Money Talk: The negative interest rate trend
If you’ve been paying attention to world economic or banking trends, you would have noticed that some countries – such as those in the European Union and China – have been implementing negative interest rate policies.
At first thought you may not understand what they are, but when you think about it, it comes off as ridiculous – but there is a method to the madness.
As you might have surmised, a negative interest rate is an interest rate in which you, as a financial consumer, are not only not making money on your accounts but also paying to put money into said accounts. This is the policy that many countries – who have not been afforded the speedy recovery that the United States had after the recession – have been adopting to avoid further economic turmoil.
While it does cost money to put money into banks, this means that those that borrow money get paid to do so.
Now, before you go out and try to get a loan, these negative interest rates have become prominent in financial markets – but unfortunately not at your local bank branch.
This policy is meant to increase the circulation of currency in the market. When individuals hold money without spending it, the economy as a whole becomes stagnant and everyone suffers.
When money isn’t circulating, economic growth falls, which would cause a slow end to the financial markets around the globe.
Using these unorthodox policies also increases inflation – which is kept at a steady two percent by central banks around the world, according to the Federal Reserve.
On the flip side, is can be a double-edged sword because in rare cases inflation can get out of hand and lead to hyperinflation.
The last large-scale case of hyperinflation occurred in Germany after World War I. During this time it was cheaper to burn legal tender instead of actually buying firewood and loaves of bread cost thousands of dollars. This was also a primary factor for Hitler and the Nazi Party rising to power.
Negative interest rates are an interesting solution to a growing global problem.
Although, if the United States’ central bank – the Federal Reserve – implemented such a policy, it wouldn’t go over too well. As the U.S. dollar is a benchmark currency and already the most traded currency in the world, a policy like that would see capital flight on a never-before-seen level.
Capital flight is when currency reserves of a central bank are depleted, which can also lead to hyperinflation.
For smaller countries whose currencies are not heavily traded, negative inflation policies could be beneficial for their economies – but the policy must be used as with a surgeon’s touch because the wrong move could be disastrous.