I was reading the following article about negative interest rates and their unexpected negative impact on lending. One of the issues I see with a zero interest rate (or now negative interest rate) policy is that they might actually cause people to de-lever. If you have cash in the bank that is not generating a meaningful return or in some cases costing you to store it, why not just use it to pay off your debt and effectively earn a risk-free return? Paying off debt could become a more popular option than fixed income to individual investors.
I’m not sure how this monetary experiment is going to turn out.
i think this is how the vast majority of the population thinks. they don’t think about potential 10%+ returns in the stock market, they think about CDs and savings accounts. i think this is a major incentive for the Fed. the “extreme low key interest rate” should probably be 2-3%, not zero, for this reason.
Interesting article. I would think the first banks that begin charging interest on cash are going to see an exodus of cash to other banks that don’t have these costs. Wiring is quick and usually free, so switching costs are very easy, and there are enough online banks with low overhead that you’ll probably be able to continue moving around your money to avoid the interest charges. I’m not sure about the increase in debt reduction. With a -1% cash rate vs. a 3% loan you’re in the same boat as 2% interest on cash w/ a 6% loan (approximately). Aside from liquidity needs, it’s clearly wise to seek the highest risk adj. return from your cash, whether that’s paying down debt or investing it in some assets.
There are so many unforeseen consequences from this financial meddling, it will be interesting to look back in 5 years.