just be crazy enough to work.
Negative interest rates? What?
The interest rate in the United States has been pretty low in the past few years, often hovering at around zero. This past December, the Fed and Janet Yellen decided to increase the interest rate after seeing some growth. But given recent economic turmoil, some people have blamed those same increases. Naturally, people are now debating whether they should stay the course with the raise or change course and decrease it.
Now, a negative interest rate is being thrown around as a solution. But why? What does that actually mean? Well in plain English, it’s essentially charging people that put their money in a bank and charging the bank that holds it.
For example, with an interest rate of negative one percent, if you went to the bank and deposited $100 you would be entitled to receive $99. Currently, saving money accumulates interest, but under a negative interest rate it would shift in the other direction.
Why should I care? Is it a bad idea?
A common pushback toward this negative interest rate proposal is the fear of people pulling their money out of the banks and storing it under their mattress (or in your closet, desk, basement; you understand).
This could prove problematic given the spending habits of many people. Studies show that close to 80 percent of people use their debit card to purchase things like groceries, gas and meals. 100 percent of people between 18-24 years old claimed they use their debit card for those same purchases.
Not many people actually use cash for everyday purchases. Personally, when I’m paying for a burrito, I might say, “Actually, can you use this six dollars in cash before my card? Trying to get rid of it.” If a negative interest rate does in fact cause bank runs and people hoarding more of their money in cash, our relationship with it will have to change.
People may not buy as many things if they carry more cash than usual. I might not go to Chipotle as often if I carry more cash (shudder). There’s something about giving a cashier something physical such as cash that makes it sting a little more; you’re literally losing something rather than letting a piece of plastic talk to a computer to do the same exchange.
Maybe it’s not an awful idea…
While there is some pushback regarding the cons of a negative interest rate, there are some pros too. Among these are the possibility of bond yields still realizing a positive return. After all, if inflation is at two percent and the interest rate is at or around negative one percent, the yield would still land around one percent.
In theory, this idea attempts to encourage banks to lend more money to consumers instead of essentially paying to hold onto those funds. An increase in lending could naturally stimulate the economy and subsequently create more businesses, more Chipotles, more startups (looking at you entrepreneur majors), etc.
Negative interest rates make people scratch their heads (and rightfully so). Given its mixed success in places like Europe, the Fed and policymakers are probably hesitant to actually pull the trigger.
But who knows? Maybe a negative interest rate in the states would stimulate lending or perhaps less people would spend their money due to the psychology behind business transactions.
Nonetheless, given the recent sludge in the domestic and international markets and economies, the Fed may have to do some soul searching regarding its interest rate stance.
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